CONTINENTAL DEVICE INDIA P.LTD,NEW DELHI vs. DCIT, CIRCLE-6(2), NEW DELHI

The facts in brief are that the assessee filed its return of income on 30.09.2015 declaring total income at Rs. 2,94,66,590/-. The case of assessee was selected under CASS for scrutiny and accordingly various notices u/s 143(2) and 142(1) were issued from time to time. The AO noticed that the assessee has claimed certain amount of income as exempt and itself has disallowed a sum of Rs. 2,87,797/- u/s 14A as was evident from Clause 21(h) of Form 3CD. The amount of investment was Rs. 89,66,30,000/- as on 31.03.2015 as compared to Rs. 85,70,81,000/- as on 31.03.2014. Accordingly vide notice dated 21.08.2017, the Ld. AO required the assessee to explain as to why expenditure in relation to the income not chargeable to tax be not disallowed u/s 14A r.w.Rule 8D. In response, the assessee filed a reply dated 24.09.2017 stating that disallowance at 0.5% of average value of investment from which tax free income was received, had already been disallowed in view of the decisions of Hon'ble Jurisdictional High Court in the cases of ACIT Vs Vireet Investment Pvt Ltd (2017) 82 taxmann.com 415 and ACB India Ltd Vs ACIT (2015) 374 ITR 108. The Ld. AO was not satisfied with the explanation of assessee and he proceeded to make the disallowance as per Rule 8D.

In appeal the Ld. CIT(A) held that the disallowance u/s 14A cannot exceed the total exempt income claimed by the appellant, therefore the AO was directed to restrict the disallowance to the extent of Rs. 37,94,067/- observing that if the same after computation as per Rule 8D exceeds the same.

Now in appeal, the assessee has raised following grounds of appeal :- “Ground No.

Heard and perused the record.

On behalf of the assessee it was submitted that in the remand report submitted by the Ld. AO it was mentioned that no borrowed funds were used by the assessee in making the investments but Ld. CIT(A) by relying upon certain judgments which had no relevance held that some part of interest bearing funds must have been used for making investment. It was submitted that Ld. CIT(A) failed to take into consideration that no part of interest can be disallowed because the assessee was having sufficient own interest free funds. It was submitted that total investment of the assessee are 89.66 crores while total interest free funds available with the assessee are Rs. 104.60 crores. It was also submitted that in assessee’s own case for the assessment year 2014-15, and for assessment year 2016-17, ITA No. 8314/Del/2019, the Co-ordinate Benches have held that no disallowance of interest can be made and the same was directed to be deleted. 6.1 On the contrary Ld. DR supported the findings of the Ld. CIT(A). 7. Appreciating the matter on record and the contentions raised it can be observed from the order of Ld. CIT(A) that in the remand report received, the Ld. AO had submitted that no borrowed fund were utilized and that assessee company increased only investment of Rs. 1.25 crores in assessment year 2015-16 on 04.04.2014 from existing refunds. It was also submitted that no fresh investment have been made on which exempt income earned. These submissions of the ld. AO have been reproduced by the Ld. CIT(A) at page 11 of its order 7.1 However, the CIT(A) failed to consider these remand report and proceeded on the premises that as assessee itself has disallowed a sum of Rs. 2,78,797/- u/s 14A, hence, it was clear that provisions of section 14A were applicable [Para 4.2, order of CIT(A)]. Further Ld. CIT(A) observed that as there are common bank accounts for exempt income as well as business income therefore, on principle of