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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 dated 15/09/2017 of CIT(A) – V, Hyderabad for AY 2012-13.
The only issue in this appeal is disallowance u/s 14A read with Rule 8D of I.T. Rules, 1962.
Briefly the facts are, assessee company engaged in the business of generation and sale of Hydro Power, filed its return of income for AY 2012-13 on 28/09/2012 admitting total loss of (-) Rs. 5,57,73,246/- under the normal provisions and book profits of Rs. Nil under the provisions of section 115JB of the IT Act. The return was processed u/s 143(1) of the I.T. Act. Subsequently, the case was selected for scrutiny and notices u/s 143(2) and 142(1) were issued.
2 ITA No. 1935/Hyd/17 Lanco Hydro Power Ltd., Hyd. The AO completed the assessment by disallowing an amount of Rs. 4,18,67,253/- u/s 14 read with rule 8D of IT Rules.
3.1 The AO observed that the assessee had shown an amount of Rs. 666,13,83,000/- towards investment in shares. The income from shares is dividend income which is exempt from tax under section 10(38) of the Act. The assessee company had claimed interest amount of Rs. 4,30,79,000/-. During the course of assessment proceedings, the AR of the assessee was asked to explain as to why the disallowance u/s 14A read with rule 8D should not be made in the case of the assessee company. In response, vide letter dated 16/03/2015, the AR of assessee furnished a note on applicability of section 14A rwr 8D, which was rejected by the AO for the reason that the above investments would yield income from dividends which is exempt from tax and further the CBDT had issued Circular No. 5/2014, dated 11/02/2014, in which it had clarified the disallowance of expenditure u/s 14A in cases where the corresponding exempt income is not earned during the financial year for the assessee. In view of the above observations, the AO made disallowance of Rs. 4,18,67,253/- u/s 14A read with rule 8D of the Act.
Aggrieved, the assessee preferred an appeal before the CIT(A) and contended that it had earned dividend income of Rs. 2,31,492/- from mutual funds. The CIT(A) following the decision of ITAT, Hyderabad in the case of Prathista Industries Ltd. in ITA No. 1302/Hyd/2015 dated 29/04/2016, confirmed the disallowance made by the AO.
Aggrieved by the order of CIT(A), the assessee is in appeal before us.
3 ITA No. 1935/Hyd/17 Lanco Hydro Power Ltd., Hyd. 6. Considered the rival submissions and perused the material on record. We find that section 14A clearly stipulates that the expenditure incurred for earning of any income which does not form part of the total income alone can be disallowed. In the case before us, the assessee has earned exempt income of Rs. 2,34,492/- whereas the AO has disallowed Rs. 4,18,67,253/ by applying Rule 8D. There are catena of decisions, which have restricted the disallowance to the extent of exempt income, in particular, the Hon’ble Delhi High Court in the case of Joint Investments Pvt Ltd. Vs. CIT (ITA No. 117/2015).
6.1 Further, we notice that section 14A(1) clearly indicates, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income, which does not form part of total income. It is clear that the expenditure in relation to earning of exempt income alone must be considered and the expenditure cannot be more than the exempt income. It has to be proportionate to the income earned or maximum to the extent of the exempt income. The rule 8D introduced to ease out the difficulty in identifying the expenditure, which cannot be separately identified considering the complications of the financial structure of the companies. In applying such rules sometimes, we reach absurd result, in such a situation, one has to apply the rules judiciously and cannot be applied blindly. Respectfully following the decision of the Hon’ble Delhi High Court (supra), we allow grounds raised by the assessee.
In the result, appeal of the assessee is allowed. Pronounced in the open Court on 11th May, 2018.
Sd/- Sd/- (P. MADHAVI DEVI) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated: 11th May, 2018
4 ITA No. 1935/Hyd/17 Lanco Hydro Power Ltd., Hyd. kv Copy to:-
1) Lanco Hydro Power Ltd., C/o P. Murali & Co., CAs, 6-3-655/2/3, 1st Floor, Somajiguda, Hyderabad – 82 2) DCIT, Circle – 16(2), Hyderabad. 3) CIT(A) – 4, Hyderabad. 4) Pr. CIT - 4, Hyd. 5) The Departmental Representative, I.T.A.T., Hyderabad. 6) Guard File