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Income Tax Appellate Tribunal, HYDERABAD BENCH “A”, HYDERABAD
Before: SMT. P. MADHAVI DEVI & SHRI S. RIFAUR RAHMAN
PER S. RIFAUR RAHMAN, A.M.:
This appeal filed by the assessee is directed against the order of CIT(A) – 5, Hyderabad dated 28/12/2016 for AY 2012-13.
In the appeal, the assessee has raised the following grounds of appeal: “1. The Learned Commissioner of Income Tax (Appeals)-5 [CIT(A) has erred on facts and in law while passing the appellate order. 2. Learned CIT(A) has erred in holding that show cause letter of the Income Tax Officer, ward17(4), Hyderabad (A.O, hereinafter) to the assessee drawing attention to sec14A(2) and Rule 8D(2) showed that he is not satisfied with correctness of the claim . 3. Learned CIT (A) failed to note that the A.O did not show that he considered the accounts of the assessee as required in law before issue of the letter. Satisfaction or the lack of it is required in law only after having regard to the accounts of the assessee.
2 ITA No. 359/Hyd/17 Zen Securities Ltd. 4. Both the lower authorities failed to consider the expenses incurred no part of which is in relation to the income from dividends. They have mechanically applied Rule 8D(2)(iii) wiithout recording lack of satisfaction, having regard to the accounts of the assessee. 5. A.O has erred in demanding dividend tax Rs. 3,94,207/-, relating to the assessment year which was paid on 26.09.2012, by not giving credit for that amount. 6. A.O is incorrect in law in presuming that the credit for Rs. 3,94,207/- could give only in the assessment year 2013-14. The dividend pertains to the previous year 2011-12, relevant to A.Y 2012-13 and payable under the I.T. Act after declaration and Annual General Body Meeting. 7. For these and any other grounds that may be raised at/ before the hearing of appeal. It is prayed that disallowance u/s 14A be deleted and the credit for dividend tax be allowed.”
2.1 The assessee has also filed the following concise additional grounds of appeal: 1. Computation of disallowance under Rule 8D(2)(iii) at Rs. 14,65,501/- is not legally correct because the value of investments in shares from which exempt income does not form part of the total income has also been included in the computation. 2. A.O has erred in not giving credit for Dividend Distribution Tax paid of Rs.6,05,389/- on 24.08.2011, specifying the Assessment Year in Challan as 2012-13. 3. A.O has not followed the principle of consistency in not giving credit for the Dividend Distribution Tax paid of Rs. 3,94,207/- as per the return and intimation u/s 143(1).”
At the time of hearing before us, the ld. AR of the assessee has only pressed the aforementioned concise additional grounds of appeal, therefore, we proceed to adjudicate them as under:
Brief facts of the case are, assessee company, carrying out the business activities of stock & share broking, filed its return of income for the AY 2012-13 on 27/09/2012 by admitting income at Rs. 1,38,28,580/-. Subsequently, the case was selected for scrutiny
3 ITA No. 359/Hyd/17 Zen Securities Ltd. through CASS, for which notices u/s 143(2) and 142(1) were issued. In response to the said notices, the ld. AR of the assessee furnished the information.
4.1 On verification of the financial statements and information produced, the AO noticed that the company has current investments of Rs. 134929246/-, Rs. 5,49,57,980/-, as on 1-4-2011 and 31-3-2012 respectively and Non-current investments of Rs 174444896/-, Rs. 221868337/-as on 1-4-2011 and 31-3-2012 respectively and claimed exempted income. A letter to the assessee company asking for confirmation letters from sundry creditors and asking as to why the disallowance u/s 14A read with Rule 8D(2)(i) to (iii) cannot be made on the investments made as the company has claimed exempted income. The company has filed some of the top sundry creditors confirmation letters and reply to the letter filed. The AO observed that for disallowance u/s 14A of the I.T. Act, the provisions of sub-section (2) of 14A of the I.T. Act are drawn which states about the disallowance of expenditure shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act. Further, referring to the Circular No. 5/2014, dated 11-2-2014, AO observed that disallowance in cases where corresponding exempt income has not been earned by an assessee during the financial years also can be considered/invoked for disallowance u/s 14A of the IT Act. In view of the above observations, the AO held that the disallowance u/s 14A of the IT Act read with Rule 8D(2)(iii) being one-half percentage of the average value of Investments as on 1-4-2011 and 31-3-2012, computed the disallowance at Rs. 9.90,783/- towards non-current investments and Rs. Rs. 4,14,718/- towards current investments and added the same to the income of the assessee company for the A.Y. 2012-13.
