DNYANESHWAR TRADING AND INVESTMENTS PRIVATE LIMITED,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE - 1(1)(1), MUMBAI, MUMBAI

In the instant case, the Assessing Officer by determining the amount of Rs. 23,70,566/- being 1% of the annual average of the monthly opening and closing balances of the valued investments and reducing the amount of disallowance already offered by the assessee and restricted the disallowance to Rs. 10,72,860/- and as the assessee has already disallowed an amount of Rs. 1,219/- under Section 14A of the Act. The disallowance of Rs. 10,71,643 (Rs. 10,72,860/- Minus Rs. 1,219/-) has been brought under Section 14A r.w.r 8D of the Income Tax Rule, 1962 (In short ‘the Rule’).

The assessee being aggrieved challenged the said addition/disallowance by filling first appeal before the Ld. Commissioner and inter alia claimed that the assessee during the year under consideration has not earned any exempt income and therefore in view of the judgments including decision of the Hon’ble Delhi High Court in the case of Cheminvest Ltd Vs. Ld. CIT(A), (378 ITR 33) relevant to the issue under consideration, the addition / disallowance made by the Assessing Officer is not sustainable. The Ld. Commissioner though reproduced the dictum laid down by various courts on the issue under consideration however, ultimately affirmed the aforesaid addition/disallowance.

Thus, the Assessee being aggrieved has preferred the instant appeal.

Heard the parties and perused the material available on record. The Assessee before us has contended that it has not earned any dividend/exempt income from the investments made during the year under consideration. The Assessee had made investments aggregating to Rs. 23.66 Crores in the equity shares of its subsidiary and associate companies. However, for the purpose of making the disallowance/addition as made by the Assessing Officer and sustained by the ld. Commissioner, only those investments from which the Assessee has earned exempt income during the 2 year under consideration can be considered, in view of the judgment of the Hon’ble Special Bench of the Tribunal, Delhi, in the case of ACIT Vs. Vireet Investment (P.) Ltd. [2017] 82 taxmann.com 415 (Delhi Trib.) (SB).

The aforesaid factual aspects and the claim of the Assessee have not been disputed by the ld. DR.

Having considered the rival submissions of the parties, we are of the view that any disallowance made under Section 14A of the Act cannot exceed the total exempt income earned by the Assessee during the year under consideration. Since the Assessee has claimed that it has not earned any exempt income during the year under consideration, and consequently no disallowance is attracted, thus the matter requires consideration in light of the judgments of the Hon’ble Jurisdictional High Court, including the decision in M/s. Nirved Traders Pvt. Ltd. vs. DCIT [2020] 421 ITR 142 (Bom.).

Further, we are in agreement with the contention of the Assessee that, while computing disallowance under Rule 8D(2)(iii), the average value of investments should be restricted to investments, which yielded exempt income during the year and computation mechanism of Section 14A read with Rule 8D cannot be applied, while computing book profit under Section 115JB(2), as held by the Special Bench in ACIT Vs. Vireet Investment (supra).

Accordingly, in view of the above, the orders passed by the Authorities below are quashed and case is remanded to the file of the Assessing Officer to examine this issue afresh, in the light of the judgments of the Hon’ble Jurisdictional High Court in M/s. Nirved Traders Pvt. Ltd. (supra) and of the Special Bench in ACIT Vs. Vireet Investment (supra), and thereafter re-compute the tax liability in accordance with law.

In the result, the appeal of the Assessee is allowed in the above terms.