ACIRA CONSULTANCY PVT. LTD.,MUMBAI vs. ITO 5 (1)(4), MUMBAI

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ITA 1273/MUM/2019Status: DisposedITAT Mumbai07 September 2021AY 2012-134 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal agreed that borrowed funds were used for investments yielding dividend income, as the assessee had negative reserves and significant interest expenses. However, it directed the AO to consider only investments that actually yielded dividend income for the disallowance calculation.

What were the facts?

The assessee, engaged in share trading, received exempt dividend income. The Assessing Officer disallowed interest expenditure under Section 14A read with Rule 8D(2)(ii) of the Income Tax Rules, attributing borrowed funds to investments yielding dividend income. The CIT(A) upheld this disallowance.

What were the issues?

Whether interest expenditure is disallowable under Section 14A read with Rule 8D(2)(ii) when the assessee has negative reserves and borrowed funds are used for investments yielding dividend income.

Which sections of the Income-tax Act were involved?

Section 14A

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Income Tax Appellate Tribunal, ‘A‘ BENCH

Before: SHRI MAHAVIR SINGH & SHRI M.BALAGANESH

For Appellant: Shri Kumar Kale
For Respondent: Shri Brajendra Kumar
Hearing: 24/08/2021Pronounced: 07/09/2021

आदेश / O R D E R PER M. BALAGANESH (A.M):

1.

This appeal in A.Y.2012-13 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-10, Mumbai in appeal No.CIT(A)-10/IT-5(1)(4)/99/2015-16 dated 28/12/2018 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 21/03/2015 by the ld. Income Tax Officer-5(1)(4), Mumbai (hereinafter referred to as ld. AO).

M/s. Acira Consultancy P. Ltd.,

2.

The only issue to be decided in this appeal is as to whether the ld CITA was justified in confirming the disallowance of interest of Rs 44,16,081/- u/s 14A of the Act read with Rule 8D(2)(ii) of the Income Tax Rules (hereinafter referred to as the Rules) in the facts and circumstances of the case.

3.

We have heard the rival submissions and perused the materials available on record. We find that the assessee company is engaged in the business of trading in shares and securities. In respect of shares held as stock in trade, the provisions of section 14A of the Act are applicable as held by the Hon’ble Apex Court in the case of Maxopp Investments reported in 402 ITR 640(SC). We find that the assessee during the year under consideration was in receipt of dividend of RS 45,83,400/- which was claimed as exempt u/s 10(34) of the Act in the return of income. Before the ld AO, the assessee had claimed that it has not incurred any expenditure to earn the said dividend income and therefore no expenditure could be attributed to the said dividend income. The ld AO did not heed to this contention of the assessee and proceeded to determine the disallowance u/s 14A of the Act by applying the computation mechanism provided in Rule 8D(2) of the Rules as under:-

Under Rule 8D(2)(i) - Rs Nil Under Rule 8D(2)(ii) - Rs2,18,30,647 – restricted to Rs 44,16,081 Being 20% of total interest paid during the Year as attributable to exempt income Under Rule 8D(2)(iii) - Rs 14,27,204 – restricted to Rs 32,740/- Being the indirect expenses claimed by the Assessee 3.1. We find that the ld CITA on perusal of the financials of the assessee observed that the assessee had negative reserves and surplus as on 31.3.2011 and 31.3.2012 and had also incurred interest expenses of Rs

M/s. Acira Consultancy P. Ltd., 2,20,80,408/- during the year. The ld CITA also categorically observed that the assessee did not have sufficient interest free funds to invest in shares. Hence disallowance of interest under Rule 8D(2)(ii) of the Rules is to be made as admittedly the borrowed funds were indeed utilised for making investment in shares held as stock in trade. The ld CITA upheld the action of the ld AO. We find that the assessee is in appeal before us only against the disallowance of interest under Rule 8D(2)(ii) of the Rules. We have gone through the financials of the assessee and find that the assessee does not have sufficient interest free funds in its kitty to make investments. Hence the finding given by the ld CITA that the borrowed funds were utilised for making investments does not require any interference. However, for the purpose of disallowance of interest under Rule 8D(2)(ii) of the Rules, we direct the ld AO to consider only those investments which had actually yielded dividend income during the year in the light of decision of Hon’ble Special Bench of Delhi Tribunal in the case of Vireet Investments vs ACIT reported in 165 ITD 27 (Del)(SB). Accordingly, the ground raised by the assessee is partly allowed and ld AO is directed to recompute accordingly.

4.

In the result, the appeal of the assessee is partly allowed.

Order pronounced on 07/09/2021 by way of proper mentioning in the notice board.

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