PEARL GLOBAL INDUSTRIES LTD,NEW DELHI vs. ACIT, CIRCLE-19(2), NEW DELHI

The solitary issue arising in the appeal relates to disallowance of Rs.7,59,997 made under Section 14A of the Income-Tax Act, 1961 read with Rule 8D(iii).

Briefly, the facts are, assessee is a resident company. For the assessment year under dispute, assessee filed its return of income on 30.11.2016 declaring total income of Rs.16,95,520.

Subsequently, assessee filed a revised return of income on 30.02.2018 declaring total income at Rs.17,18,96,120.

In course of assessment proceedings, Assessing Officer noticed that assessee, in the year under consideration, had earned exempt income by way of long term capital gain on sale of mutual fund etc. amounting to Rs.1,65,43,156. Whereas, assessee has not disallowed any expenditure attributable to such income. When called upon to explain the reasons for not doing so, assessee submitted, it had not earned any exempt income during the year. Assessing Officer did not accept the aforesaid explanation of the assessee, since, assessee did earn exempt income during the year. Therefore, he proceeded to compute disallowance under Rule 8D read with section 14A of the Act. While doing so, he disallowed an amount of Rs.47,99,905 under Rule 8D(ii) of the Act towards interest expenditure.

Further, he disallowed an amount of Rs.7,59,987 under Rule 8D(ii) of the Act. Thus, in aggregate, he disallowed an amount of Rs.55,59,892.

Assessee contested the aforesaid disallowance by filing an appeal before learned Commissioner (Appeals).

While deciding assessee’s appeal, learned Commissioner (Appeals) deleted the disallowance of interest expenditure amounting to Rs.47,99,905. However, he sustained the disallowance of administrative expenditure of Rs.7,59,987 made under Rule 8D(iii) of the Act.

Before us, learned counsel appearing for the assessee submitted that disallowance under Rule 8D(iii) of the Act should be made considering only those investments which yielded exempt income during the year under consideration. In support of such contention, she relied upon the following decisions:

Further, she submitted, while computing book profit under Section 115JB of the Act, no disallowance can be made with reference to Section 14A read with Rule 8D.

Learned Departmental Representative strongly relied upon the observations of the Assessing Officer and learned Commissioner (Appeals).

We have considered rival submissions in the light of the decisions relied upon and perused the material available on record.

As discussed earlier, assessee, per se, has not contested the disallowance made under Rule 8D(iii) read with section 14A of the Act. The only grievance of the assessee is, disallowance under Rule 8D(iii) read with section 14A of the Act has to be made by considering only those investments which have yielded exempt income during the year.

Keeping in view the ratio laid down in the decisions cited before us, in principle, we agree with the aforesaid submission of learned counsel for the assessee. Therefore, we direct the Assessing Officer to compute disallowance under Section 14A read with Rule 8D(iii), by considering only those investments which yielded exempt income during the year under consideration.

Further, we hold, while computing book profit under Section 115JB of the Act, no adjustment can be made with reference to section 14A read with Rule 8D.

In the result, the appeal is allowed as indicated above.