4 ITA No. 359/Hyd/17 Zen Securities Ltd. 5. When the assessee preferred an appeal before the CIT(A), the CIT(A) confirmed the assessment order.
Aggrieved by the order of CIT(A), the assessee is in appeal before us.
Referring to the concise ground of appeal No. 1 regarding computation of disallowance under rule 8D(2)(iii) at Rs. 14,65,501/-, the ld. AR of the assessee submitted that the disallowance made by the AO is not legally correct because the value of investments in shares from which exempt income does not form part of the total income, has also been included in the computation. Referring to the decision of the Special Bench of Tribunal in the case of ACIT Vs. Vireet Investments, 165 ITR 27 (Delhi), submitted that investments which have not yielded exempt income should not be considered for averaging of the assets. Assessee also filed a statement of investments and dividend. It contains the details of investment which earned dividend income, which is placed on record as part of paper book.
Ld. DR, on the other hand, relied on the orders of revenue authorities.
Considered the rival submissions and perused the material on record. The AO disallowed a sum of Rs. 14,65,501 @ 0.5% on the value of average current and non-current investments held by the company on estimated basis as provided in Rule 8D(2)(iii) in respect of investments held by the assessee during the year. Whereas, the grievance of the assessee is that disallowance made by the AO is not legally correct because the value of investments in shares from which exempt income does not form part of the total income, has also been included in the computation. Under similar facts and circumstances, the coordinate bench of this Tribunal in the case of Transport
5 ITA No. 359/Hyd/17 Zen Securities Ltd. Corporation of India Ltd. in ITA No. 117/Hyd/2016 vide order dated 21st September, 2016 has held as under: “11.1 While carefully reading the rule 8D(2)(ii), the formula given are: A X B/C Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year: B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; C = the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; In particular, the notes for ‘B’ clearly states that the average value of investment, income from which does not or shall not form part of the total income. It is clear that we have to include those investments which has generated income and exclude those investments, which have not generated income. In the present case, AO had taken the total investment instead of those investments, which have generated income. Accordingly, we direct the AO to calculate the disallowance of interest as below ( as per rule 8D): Interest X Investment( which generated income) Average total assets The main reason is that as per section 14A, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income, which is exempt from tax. The relevance is the expenditure in relation to income. The quantification has to be undertaken in relation to the exempt income. The investment which has not generated exempt income should be excluded from the calculation of ratio to determine the disallowance. 11.2 Similarly, for the administrative expenses, 0.5% of average investments from which the exempt income is received should be considered instead of average of the total investments. 11.3 considering the above discussion, we direct the AO to recalculate the disallowance as per rule 8D as per the above guidance. Accordingly, ground raised by assessee is allowed.”
6 ITA No. 359/Hyd/17 Zen Securities Ltd. As the issue under consideration is materially identical to that of the said case, following the conclusions drawn therein we direct the AO to recalculate the disallowance as per rule 8D as per the guidelines given as above in the case of Transport Corporation of India and calculate the disallowance of expenditure under rule 8D(2)(iii) taking the average investment from which the exempt income is received. Accordingly, ground No. 1 is treated as allowed for statistical purposes.
As regards ground Nos. 2 & 3 regarding denial of giving credit for dividend distribution tax paid of Rs. 6,05,389/-, it is observed that initially the AO denied in giving credit for dividend distribution tax, but, later, he rectified the mistake by passing order u/s 154 dated 10/08/2015, the order of which is on record. Therefore, the grounds raised by the assessee have become infructuous.
In the result, appeal of the assessee is allowed for statistical purposes.
Pronounced in the open Court on 15th November, 2018.
Sd/- Sd/- (P. MADHAVI DEVI) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated: 15th November, 2018 kv
Copy to:- 1) M/s Zen Securities Ltd., 6-3-788/32, 3rd Floor, Vamsee Estates, Ameerpet, Hyderabad – 500 073 2) ITO, Ward – 17,(4), Signature Towers, Kondapur, Hyderabad. 3) CIT(A) – 5 Hyderabad. 4) Pr. CIT - 5, Hyd. 5) The Departmental Representative, I.T.A.T., Hyderabad. 6) Guard File