KALRA OVERSEAS AND PRECISION ENGINEERING LTD,PUNE vs. INCOME-TAX OFFICER, WARD - 14(2), PUNE

आदेश / ORDER

PER ANIL CHATURVEDI, AM :

This appeal filed by the assessee is emanating out of the order of 1. the Commissioner of Income Tax – (Appeals) – 7, Pune dated 22.06.2018 for the assessment year 2015-16.

Assessee is a company which is stated to be engaged in the business of manufacturing of Forged and Cast Machine components. Assessee electronically filed its return of income for A.Y. 2015-16 on 03.10.2015 declaring total income at Rs.13,67,660/-. The case was

selected for scrutiny and thereafter assessment was framed u/s 143(3)

of the Act vide order dt.03.11.2017 and the total income was determined

at Rs.26,17,220/-. Aggrieved by the order of AO, assessee carried the

matter before Ld.CIT(A), who vide order dt.22.06.2018 (in appeal

No.PN/CIT(A)-7/Wd-14(2)/10218/2017-18) dismissed the appeal of

assessee. Aggrieved by the order of Ld.CIT(A), assessee is now in appeal

before us and has raised the following grounds :

“1. On the facts and in the circumstances of the case and in law the honorable CIT (Appeals) - 7, Pune erred in confirming the disallowance of Interest and other expenses amounting to Rs. 12,49,564/- as disallowed by the Learned AO by applying the provision of section 14A of the I. T. Act read with Rule 80 of the I. T. Rules, 1962 without appreciating the facts of the case. The appellant hereby prays that the addition may please be deleted. 2. On the facts and in the circumstances of the case and in law the honorable CIT (Appeals) - 7, Pune erred in confirming the disallowance of interest and other expenses amounting to Rs. 12,49,564/- made under section 14A of the I. T. Act read with Rule 80 of the I. T. Rules, 1962 without appreciating the facts that a) The appellant has not made any new investment during the year under consideration, income from which is exempt from tax. b) The appellant has not incurred any expenditure in relation to the income not forming part of total income in order to attract the provisions of section 14A of the I.T. Act c) The interest free funds available with the appellant in the form of Share Holders Funds (Share Capital plus Reserve and Surplus) are much more than the Investments made by the appellant in the shares of the companies.”

has raised various grounds but the only issue is with respect to

disallowance u/s 14A r.w. Rule 8D of the Income Tax Rules.

assessee had made investments in Equity Instruments and had

incurred interest expenses. AO was of the view that in view of the fact

that income from equity instruments was exempt from taxes, provisions

of Sec.14A r.w. Rule 8D(2)(ii) of I.T. Rules are applicable. The assessee

was asked to explain as to why the disallowance u/s 14A r.w. Rule

8D(2)(ii) of I.T. Rules not be made. The submissions of the assessee

were not found acceptable to the AO. AO on the basis of method

prescribed under Rule 8D(2)(ii) worked out the total disallowance of

interest u/s 14A of the Act at Rs.11,31,983/- and on account of other

expenses at Rs.1,17,581/- under Rule 8D(2)(iii) of I.T. Rules and thus

disallowed Rs.12,49,564/- u/s 14A of the Act. Aggrieved by the order of

AO, assessee carried the matter before Ld.CIT(A), who upheld the order

of AO. Aggrieved by the order of Ld.CIT(A), assessee is now in appeal

before us.

Ld.CIT(A) and further pointing to the audited Balance-Sheet placed at

page 6 of the Paper Book submitted that as against the investment of

Rs.86 lakhs assessee was having sufficient interest free funds in the

form of Share capital and Reserves and Surplus aggregating to Rs.23

crores which were more than the investments and in such a situation, it

is to be presumed that investments are out of interest free funds.

Ld.A.R. relied on the decision of Hon’ble Bombay High Court in the case

of CIT Vs. HDFC Bank Ltd., reported in (2014) 366 ITR 505 wherein it

was held that when the own funds are more than the investments then

no disallowance of interest u/s 14A of the Act is called for. Relying on

the aforesaid decision, he submitted that no disallowance of interest

under Rule 8D(2)(ii) of I.T. Rules is called for in the present case. He

further submitted that assessee has earned exempt income of only

Rs.3,705/- u/s 10(34) of the Act and in such an eventuality, the

disallowance u/s 14A of the Act is to be restricted to the exempt income

earned. Ld.D.R. on the other hand, supported the order of lower

authorities.

record. The issue in the present ground is with respect to disallowance

u/s 14A r.w. Rule 8D of the Act. Before us, assessee from the audited

Balance-Sheet has pointed out that the availability of interest free funds

in the form of Share capital, Reserves and Surplus aggregates to Rs.23

crores as against the investments made at Rs.86 lakhs which shows

that the availability of interest free funds to be much more than the

investments. We find that Hon’ble Bombay High Court in the case of

CIT Vs. HDFC Bank Ltd (supra) has held that when own funds are more

than the investments, then no disallowance of interest u/s 14A of the

Act is called for. Following the aforesaid decision of Hon’ble Bombay

High Court we hold that in the present case, no disallowance of interest

u/s 14A r.w 8D(2)(ii) of I.T. Rules is called for. As far as disallowance of

administrative expenses u/s 14A r.w. Rule 8D(2)(iii) is concerned, we

find that under Rule 8D(2)(iii) of I.T. Rules, the disallowance of other

expenses has been worked out at Rs.1,17,581/-. It is assessee’s

contention that assessee has earned exempt income of dividend only of

Rs.3,705/-. The aforesaid contention of the assessee has not been

controverted by Revenue. We find that the Hon’ble Punjab and Haryana

High Court in the case of PCIT Vs. State Bank of Patiala in ITA No.359 of

2017 dt.14.11.2017 has held that the amount of disallowance u/s 14A

of the Act has to be restricted to the amount of exempt income only and

not at a higher figure. We find that against the aforesaid order of

Punjab and Haryana High Court, Revenue filed S.L.P. before the Hon’ble

Apex Court and the S.L.P. was dismissed by the Hon’ble Apex Court.

We further find that Hon’ble Delhi High Court in the case of PCIT Vs

Caraf Builders & Construction (P) Ltd., (2019) 101 Taxmann.com 167 (Del) after considering the decisions of Hon’ble Apex Court in the case of Maxopp Investment Ltd. Vs. CIT (2018) 402 ITR 640, Cheminvest Vs. CIT (2015) 378 ITR 33 and other decisions has held that disallowance u/s 14A cannot exceed exempt income of the relevant year. In the present case, since assessee has earned exempt income from dividends only to the extent of Rs.3,705/-, we relying on the aforesaid decisions direct the disallowance u/s 14A of the Act be restricted to the extent of exempt income i.e., Rs.3,705/-. Thus, the grounds of the assessee are partly allowed.

Order pronounced on 7th day of March, 2019.

Sd/- Sd/- (VIKAS AWASTHY) (ANIL CHATURVEDI) �या�यक सद�य / JUDICIAL MEMBER लेखा सद�य / ACCOUNTANT MEMBER

पुणे Pune; �दनांक Dated : 7th March, 2019. Yamini

आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent 3. CIT(A) –7, Pune. 4 Pr.CIT-6, Pune. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, “एक सद�य” / 5. DR, ITAT, “SMC” Pune; 6. गाड� फाईल / Guard file.

आदेशानुसार/ BY ORDER

// True Copy // व�र�ठ �नजी स�चव / Sr. Private Secretary आयकर अपील�य अ�धकरण ,पुणे / ITAT, Pune.