SOUTH INDIA TRAVELS PRIVATE LIMITED,CHENNAI vs. INCOME TAX OFFICER, CHENNAI

Aggrieved, the assessee filed further appeal before the CIT(A). The CIT(A) upheld the disallowance computed by the AO. The assessee is in appeal before the Tribunal against the order of the CIT(A).

The Ld. Authorized Representative (AR) of the assessee submitted that the AO has made disallowance under Rule 8D(2)(i) of the Rules amounting to Rs.3,217/- stating that the same is based on assessee’s submissions. However, the assessee has not made any submission with regard to the direct expenses incurred towards earning the exempt income and therefore there is no basis on which the AO has arrived at the disallowance. With regard to disallowance under Rule 8D(2)(ii) of the Rules, the Ld. AR submitted that the interest paid by the assessee during the course of hearing has no correlation to the exempt income earned by the assessee. Since the assessee has already closed all the loans outstanding. The Ld. AR further submitted that the interest paid is attributable to the borrowing from HDFC bank towards car loan (refer Schedule-3-long term borrowings). Accordingly, it is submitted that no disallowance towards interest is warranted. With regard to disallowance under Rule 8D(2)(iii) of the Rules, the Ld. AR submitted that the AO has considered the entire investments, whereas as per the judicial precedence those investments which earned the exempt income are only to be considered for the purposes of disallowance u/s. 8D(2)(iii) of the Rules. The Ld. AR submitted the below table and prayed for directions in this regard:

The Ld. Departmental Representative (DR), on the other hand, submitted that the assessee did not furnish the proper breakup of investments or the funds flow statement before the lower authorities. Accordingly, the Ld. DR supports the orders of the lower authorities.

We have heard the parties and perused the material available on record. We notice from the perusal of the balance sheet as on 31.03.2015 that the assessee has closed all the unsecured loans during the year under consideration. We further notice that the assessee has borrowed from HDFC bank towards car loan towards which the interest has been debited. The relevant schedule from the financial statements are extracted hereunder:

From the perusal of the above, it is noticed that the assessee has paid interest towards car loans and no interest is paid on unsecured loans. Therefore, we see merit in the submissions of the Ld. AR that no disallowance towards interest is warranted under Rule 8D(2)(ii) of the Rules. With regard to disallowance under Rule 8D(2)(iii) of the Rules, it is noticed that the AO has considered the entire investments as on 31.03.2015 for the purpose of making the disallowance. It is a settled position that while making disallowance under rule 8D(2)(iii) of the Rules only those investments which earned in exempt income is to be considered and in this regard, we place reliance on the decision in the case of ACIT v. Vireet Investment (P.) Ltd., [2017] 82 taxmann.com 415 (Del Trib.)(SB). We have extracted the details furnished by the Ld. AR with regard to those investments which have yielded exempt during the year under consideration in the earlier part of this order. We direct the A.O to consider the judicial precedence and the details furnished hereinabove to recompute the disallowance under Rule 8D(2)(iii) of the Rules. With regard to the disallowance made towards direct expenses, we notice that the basis on which the AO has arrived at that amount is not coming out clearly from the records. Further, we have perused the details of the expenses from the financial statements from which we notice that there are no direct expenses attributable for earning the exempt income debited to the profit and loss account. Accordingly, there is merit in the submission that the

In the result, the appeal of the assessee is partly allowed.