NARESH POONAMCHAND JAIN,MUMBAI vs. ITO 18 (2)(4), MUMBAI

In the aforesaid appeal for Assessment Year (AY) 2013-14, the assessee is aggrieved by confirmation of disallowances u/s 14A & 40(a)(ia). The impugned order has been passed by Ld. Commissioner of Income-Tax (Appeals)-53, Mumbai, [in short referred to as ‘CIT(A)’], Appeal No.CIT(A)-53/IT-368/ ITO 18(2)(4)/2018-19 on 24/05/2019.

We have carefully considered the rival submissions and perused relevant material on record. Our adjudication to the subject matter of appeal would be as given in succeeding paragraphs.

The material facts are that the assessee being resident individual stated to be engaged in manufacturing and trading of copper products was assessed for the year u/s 143(3) on 31/03/2016 wherein it was saddled with impugned disallowances. 4. Disallowance u/s 14A 4.1 The assessee earned exempt dividend income of Rs.21,865/- and PPF interest of Rs.41,634/-. However, it did not offer any disallowance u/s 14A. The Ld. AO, invoking Rule 8D, computed aggregate disallowance of Rs.12.25 Lacs which comprised-off of direct expenses disallowance u/r 8D(2)(i) for Rs.0.07 Lacs, interest disallowance u/r 8D(2)(ii) for Rs.11.59 Lacs and indirect expense disallowance u/r 8D(2)(iii) for Rs.0.58 Lacs. The stand of Ld. AO, upon confirmation by Ld. CIT(A), is under challenge before us. 4.2 Upon perusal of assessee’s financial statements, we find that the assessee has made investments of Rs.282.67 Lacs out of which investment in shares is Rs.11.70 Lacs whereas the balance investment of Rs.270.97 Lacs is on account of investment in an entity namely JANS Copper Private Limited, investment in Mutual Funds, LIC investments and PPF investment. Prima-facie, these investments have not yielded any exempt income during the year except interest on PPF which is directly credited in assessee’s PPF account. Furthermore, majority of the secured loans obtained by the assessee are for specific purposes viz. cash-credit limit, Term loan for Plant & Machinery and home loans and therefore, no part of the interest could be said to have applied towards investments. It is also evident that as against exempt dividend income of Rs.21,865/-, Ld. AO has computed disallowance of Rs.12.25 Lacs which could not be held to be justified, as per settled legal position. Therefore, on the facts and circumstances of the case, we confirm direct expense disallowance u/r 8D(2)(i) for Rs.7,772/-. The disallowance u/r 8D(2)(ii) & (iii) stands restricted to the extent of Rs.21,865/-, being exempt income earned by the assessee during the year. In nutshell, the disallowance u/s 14A stand restricted to the extent of Rs.29,637/- . The Ld. AO is directed to re-compute the assessee’s income in terms of our adjudication. The ground stand partly allowed.

Disallowance u/s 40(a)(ia) 5.1 Since the assessee failed to deduct tax at source on interest paid to certain non-banking finance companies (NBFC), Ld. AO invoking the provisions of Sec. 40(a)(ia) disallowed 1/3rd of interest expenditure of Rs.6.48 Lacs which resulted into an addition of Rs.2.16 Lacs in the hands of the assessee. 5.2 Before Ld. CIT(A), the assessee submitted that payee NBFCs were regularly filing their tax returns and considered interest income while computing their income. The Ld. CIT(A) concurred with assessee’s submissions that interest paid to Barclays Bank did not require deduction of tax at source since it was a banking company. However, interest paid to remaining two NBFCs i.e. M/s Bajaj Finance Ltd. and M/s Magma Finance Corp. Ltd. would require deduction of tax at source. Since, the assessee failed to furnish requisite Form 26A with respect to these two entities during assessment proceedings and therefore, there was non- compliance on the part of the assessee. Consequently, disallowance made against interest paid to these two entities was upheld.