SANSERA ENGINEERING LIMITED (FORMERLY KNOWN AS SANSERA ENGINEERING PRIVATE LIMITED),BANGALORE vs. COMMISSIONER OF INCOME TAX(APPEALS)- 14, BANGALORE

The assessee is a company engaged in the business of manufacture of automobile components and the assessment for Assessment Year 2009-10 was completed under section 143(3) for Assessment Year 2009-10 on 31.10.2011. The AO made disallowance of expenses under section 14A of the Income Tax Act, 1961 (hereinafter called ‘the Act’). That disallowance was a subject matter of challenge by the assessee before the Hon’ble Tribunal in and the Tribunal by its order dated 10.12.2014 set aside the order of the CIT(A) and remanded the issue of disallowance under section 14A of the Act for fresh consideration by the AO.

In the set aside proceedings the AO passed an order dated 29.10.2015 in which he accepted that there was no necessity for making any disallowance under section 14A of the Act r.w.r. 8D(2)(ii) of the Rules. He however made a disallowance of other expenses under Rule 8D(2)(iii) of the Act of a sum of Rs.11,72,052/-. The assessee filed appeal against the aforesaid order of the AO. It was dismissed by the CIT(A) by impugned order.

Before us, learned Counsel for the assessee drew our attention to the Profit and Loss A/c and submitted that none of the expenses can be said to be attributable to earning tax free dividend income. Without prejudice to his submission that no expenditure was incurred in earning the exempt income. Assessee submitted that the disallowance under section 14A read with rule 8D is to be in relation to the income which does not form part of the total income and this can be done only by taking into consideration the investment which has given rise to exempt income which does not form part of the total income (ACB India Ltd. v. ACTT (374 ITR 108), REI Agro Ltd. v. DCIT (144 ITD 141), DCIT v. Teenlok Advisory Services (P.) Ltd. (159 ITD 991)). In the present case, the assessee had earned dividend income during the year only from the investments in mutual funds and not from the investments in subsidiaries. Therefore, for the purpose of calculating "average investments", opening and closing balance of investments in mutual funds should be taken. The AO has not considered this aspect and hence the computation of disallowance by him is erroneous.

Learned DR relied on the order of the CIT(A) and submitted that the disallowance was proper and calls for no interference.

After considering the rival submissions, we are of the view that the alternative prayer made by the assessee for making disallowance under Rule 8D(2)(iii) by taking the average value of those investments which yielded tax free dividend income and apply the percentage as specified in Rule 8D(2)(iii) of the Rules. In holding so, we are supported by the decision of the Hon’ble Special Bench of ITAT in the case of ACIT v. Vireet Investments Pvt. Ltd. (2017) 82 taxmann.com 415 (Del)(Trib)(SB) wherein it has been held that for computation of disallowance of expenses incurred to earn exempt only investments that yielded tax free income has to be taken for working out the average value of investments. The AO is accordingly directed to compute disallowance under Rule 8D(2)(iii) accordingly.

The appeal of the assessee is accordingly partly allowed.