M/S. ALPHAGREP SECURITIES PRIVATE LIMITED,BANGALORE vs. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE- 1(1)(1), BANGALORE

This appeal at the instance of the assessee is directed against CIT(A)’s order dated 10.06.2019. The relevant assessment year is 2016-2017.

The solitary issue raised is whether the CIT(A) was justified in confirming the A.O.’s further disallowance of Rs.66,830, u/s 14A r.w.r. 8D(2)(ii) of the I.T.Rules (assessee had already disallowed u/s 14A of the I.T.Act of Rs.2,88,457).

The brief facts of the case are as follow: The assessee is a company. It is engaged in the business of consultancy services and stock trading activities. For the assessment year 2016-2017, the return of income was filed on 01.10.2016 declaring total income of Rs.34,99,00,649. During the relevant year, the assessee had made investments in equity shares and mutual funds amounting to Rs.11,07,43,921.

The assessment was concluded u/s 143(3) of the I.T.Act vide order dated 14.12.2018, wherein the A.O. had made an additional disallowance of Rs.66,813 under the provisions of section 14A of the I.T.Act r.w.r. 8D(2)(ii) of the I.T.Rules. In doing so, the Assessing Officer rejected the contentions of the assessee that no portion of the borrowed funds was utilized for the purpose of investment and the assessee was having sufficient own interest free funds to cover up for the investment.

Aggrieved by the order of the assessment making further disallowance of Rs.66,813, the assessee filed an appeal to the first appellate authority. Before the first appellate authority, the assessee raised several contentions. The main contention was that the assessee was having substantial interest free funds which far exceeds the investment considered by the A.O. for disallowance of proportionate interest expenses under Rule 8D(2)(ii) r.w.s. 14A of the I.T.Act. The CIT(A), however, rejected the contentions of the assessee and held that the assessee has not maintained separate books of account and outflow is from the common pool. With these observations, the CIT(A) justified the disallowance of proportionate interest under Rule 8D(2)(ii) r.w.s. 14A of the I.T.Act.

The learned Departmental Representative, on the other hand, strongly supported the orders of the A.O. and the CIT(A).

We have heard the rival submissions and perused the material on record. On perusal of the financials of the assessee, which is enclosed in the paper book filed by the assessee, it is clear that the interest free funds in possession of the assessee far exceeded the investments made during the current year and even in the immediately preceding assessment year. For the year ending 31.03.2016, the assessee’s share capital, reserves and surplus together is Rs.33,70,22,076, whereas, the current year’s investment is only Rs.11,07,43,921. The only justification of the CIT(A) was that the investments are from a common pool, and therefore, a portion of the interest disallowance is warranted. The Hon’ble jurisdictional High Court in the case of CIT v. Microlabs Ltd. [(2016) 383 ITR 490 (Kar.)] had held that even in a situation where investments are from common pool, if non-interest bearing funds are more than the investments in tax free securities, no disallowance can be made u/s 14A of the I.T.Act r.w.r. 8D(2)(ii) of the I.T.Rules. The Hon’ble jurisdictional High Court while laying down the above

In the result, the appeal filed by the assessee is allowed.