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Income Tax Appellate Tribunal, PUNE BENCH “SMC”, PUNE
Before: SHRI ANIL CHATURVEDI, AM & SHRI VIKAS AWASTHY, JM
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.
The relevant facts as culled out from the material on record are as under :-
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.”
Before us, at the outset, Ld.A.R. submitted that though assessee
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.
During the course of assessment proceedings, AO noticed that
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.
Before us, Ld.A.R. reiterated the submissions made before AO and
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.
We have heard the rival submissions and perused the material on
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.
In the result, the appeal of the assessee is 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.