TRITON TRADING COMPANY PRIVATE LIMITED ,MUMBAI vs. DCIT 5(3)(2), MUMBAI

Briefly stated, the relevant facts are that the assessee company had made investments in shares and mutual funds, income from which was exempt from tax. In the return of income, the assessee had itself offered a disallowance of Rs.60,000/- under section 14A. During the course of assessment proceedings, the Assessing Officer noted that the assessee had substantial investments capable of yielding exempt income and was of the view that the disallowance offered by the assessee was not in accordance with the method prescribed under Rule 8D. Accordingly, the assessee was called upon to furnish the computation of disallowance under Rule 8D. Based upon such working, the Assessing Officer computed the total disallowance at Rs.1,16,28,030/- and after reducing the amount already disallowed by the assessee, made a further addition of Rs.1,15,68,030/-.

Before the learned First Appellate Authority, the assessee challenged the action of the Assessing Officer and submitted that no disallowance under Rule 8D(2)(ii) on account of interest expenditure could be made, as the assessee possessed substantial interest-free funds far in excess of the investments. It was further submitted that a substantial

Before us, the learned counsel reiterated that the disallowance of Rs.10,45,495/- made under Rule 8D(2)(ii) is wholly unsustainable. Referring to the audited financial statements, he submitted that the assessee had substantial own funds comprising share capital and reserves and surplus, which were far in excess of the investments held by it. He further submitted that a substantial portion of the investments represented shares received on account of amalgamation and not investments made by deploying borrowed funds. The capital structure and investment position of the assessee was highlighted as under:

The learned counsel further submitted that during the year the assessee had earned dividend income of Rs.4,78,13,864/- and a substantial portion thereof was received from amalgamated companies. It was contended that it is now a settled proposition that while computing disallowance under Rule 8D(2)(iii), only those investments which have actually yielded exempt income during the year can be taken into consideration. Based on this principle, the assessee has furnished a working showing the disallowance at Rs.71,73,106/- and submitted that the disallowance, if any, should be restricted to the said amount.

Per contra, the learned Departmental Representative strongly relied upon the orders of the Assessing Officer and the learned CIT(A).

We have carefully considered the rival submissions, perused the orders of the authorities below and examined the material placed before us. From a perusal of the assessment order, it is seen that the Assessing Officer has proceeded to

As regards the disallowance computed under Rule 8D(2)(iii), we find considerable merit in the alternative contention raised on behalf of the assessee. The object of section 14A is to disallow expenditure incurred in relation to earning exempt income and therefore the computation mechanism under Rule 8D has to be applied in a manner consistent with such legislative intent. It is now fairly well settled that while computing the average value of investments for the purpose of Rule 8D(2)(iii), only those investments which have actually yielded exempt income during the relevant previous year are required to be taken into consideration. The rationale behind this principle is that investments which have not generated any exempt income during the year cannot be presumed to have occasioned expenditure for earning such income. In the present case, the assessee has furnished before us a detailed working demonstrating that if this principle is applied, the resultant disallowance works out to Rs.71,73,106/-. The said working has been placed before us as part of the annexure to the grounds of appeal. Since the correctness of such computation has not been examined by the Assessing Officer, we deem it appropriate to restore this limited aspect to his file for verification of the working furnished by the assessee. Subject

Accordingly, the Assessing Officer is directed to recompute the disallowance under section 14A in the light of the directions given hereinabove. The assessee thus succeeds substantially on the issue raised before us.

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