SHRIRAM VENTURE LIMITED,CHENNAI vs. DCIT CORPORATE CIRCLE-6(1), CHENNAI

The only issue in this appeal of assessee is as regards to the order of CIT(A) confirming the action of AO in disallowing the expenses relatable to exempt income by invoking the provisions of section 14A of the Act read with rule 8D of the Income Tax Rules, 1962 (hereinafter the ‘Rules’). The disallowance of expenses are under Rule 8D(2)(i) at Rs.48,21,918/- and under Rule 8D(2)(ii) at ‘0’ and under Rule 8D(2)(iii) at Rs.1,57,13,756/-.

We have heard rival contentions and gone through facts and circumstances of the case. Admittedly, the assessee has earned dividend income of Rs.9,73,29,490/-. The assessee before us claimed that now the disallowance is only on two limbs i.e., direct expenses under Rule 8D(2)(i) at Rs.48,21,918/- and under Rule 8D(2)(iii) at Rs.1,57,13,756/-. The CIT(A) restricted the above two disallowances and thereby created total disallowance at Rs.2,05,34,274/-.

The ld.counsel for the assessee before us filed the details of investment made in debenture and investments other than subsidiary companies which did not yield dividend income. He also filed details of investment in mutual funds from where the assessee has earned dividend of Rs.9,73,29,490/-. The assessee filed following details:- Value of Shares as Name of the company on 31.03.2012 Investments in Mutual Funds: ICICI Flexible Income Fund 170049612 IDFC Money Manager Fund 80415589 UTI Treasury Advantage Fund 219190361 Total 469655562 The ld.counsel stated that the AO has computed the disallowance on the total investments i.e., Rs.4,38,94,02,409/- but assessee has not earned any dividend on investment in subsidiary companies and other companies but dividend earned is only from the above mentioned investments in mutual funds. The ld.counsel for the assessee also stated that the disallowance under Rule 8D(2)(iii) be restricted qua the investments made which gives raise to exempt income i.e., investments in mutual funds and rest of the investments which does not yield exempt income can be excluded for the purpose of computation of disallowance being average value of investments as on 31.03.2012. As regards to disallowance under Rule 8D(2)(i), the ld.counsel stated that there is no direct expenses and in case, AO has any doubt about direct expenses he can verify from the books of accounts and accordingly decide. When this proposition was put to ld. Senior DR, he fairly agreed that issue can be remitted back to the file of the AO with the above proposal.

After hearing both the sides and going through the case records, we are in agreement with the argument of the ld.counsel for the assessee that the AO will first examine the issue of direct expenses from the books of accounts i.e., profit & loss account. If any direct expense relatable to dividend income is found, disallowance can be made otherwise not. The second under Rule 8D(2)(iii) i.e., for computing average value of investment, the AO will only take the investments which are giving raise to exempt income and he can verify which investments are giving exempt income. Accordingly, the AO will compute disallowance and decide the quantum of disallowance.

In the result, the appeal filed by the assessee is allowed as indicated above.