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Income Tax Appellate Tribunal, VISAKHAPATNAM BENCH, VISAKHAPATNAM
Before: SHRI V. DURGA RAO& SHRI D.S. SUNDER SINGH
आदेश /O R D E R
PER D.S. SUNDER SINGH, Accountant Member:
This appeal is filed by the assessee against the order of the Commissioner of Income Tax (Appeals) [(CIT(A)]-9, Hyderabad vide Appeal No.10232/ITO-2/Kakinada/2017-18 dated 19.04.2018 for the Assessment Year (A.Y)2014-15.
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All the grounds of appeal are related to the addition of Rs.87,52,655/- u/s 14A read with Rule 8D of the Income Tax Rules, 1962. During the assessment proceedings, the Assessing Officer (AO) found that the assessee had invested a sum of Rs.11,80,91,771/- in Listed Securities as per Schedule-10 of the Balance Sheet. Since the assessee did not make any disallowance towards the expenditure incurred in relation to income not includable in the total income as per section 14A of the Income Tax Act, 1961 (hereinafter called as ‘Act’), the AO made the disallowance of Rs.87,51,655/- under Rule 8D of the IT Rules by order u/s 143(3) dated 04.11.2016.
Aggrieved by the order of the AO, the assessee went on appeal before the CIT(A) and the Ld.CIT(A) confirmed the addition made by the AO.
Aggrieved by the order of the Ld.CIT(A), the assessee filed appeal before this Tribunal. During the appeal hearing, the Ld.AR argued that the assessee has derived income of Rs.500/- as dividend income which is exempt and argued that the addition u/s 14A r.w.r.8D should not exceed the exempt income. The assessee relied on the decision of Hon’ble High Court of Delhi in the case of Joint Investments Pvt. Ltd. Vs. Commissioner of
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Income Tax [372 ITR 0694] and also the decision of ITAT Ahmedabad Bench in the case of K.Ratanchand & Co., Vs. ITO, Ward 11(4), Ahmedabad.
On the other hand, the Ld.DR supported the orders of the lower authorities.
We have heard both the parties and perused the material placed on record. In this case, the assessee made the investments in the Listed Securities, but the exempt income earned was only Rs.500/-. The AO made the disallowance of Rs.87,51,655/- as per Rule 8D of income tax Rules. The Ld.AR relied on the decision of Hon’ble High Court of Delhi in the case of Joint Investments Pvt. Ltd. Vs. Commissioner of Income Tax (supra), wherein it was held that the disallowance should not exceed the income earned by the assessee. For the sake of clarity and convenience, we extract relevant part of the order of Hon’ble High Court of Delhi which reads as under : “9. In the present case, the AO has not firstly disclosed why the appellant/assessee's claim for attributing Rs.2,97,440/- as a disallowance under Section 14A had to be rejected. Taikisha says that the jurisdiction to proceed further and determine amounts is derived after examination of the accounts and rejection if any of the assessee's claim or explanation. The second aspect is there appears to have been no scrutiny of the accounts by the AO - an aspect which is completely unnoticed by the CIT (A) and the ITAT. The third, and in the opinion of this court, important anomaly which we cannot be unmindful is that whereas the entire tax exempt income is Rs.48,90,000/-, the
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disallowance ultimately directed works out to nearly 110% of that sum, i.e., Rs.52,56,197/-. By no stretch of imagination can Section 14A or Rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed, The window for disallowance is indicated in Section 14A, and is only to the extent of disallowing expenditure "incurred by the assessee in relation to the tax exempt income'. This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case.” 7. The Ld.AR also relied on the decision of K. Ratanchand & Co. of coordinate Bench Ahmedabad, wherein the coordinate Bench has examined various decisions of Hon’ble High Courts and the Coordinate Benches and restricted the disallowance to exempt income earned by the assessee u/s 14A. We extract the relevant part of the order of the coordinate bench in the case of K.Ratanchand &Co supra which reads as under: 7. Further in the case of Jivraj Tea Ltd. (supra) and others, the co-ordinate Bench held that disallowance under section 14A cannot be more than the exempt income. The relevant portion of the decision is reproduced below— "20. We have heard the rival submissions and perused the orders of the lower authorities and materials available on record. In the instant case, the assessee received exempt dividend income of Rs.900/-. The Assessing Officer was of the opinion that expenditure incurred for earning the exempt dividend income was not allowable to