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Income Tax Appellate Tribunal, DELHI BENCH “C”: NEW DELHI
Before: SHRI N.K. BILLAIYA & MS. ASTHA CHANDRA
The appeal by the assessee is directed against the order dated 27.04.2018 of the Ld. Commissioner of Income Tax (Appeals)-20, New Delhi (“CIT(A)”) pertaining to the assessment year (“AY”) 2014-15.
The assessee has taken the following ground:
2.
1. The Ld. CIT(A) has erred in law and facts of the case in confirming the addition of Rs. 39,15,118/- being interest incurred for acquisition of shares of Apex Heart Care Pvt. Ltd. in accordance with Section 14A r.w.r8D(2)(i) of the Rules disregarding the fact that no exempt income was earned on these shares, which is arbitrary, highly unjustified, based on surmise, uncalled for and bad in law.
2. Without prejudice to the above Ground No. 1, the Ld. CIT(A) has erred in law and facts of the case in confirming the addition of Rs. 39,15,118/-, in accordance with Section 14A r.w.r 8D(2)(i) of the Rules disregarding the fact that very small amount of dividend of Rs. 19,630 on the shares other than the shares of Apex Heart Care Pvt. Ltd. was earned by the assessee which is arbitrary, unjustified, baseless and bad in law.
3. The Ld. AO has erred in law and fats of the case in initiating the penalty proceedings under section 271(1)(c) of the Act without recording proper satisfaction, which is highly unjustified and bad in law.”
Briefly stated, the assessee is a doctor by profession. He filed his return for AY 2014-15 on 26.09.2014 declaring total income of Rs. 1,47,30,487/-. The case was selected for limited scrutiny. The Ld. Assessing Officer (the “AO”) found that the assessee earned dividend income of Rs. 19,630/- during the year. On query by the Ld. AO, the assessee vide letter dated 16.08.2016 replied that the dividend income is exempt under section 10(34) of the Income Tax Act, 1961 (“Act”) and that no expenditure has been incurred for earning the said income. As such the provisions of section 14A are not applicable. The reply of the assessee did not satisfy the Ld. AO. For detailed reasons recorded by him, he disallowed Rs. 44,84,732/- under section 14A of the Act r.w Rule 8D which comprised of Rs. 39,15,118/- under rule 8D(2)(i) being interest on loan from Punjab National Bank invested in shares of Apex Heart Care Pvt. Ltd. (“AHCPL”) and Rs. 5,69,613/- under rule 8D(2)(iii) being 0.5% of average value of investments.
Aggrieved, the assessee filed appeal before the Ld. CIT(A). Vide submission dated 09.11.2017 it was contended that the assessee had invested the borrowed funds for acquisition of controlling stake in the business and therefore, the provisions of section 36(1)(iii) of the Act cannot be invoked. Reliance was placed on the following decisions: (i) CIT vs. Anand Technology Resource Park Pvt. Ltd. (2011) 15 taxmann.com 4(Kar) (ii) CIT vs. Rajeeva Lochan Kanoria (1995) 80 Taxman 572 (Cal) (iii) CIT vs. Shriram Investments (Firm) Moongambika Complex, Chennai (2015) 54 taxmann.com 15 (Madras)
(iv) SA Builders Ltd. vs. CIT (2007) 158 Taxman 74 (SC)
4.1 It was also contended that the assessee made investments with a view to acquire controlling stake in the hospital and not to earn any exempt income. The Ld. AO’s action in considering the investment in the hospital and interest expense incurred thereon for making disallowance under section 14A is not justified. The assessee relied on the decision of Kolkata ITAT in the case of DCIT vs. Binani Industries Ltd. (2017) 82 taxmann.Com 320 (Kolkata-Trib).
4.2 Without prejudice to the above, the Ld. AR submitted that at best the disallowance may be restricted to the extent of exempt income earned and cited the following precedents: (i) Joint Investments Pvt. Ltd. vs. CIT(2015) taxmann.com 295 (Delhi) (ii) PCIT vs. Empire Packaging Pvt. Ltd. (2017) 81 taxmann.Com 108 (P&H) Several decisions of the Tribunal were also cited.
4.3 The assessee re-iterated the above submissions in his reply dated 20.02.2018 also.
For the reasons recorded by the Ld. CIT(A), he confirmed the disallowance of Rs. 39,15,118/- under Rule 8D(2)(i) being interest expenditure debited to P & L account for acquiring shares in AHCPL and deleted the disallowance of Rs. 5,69,613/- under Rule 8D(2)(iii). It is against the confirmation of disallowance of Rs. 39,15,115/- under Rule 8D(2)(i) of the Rules by the Ld. CIT(A) that the assessee has come up in appeal before the Tribunal and ground No. 1 and 2 relate thereto.
We have heard the Ld. Representative of the parties. The Ld. AR submitted that the impugned interest expenditure was incurred for acquisition of shares of AHCPL on which no exempt income was earned. Therefore, the disallowance thereof under section 14A read with Rule 8D(2)(i) is not justified. He further submitted that a very small amount of 3 dividend of Rs. 19,600/- on the shares other than shares of AHCPL was earned by the assessee which is exempt under section 10(34) of the Act. Therefore, the impugned disallowance is arbitrary. Alternatively, the Ld. AR pleaded that at best the disallowance may be restricted to the extent of the exempt income earned by the assessee in the year. The Ld. AR relied on the decision of the Hon’ble Delhi High Court in Pr. CIT v. Caraf Builders and Constructions Pvt. Ltd. (2019) 414 ITR 122 (Delhi). The Ld. DR on the other hand supported the order of the Ld. CIT(A).
On consideration of the rival submissions we are inclined to accept the alternate plea of the Ld. AR that the disallowance under section 14A cannot exceed the exempt dividend income earned by the assessee during the year. In Pr. CIT vs. Caraf Builders and Constructions Pvt. Ltd. (supra) the Hon’ble Delhi High Court observed that upper disallowance as held in Pr. CIT vs. McDonalds India Pvt. Ltd. of 2018 decided on October 22, 2018 cannot exceed the exempt income of that year. This decision follows the ratio and judgment of Hon’ble Supreme Court in the case of Maxopp Investment Ltd. vs. CIT (2018) 402 ITR 640 (SC) and the earlier judgments of the Delhi High Court in Cheminvest Ltd. vs. CIT(2015) 378 ITR 33 (Delhi) and CIT vs. Holcim India Pvt. Ltd. (2014) 272 CTR (Delhi) 282. In taking this view, we are also supported by the following decisions:
(i) Pr. CIT vs. Reliance Ports and Terminals Ltd. (2020) 114 taxmann.com 529 (Bom) (ii) Pragathi Krishna Gramin Bank Vs. Jt. CIT (2018) 256 Taxman 349 (Kar) (iii) Pr. CIT vs. State Bank of Patiala (2018) 99 taxmann. Com (P&H) SLP dismissed in Pr. CIT vs. State Bank of Patiala (2018) 99 taxmann.com 286/257 Taxman. 509 (SC) (iv) Kundan Rice Mills Ltd. vs. ACIT (2020) 185 ITD 765 (Delhi)
Accordingly, we set aside the order of the Ld. CIT(A) and direct the Ld. AO to restrict the disallowance under section 14A to the amount of exempt income of Rs. 19,630/- only and amend the order of assessment.
Ground No. 3 relates to initiation of penalty under section 271(1)(c) of the Act which cannot be adjudicated in this appeal.
In the result, the appeal of the assessee is partly allowed.