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Income Tax Appellate Tribunal, ‘’SMC’’ BENCH, AHMEDABAD
(Applicant) (Respondent) Assessee by : Shri S.N. Divatia, A.R Revenue by : Shri Vinod Tanwani, Sr.DR सुनवाई क� तार�ख/Date of Hearing : 18/07/2019 घोषणा क� तार�ख /Date of Pronouncement: 14/10/2019 आदेश/O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned appeal has been filed at the instance of the Assessee against the order of the Learned Commissioner of Income Tax(Appeals)-2, Ahmedabad [Ld.CIT(A) in short], dated 16/06/2017 arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here- in-after referred to as "the Act") dated 16/06/2017 relevant to Assessment Year (AY) 2013-14.
The assessee has raised the following grounds of appeal:
1.1 The order of asstt. passed u/s. U/s.250 passed on 16.86.2017 for A.Y.2013-14 by CIT(A)-2, A'bad confirming the disallowance to the extent of Rs. 17,24,557/- as well as adjustment in computation of book profit u/s.115JB to the same extent is wholly illegal, unlawful and against the principles of natural justice. 1.2 The Ld. CIT(A) has grievously erred in law and or on facts in not considering fully and properly the explanations furnished and the evidence produced by the appellant. 2.1 The Ld. CIT(A) has grievously erred in law and or on facts in upholding that the provisions of section 14A r.w. Rule-8D(2)(iii) were applicable and thereby confirming the disallowance of Rs. 17,24,557/-. 2.2 That in the facts and circumstances of the case, the Ld.CIT(A) ought not to have upheld that the provisions of section 14A r.w. Rule-8D(2)(iii) were applicable and thereby confirming the disallowance of Rs. 17,24,557/-. 2.3 Without prejudice to above and in alternative, the Ld. CIT(A) has failed to appreciate that the AO had reduced the impugned disallowance to Rs.16,07,584/- by order u/s.154 dated 21.06.2016 and copy of said order was filed with written submission, yet no cognizance has been taken thereof. 3.1 The Ld. CIT(A) has grievously erred in law and or on facts in upholding the adjustment by way of disallowance U/S.14A of Rs. 17,24,557/- while computing book profit u/s.ll5DB. 3.2 That in the facts and circumstances of the case, the Id.CIT(A) ought not to have upheld the adjustment by way of disallowance U/S.14A of Rs. 17,24,557/- while computing book profit u/s.ll5JB.
It is therefore prayed that the disallowance of Rs. 17,24,557/- made by the AO should be deleted.
The interconnected issue raised by the assessee is that the learned CIT (A) erred in confirming the disallowance made by the AO under section 14A r.w. rule 8D of Income Tax Rule for ₹1 7,24,557/- under normal computation of income viz a viz under the provisions of section 115 JB of the Act
Briefly stated facts are that the assessee in the present case is a private limited company and engaged in the business of manufacturing and trading of Ferro Alloys and trading in shares. The assessee in the year under consideration has received dividend income of Rs. 49,66,578/- only which was claimed as exempt under section 10(34) of the Act. The assessee against such income has made the disallowance of expenses as required under section 14A of the Act for Rs. 1,51,460/- only.
2.2 However, the AO was of the view that the assessee failed to establish the nexus between the funds available with it and the funds utilized for making the impugned investments. Therefore he invoked the provisions of section 14A r.w. Rule 8D of the Income Tax Rules and made the disallowance as under: Sr.No. Particulars Amount 1. Direct expenses under Rule 8D 2(i) of the Act Nil 2. Interest expenses under Rule 8D 2(ii) of the Act 34,487/- 3. Administrative expenses under Rule 8D2(ii) of the Act 17,24,557/- Total 17,59,044/- 2.3 The AO accordingly worked out the difference of Rs.16,07,584/- (1759044-151460) and disallowed the same. Accordingly the AO added the sum of Rs.16,07,584/- under normal computation of income and the sum of Rs.17,59,044/- under MAT computation of income.
Aggrieved assessee preferred an appeal to the ''Ld.CIT (A)''.
The assessee before the learned CIT (A) submitted that its own fund exceeds the amount of investment. Therefore there cannot be disallowance of interest expenses.
3.1 The assessee regarding the interest expenses submitted that it has already made a disallowance of Rs. 1,51,460/- only against the dividend income which was added under normal computation and MAT computation of income. As such the AO cannot substitute the amount disallowed by the assessee until and unless it points out the defect in it.
3.2 However the ''Ld.CIT (A)'' deleted the addition made by the AO for the interest expenses on the ground that the own fund of the assessee exceeds the amount of investment.
3.3 However the ''Ld.CIT (A)'' disregarded the contention of the assessee regarding the administrative expenses by observing that similar disallowance was also upheld by the order of his predecessor in the immediate preceding assessment year. Accordingly, the ''Ld.CIT (A)'' confirmed the order of the AO.
Being aggrieved by the order of the ''Ld.CIT (A)'' the assessee is in appeal before us.