the assessee and the assessee has not disallowed any expenditure towards the earning of the exempted dividend income, he by invoking the provisions of Section 14A computed expenditure attributable to the earning of exempt dividend income under Rule 8D of the Income-tax Rules and made disallowance for interest expenditure of Rs.1,49,710/- and administrative expenses of Rs.12,750/-. The assessee unsuccessfully appealed before the CIT (A). The contention of the assessee is that the interest free funds available with the assessee in the form of share capital and free reserves as on the date of balance- sheet was Rs.17,86,69,501/- and the investments at the end of the year was at Rs.1,26,00,538/- only. Therefore, in view of the decision of the Hon'ble Gujarat High Court in the case of Hitachi Home and Life Solutions (I) Ltd. (supra) and Torrent Power Ltd. (Supra), no disallowance towards interest expenditure incurred for earning exempt income can be made. Regarding the disallowance of administrative
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expenses of Rs.12,750/-, we find that the Chandigarh Bench of the Tribunal in the case of A.C.I.T. v. Punjab State Coop & Marketing Fed. Ltd. in ITA No. ITA No.548/Chd/2011 for AY 2007- 08 has held that disallowance u/s. 14A read with Rule 8D cannot exceed the exempt dividend income. Therefore, we restrict the disallowance of administrative expenses to Rs.900/- only, being the exempt dividend income earned by the assessee. Thus, this ground of appeal of the assessee is partly allowed." 8. The facts of the case of assessee are well covered by the above referred judicial pronouncements of the Co-ordinate Benches. So much so that it is undoubted that assessee is a dealer in shares, trading of shares has been shown as income from business, stock in trade in shares is at Rs.41,16,992 investment in shares not held for business are only Rs.51,000, and dividend income earned during the year is Rs.58,963. However, assessee has maintained same books of accounts for his business of trading in cloth, trading in shares, commission income, income from real estate and exempt income. There is no bifurcation available on record to segregate the entire expenses incurred on the type of business activities carried on and some element of cost for earning exempt income cannot be ignored in these circumstances. The assessee has demonstrated that it has carried out the business activity of sale and purchase of shares. The Revenue on the other hand could not place any contrary material on record. Therefore, in the light of decision of the co-ordinate Benches we are of the considered view that the AO was not justified in invoking the provisions of section 14A of the Act. The dividend so earned is incidental to normal business activities of the assessee. Moreover, the AO has made disallowance of Rs.4,04,204/- whereas the assessee has earned exempt income in the form of dividend of Rs.58,963/-. Even assuming that some expenditure is required to be disallowed but such disallowance should not exceed the quantum of exempt income. Therefore, in view of the decision of the Co-ordinate Benches we hereby hold that the addition under section 14A cannot be more than the exempt income and should therefore be restricted to Rs.58,963/-. This ground of the assessee is partly allowed.” During the appeal hearing, the Ld.DR did not bring any other case law of Higher Court/ jurisdictional High court to controvert the decisions relied upon by the assessee. Therefore, respectfully following the decision of the Hon’ble High Court and the Coordinate Bench, we hold that disallowance u/s 14A required to be restricted to the extent of dividend income earned by the assessee, under section 14A read with Rule 8D of I.T.Rules.
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Accordingly, we set aside the orders of the lower authorities and allow the appeal of the assessee.
In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 28th November, 2018.
Sd/- Sd/- (िी.दुगाा राि) (धड.एस. सुन्दर ससह) (V. DURGA RAO) (D.S. SUNDER SINGH) न्याधयक सदस्य/JUDICIAL MEMBER लेखा सदस्य/ACCOUNTANT MEMBER धिशाखापटणम /Visakhapatnam ददिांक /Dated : 28.11.2018 L.Rama, SPS आदेश की प्रधिधलधप अग्रेधर्ि/Copy of the order forwarded to:- 1. अपीलाथी / The Appellant - M/s RKR Investments Services (P) Ltd., D.No.2- 225/1, Paper Mill Road, Yeditha, East Godavari Dist. 2. प्रत्याथी / The Respondent – The Income Tax Officer, Ward-2, Kakinada 3. The Pr.Commissioner of Income Tax-2, Visakhapatnam 4. The Commissioner of Income Tax (Appeals)-9, Hyderabad 5. धिभागीय प्रधिधिधि, आयकर अपीलीय अधिकरण, धिशाखापटणम /DR, ITAT, Visakhapatnam 6. गाडा फ़ाईल / Guard file
आदेशािुसार / BY ORDER // True Copy //
Sr. Private Secretary ITAT, VISAKHAPATNAM