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Income Tax Appellate Tribunal, “SMC” BENCH, MUMBAI
Before: SHRI M. BALAGANESH & SHRI SANDEEP SINGH KARHAIL
The present appeal has been filed by the assessee challenging the impugned order dated 25/10/2022, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals) [“learned CIT(A)”], which in turn arose from the order dated 31/03/2021, passed under section 154 of the Act, for the assessment year 2014-15.
The brief facts of the case are: The assessee is engaged in the business of construction and development work. For the year under consideration, the Advance Construction Co. Pvt. Ltd. ITA no.3215/Mum./2022 assessee filed its return of income on 30/11/2014, declaring a loss of Rs.66,06,507. The return of income filed by the assessee was processed under section 143(1) of the Act. Thereafter, the return was selected for scrutiny assessment and accordingly statutory notices under sections 143(2) and 142(1) were issued and served on the assessee. The Assessing Officer (“AO”) vide order dated 23/08/2016, passed under section 143(3) of the Act assessed the total income of the assessee at a loss of Rs.56,57,839, under normal provisions of the Act, inter-alia, after making a disallowance of Rs.8,04,894, under section 14A r/w Rule 8D. Subsequently, the AO passed the rectification order dated 31/03/2021, under section 154 of the Act assessing the total income of the assessee at Rs.24,84,148, on the following basis:-
"It was seen from Para 4 of Assessment Order that Department had disallowed an amount of Rs. 8,04,894/- u/s 14A. From the computation of disallowance u/s 14A by the department it was noticed that negative investment in 'Integrated Joint Venture' was taken in account for calculation of average investment. Negative investment is actually a debit balance which do not generate income. Therefore it is not eligible for computation of disallowance under Rule 8D(2). Further, disallowance under clause (ii) of Rule 8D was not considered though there was interest expenses debited in P&L Account. Therefore disallowance u/s 14A under clause (ii) & (iii) is recalculated as below.”
The learned CIT(A) vide impugned order dismissed the appeal filed by the assessee and upheld the exercise of jurisdiction by the AO under section 154 of the Act as well as the computation of disallowance under section 14A r/w Rule 8D. The relevant findings of the learned CIT(A) are as under:-
“5.3 In view of the above judgements of the Hon. Supreme Court and the Rule 8D of the Income Tax Rules, it is very clear that the computation of disallowance under Rule 8D(2) is an automatic process, once the ingredients of the Section 14A are present and the AO is reasonably satisfied, about the applicability of Rule 8D.The Average yearly value of Investments in this case was Rs. 28.55 Crores, which generated/ would generate exempt income and Page | 2
Advance Construction Co. Pvt. Ltd. ITA no.3215/Mum./2022 the related interest expenses in the profit and loss account were Rs. 2.90 Crores. Proportionate part of such expenses would have to computed as per Rule 8D and then would have to be added by the AO. 5.4 Therefore, the computation made by the AO under Rule 8D(2)(ii) and (iii), which was incorrectly made in the earlier order, was liable to be corrected under section 154, as it was made incorrectly earlier and was a mistake apparent from the record. Earlier computation of disallowance under Rule 8D, as made by AO, was only Rs. 8.04,894/-, which was later on computed upwards at Rs. 89,19,881/- (under both the limbs (ii) and (iii) of Rule 8D(2) at Rs. 74,91,892/- and Rs. 14,27,989/-, respectively). Difference amount was added by the AO to the total income of appellant, by way of order u/s 154. Accordingly, the order of the AO is a correction of a mistake apparent from the record and the same is legally tenable. Thus, the order of the AO is upheld. Grounds of Appeal No. 1-4 against rectification order u/s 154 are dismissed. GOA No. 5-8 relating to disallowance computation under Rule 8D are also dismissed.”
Being aggrieved, the assessee is in appeal before us.