The learned AR before us submitted that the investments which have yielded the dividend income in the year under consideration should only be considered for the purpose of the disallowance under rule 8D 2(iii) of the Act.
On the other hand the learned AR vehemently supported the order of the authorities below.
We have heard the rival contentions of both the parties and perused the materials available on record. The limited prayer in the present case of the Page 4 of 8 assessee is that the investments which have yielded the dividend income should only be considered for the purpose of the disallowance. In this regard we note that the ITAT in the case of ACIT Vs Vireet Investments Pvt. Ltd. reported in 165 ITD 27 has held as under:
“11.17 As far as argument relating to meaning to be ascribed to the phrase 'shall not' used in Rule 8D(2)(iii) is concerned, the Revenue's contention is that it refers to those investments which did not yield any exempt income during the year but if income would have been yielded it would have remain exempt. There is no dispute that if an investment has yielded exempt income in a particular year then it will enter the computation of average value of investments for the purposes of Rule 8D(2)(iii). The assessee's contention that if there is no certainty that an income, which is exempt in current year, will continue to be so in future years and, therefore, that investment should also be excluded, is hypothetical and cannot be accepted.”
In view of the above, we hold that the investments which have generated the income in the year under consideration, should only be considered for the purpose of the disallowance under section 14A r.w.r. 8D of Income Tax Rules. In view of the above, we set aside the order of the ld. CIT- A and direct the AO adjudicate the issue afresh in the light of the above discussion and as per the provision of law. Hence the ground of appeal of the assessee is allowed for statistical purposes.
6.1 We also make it clear that the amount of disallowance to be made under section 14A r.w. rule 8D of income tax Rules cannot be imported while computing the book profit under section 115 JB of the Act. In this connection, we note that in the recent judgment of Special Bench of Hon’ble Delhi Tribunal in the case of ACIT vs. Vireet Investment Pvt. Ltd. reported in 82 Taxmann.com 415 has held that the disallowances made u/s 14A r.w.r. 8D cannot be the subject matter of disallowances while determining the net profit u/s 115JB of the Act. The relevant portion of the said order is reproduced below:
“In view of above discussion, the computation under clause (f) of Explanation 1 to section 115JB(2), is to be made without resorting to the computation as contemplated under section 14A, read with rule 8D of the Income-tax Rules, 1962.”
6.2 The ratio laid down by the Hon’ble Tribunal is squarely applicable to the facts of the case on hand. Thus it can be concluded that the disallowance made under section 14A r.w.r. 8D cannot be resorted while determining the expenses as mentioned under clause (f) to explanation 1 to section 115JB of the Act.
6.3 However, it is also clear that the disallowance needs to be made with respect to the exempted income in terms of the provisions of clause (f) to section 115JB of the Act while determining the book profit. In holding so, we draw support from the judgment of Hon’ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. in GO No.1501 of 2014 (ITAT No.47 of 2014) dated 19.11.14 wherein it was held that the disallowance regarding the exempted income needs to be made as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. The relevant extract of the judgment is reproduced below:-
“We find computation of the amount of expenditure relatable to exempted income of the assessee must be made since the assessee has not claimed such expenditure to be Nil. Such computation must be made by applying clause (f) of Explanation 1 under section 115JB of the Act. We remand the matter for such computation to be made by the learned Tribunal. We accept the submission of Mr. Khaitan, learned Senior Advocate that the provision of section 115JB in the matter of computation is a complete code in itself and resort need not and cannot be made to section 14A of the Act.”
Given above, we hold that the disallowances made under the provisions of Sec. 14A r.w.r. 8D of the IT Rules, cannot be applied to the provision of Sec. 115JB of the Act as per the direction of the Hon'ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. (Supra).
6.4 Now the question arises to determine the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. In this regard, we note that there is no mechanism/ manner given under the clause (f) to Explanation-1 of Sec. 115JB of the Act to workout/ determine the expenses with respect to the exempted income. Therefore in the given facts & circumstances, we feel that ad-hoc disallowance will serve the justice to the Revenue and assessee to avoid the multiplicity of the proceedings and unnecessary litigation. Thus we direct the AO to make the disallowance of 1% of the exempted income as discussed above under clause (f) to Explanation-1 of Sec. 115JB of the Act. We also feel to bring this fact on record that we have restored other cases involving identical issues to the file of AO for making the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. But now we note that there is no mechanism provided under the clause (f) to Explanation-1 of Sec. 115JB of the Act to make the disallowance independently. Therefore our action for restoring back the issue to the file of AO would unnecessarily cause further litigation. Thus we limit the disallowance on an ad-hoc basis @ 1 % of the exempted income as per the clause (f) to Explanation-1 of Sec. 115JB of the Act subject to the minimum amount disallowed by the assessee. Thus the ground of appeal of the assessee is allowed for the statistical purposes.
In the result, the appeal of the assessee is allowed for the statistical purposes.
Order pronounced in the Court on 14/10/2019 at Ahmedabad.