M/S. PREMIUM POLYALLOYS PVT. LTD.,AHMEDABAD vs. THE DY. COMMISSIONER OF INCOME TAX, CIRCLE-2(1)(2), BARODA

As claimed on behalf of the assessee, the facts are similar and common issues are involved in both assessment years and therefore both the appeals were heard together and disposed of by common order.

The solitary issue in the captioned appeal concerns disallowance of expenditure of Rs.7,94,098/- under S. 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 (the Rules).

In the course of scrutiny assessment, the AO inter alia invoked Section 14A of the Act and computed disallowance of expenditure attributable investments giving rise to exempt income as per statutory formula laid down under Rule 8D of the Rules. The AO accordingly disallowed Rs.5,98,488/- towards proportionate interest expenditure under Rule 8D (2)(ii) and Rs.1,95,610/- towards administrative expenditure under Rule 8D(2)(iii) of the Rules. The CIT(A) confirmed the action of the AO.

When the matter was called for hearing, the learned AR for the assessee pointed out that interest free surplus funds at its disposal substantially in excess of the corresponding investments giving rise to the tax free income. The learned AR thus submitted that there is no warrant in invoking Rule 8D(2)(ii) proportionate in the disallowance in view of the long line of judicial precedents in the given situation. We straightway find merit in the plea of the assessee with regard to the judicial precedents in the case of Pr.CIT vs. Sintex Industries Ltd. [2018] 403 ITR 418 (Guj) and CIT vs. Reliance Utilities & Power Ltd. [2009] 313 ITR 340 (Bom.).

The disallowance towards administrative expenditure under Rule 8D(2)(iii) is however sustained in the absence of any cogent reason for departure from the statutory formula. Consequently, the disallowance of Rs.5,98,488/- is deleted and the remaining disallowance of Rs.1,95,610/- is sustained.

In the result, appeal of the assessee in AY 2012-13 is partly allowed.

The assessee in the captioned appeal is aggrieved by the order of the CIT(A) towards; (i) disallowance of proportionate interest amounting to Rs.12,83,379/- by invoking Section 14A of the Act in terms of formula laid down under Rule 8D(2)(ii) of the Rules and (ii) disallowance of employees contributions to Provident Funds amounting to Rs.86,786/- under s.2(24)(x) r.w.s. 36 (1)(va) of the Act.

Ground No.1 is similar to the grievance raised in AY 2012-13 discussed in preceding paras. In view of the similarity of the facts i.e. the own funds (interest free funds in excess of the corresponding investment yielding tax free income), we do not see any justification in the action of the Revenue authorities indulging in proportionate disallowance on interest expenditure. The AO is accordingly directed to delete the disallowance of proportionate interest expenditure carried out under Rule 8D(2)(ii) of the Rules.

In the result, Ground No.1 of the assessee’s appeal is allowed.

Ground No.2 concerns disallowance of employees contributions to Provident Fund under s.36(1)(va) of the Act. This ground raised by the assessee is dismissed as not pressed.

In the result, appeal of the assessee in AY 2013-14 is also partly allowed.

In the combined result, both appeals of the Assessee are partly allowed.