TOLANI SHIPPING CO. LTD.,MUMBAI vs. DCIT,CIR-5(3)(2), MUMBAI

This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre, Delhi (hereinafter referred to as the “CIT(A)”) dated 17/08/2022 for, assessment year 2016- 17.

The assessee has filed multiple set of grounds of appeal. From perusal of grounds of appeal, the only issue that emanates for adjudication is; disallowance made u/s 14A r.w.r. 8D(2) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”). The Assessing Office (AO) has made disallowance of Rs.6,35,854/- under Rule 8D(2)(ii) and disallowance of Rs.2,71,550/- under Rule 8D(2)(iii) of the Income Tax Rules, 1963 (hereinafter referred to as “the Rules”).

Per contra, Ms. Richa Gulati representing the Department vehemently defended the impugned order and prayed for dismissing appeal of the assessee.

We have heard the submissions made by rival sides and have examined the orders of authorities below. It is an undisputed fact that the assessee during the period relevant to assessment year under appeal has earned dividend income of Rs.23,26,663/-, exempt from tax. No suo-moto disallowance of expenses is made by the assessee for earning exempt income. The assessee is engaged in the business of operation of ships and ship management. Ostensibly, the assessee has taken loans for its shipping business. The contention of the assessee is that no investments have been made by the assessee from borrowed funds. The loans have been availed for the purpose of acquisition of ships, running and repair of the ships, staff salary etc. The assessee has filed balance sheet as on 31/03/2016 at page 51 of the Paper Book. A perusal of the same shows that the assessee has sufficient own interest free funds comprising of share capital, reserves and surplus to cover the investments. The Hon’ble Bombay High Court in the case of Reliance Utilities and Power Ltd (supra) has held that where the assessee has mixed bag of borrowed and own funds, it shall be deemed that the investments are made from own interest free funds. Thus, in the facts of the case, no disallowance under Rule 8D(2)(ii) is warranted. The AO is directed to delete the disallowance made under Rule 8D(2)(ii) of the Rules.

As regards disallowance under Rule 8D(2)(iii), the contention of the assessee is that investments are made only in growth funds and the assessee has not earned any dividend income. It is now a settled legal position that for the purpose of disallowance under Rule 8D(2)(iii), only dividend yielding investments should be considered. In principle, we are in agreement with the submissions of the assessee. However, for the P a g e | (A.Y.2016-17) M/S TOLANI SHIPPING CO. LTD limited purpose of verification of the nature of investments, we deem it appropriate to restore this issue back to the file of AO.

In the result, appeal of the assessee is allowed, in terms aforesaid.