We have heard the rival submissions and perused the material available on record. In the present appeal, the assessee is aggrieved against the exercise of jurisdiction under section 154 of the Act by the AO. The assessee has also challenged the computation of disallowance under section 14A r/w Rule 8D. From the perusal of the assessment order dated 23/08/2016, passed under section 143(3) of the Act, we find that the AO noted that during the year, the assessee has earned exempt income totaling to Rs.11,20,109, which is inclusive of dividend of Rs.6,66,612, exempt under section 10(34/35) and share from joint venture of Rs.4,53,497. The AO did not agree with the submission of the assessee that there are no expenses which are incurred in relation to income which is exempt from tax and accordingly, computed the disallowance under section 14A r/w Rule 8D as under:-
“4.4 Thus, having regard to the accounts of the assessee company of the previous year relevant to A.Y. 2014-15, the undersigned is not satisfied with Page | 3
Advance Construction Co. Pvt. Ltd. ITA no.3215/Mum./2022 the correctness of the assessee's claim. Accordingly, the amount of expenditure disallowable u/s.14A of the Act in relation to such income is hereby determined in accordance with the provisions of Rule 8D of the Income Tax Rules, 1962 as under:-
The amount of expenditure directly relating to income which (i) – – – – does not form part bf total income Proportionate of interest expenditure computed in (ii) (A X B/C) – – accordance with the formula given in Rule 8D(2)(ii) Amount equal to one-half percent of the average of the value of investment, income from which does not or shall not 0.5% of (iii) form part of the total income as Rs.8,04,894/– Rs.16,09,78,739/– appearing in the Balance Sheet of the assessee, on the first day and the last day of the previous year. Total Expenditure disallowed u/s. 14A Rs.8,04,894/–
From the perusal of audited financial statement of the assessee, forming part of the paper book, we find that during the year, the assessee debited interest expenses of Rs.2,90,08,082. Since, while computing the disallowance under section 14A r/w Rule 8D vide assessment order passed under section 143(3), the said interest expenditure was not taken into account as per Rule 8D(2)(ii), we find no infirmity in the assumption of jurisdiction by the AO under section 154 of the Act. At the same time, from the audited financial statement, we find that the assessee has own funds of Rs.25,95,85,049 (comprising of share capital of Rs.2,00,00,000, and reserves & surplus of Rs.23,95,85,049). While the amount of investment held by the assessee earning exempt income is only Rs.16,09,59,031. We find that the Hon'ble Jurisdictional High Court in CIT vs HDFC Bank Ltd., [2014] 366 ITR 505 (Bom.) Page | 4
Advance Construction Co. Pvt. Ltd. ITA no.3215/Mum./2022 held that where assessee’s own funds and other non–interest bearing funds were more than the investment in tax-free securities, no disallowance under section 14A of the Act can be made. We further find that the Hon'ble Supreme Court in South Indian Bank Ltd. vs CIT, [2021] 438 ITR 001 (SC) held that disallowance under section 14A of the Act would not be warranted where interest-free own funds exceed the investment in tax-free securities and in such a case the investment would be presumed to be made out of assessee’s own funds. Therefore, respectfully following the law laid down by the Hon’ble Supreme Court and the Hon’ble jurisdictional High Court in cases cited supra, the AO is directed to delete the disallowance made under section 14A r/w Rule 8D(2)(ii).
In the present case, it is undisputed that during the year, the assessee earned exempt income totaling Rs.11,20,109. We find that the Hon’ble jurisdictional High Court in Nirved Traders (P.) Ltd. Vs. Dy. CIT, I.T. Appeal No.149 of 2017, vide judgment dated 23.04.2019, has held that disallowance under section 14A of the Act cannot be more than exempt income. Therefore, respectfully following the aforesaid decision of the Hon’ble jurisdictional High Court, the AO is directed to restrict the disallowance made under section 14A r/w Rule 8(2)(iii) to the exempt income earned by the assessee.
As a result, grounds challenging the assumption of jurisdiction under section 154 of the Act are dismissed. While grounds challenging the disallowance under section 14A r/w Rule 8D are partly allowed. The issues arising in grounds no.9-12 are consequential in nature and do not require any specific adjudication. Page | 5
Advance Construction Co. Pvt. Ltd. ITA no.3215/Mum./2022
In the result, the appeal by the assessee is partly allowed. Order pronounced in the open Court on 23/03/2023