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Income Tax Appellate Tribunal, AHMEDABAD “A” BENCH, AHMEDABAD
Before: SHRI P.M. JAGTAP & Ms. SUCHITRA KAMBLE
PER SUCHITRA KAMBLE, JUDICIAL MEMBER :
This is an appeal filed by the Revenue against the order dated 04.03.2020 passed by the CIT(A)-8, Ahmedabad for the Assessment Year 2016-17.
The Revenue has raised the following grounds of appeal:
“1. Whether the Ld. CIT(A) has erred in law and on facts in deleting the disallowance of Rs.1,25,26,652/- u/s.14A of the Income Tax Act, 1961. 2. Whether the Ld. CIT(A) has erred in law and on facts in deleting the addition made on account of disallowance made u/s.14A of the Income Tax Act, 1961 of Rs.1,61,49,686/- while computing the book profit u/s. 115JB of the Income Tax Act, 1961.”
The assessee company is engaged in the business of manufacturing and trading in Jewellery, Bullion, trading and Speculation in commodities, Shares Securities, Units of Mutual Funds and Derivatives, Generation and Sales of Electric
Page 2 of 4 Power through Windmills and trading in SEZ Unit, refining of gold and silver. The return of income was filed on 17.10.2016 showing total income of Rs.85,84,550/-. The Assessing Officer observed that the assessee company had made investments and the assessee has also earned exempt income. Accordingly, show cause notice dated 23.10.2018 was issued thereby calling upon in respect of disallowance under Section 14A of the Act read with Rule 8D as to why the same should not be made as the assessee has earned dividend income thus exempt from tax. Assessee filed reply before the Assessing Officer along with details. The Assessing Officer made disallowance of Rs.1,61,49,686/- under Section 14A of the Act. The Assessing Officer also made addition to book profit due to disallowance under Section 14A to the extent of Rs.59,357/- as well as addition of Rs.5,00,294/- towards deemed income from house property. The Assessing Officer further made disallowance of Rs.26,301/- under Section 36(1)(iii) of the Act and addition of Rs.8,162/- regarding miscellaneous income.
Being aggrieved by the assessment order the assessee filed appeal before the CIT(A). The CIT(A) partly allowed the appeal of the assessee.
Ld. DR submitted that the CIT(A) erred in deleting the disallowance of Rs.1,25,26,652/- under Section 14A of the Act as well as disallowance under Section 14A amounting to Rs.1,61,49,686/- while computing the book profit under Section 115JB of the Act.
Ld. AR submitted that the CIT(A) as well as the Assessing Officer has not calculated the administrative cost hence the matter may be restored to the file of the Assessing Officer for proper application of Section 14A read with Rule 8D. Ld. AR further submitted that the Assessing Officer has categorically observed that the assessee has earned exempt income which is Rs.2,00,19,450/- as dividend interest from tax free bonds and shares of profit from firm. Ld. AR submitted that the CIT(A) has rightly deleted this addition in light of the decision of the Hon’ble Gujarat High Court in the case of Pr. CIT vs. Adani Agro Pvt. Ltd. (R/Tax Appeal No.886 of 2019, order dated 10.02.2020) and thus has calculated the administrative expenses to the extent of Rs.36,23,034/-.
Page 3 of 4 7. As regards ground no.2, the Ld. AR relied upon the Special Bench decision of the Tribunal in the case of ACIT vs. Vireet Investment Pvt. Ltd., 82 Taxmann.com 415. Ld. AR further submitted that the CIT(A) has taken proper cognisance and deleted this addition.
We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the Assessing Officer has also observed that the assessee earned exempt income which is Rs.2,00,19,450/- which can be seen from page no.2 of the assessment order. The records also show that the assessee had non-interest bearing funds of Rs.404,60,64,011/- as against investment yielding tax- free income of Rs.221,96,90,411/-. The CIT(A) has rightly observed that no disallowance has been made under Rule 8D(2)(ii) of the I.T. Rules 1962 by the assessee and, therefore, an amount equivalent to 0.5% of annual average of opening and closing balances of value of investment was taken into consideration by the CIT(A). The CIT(A) further observed that assessee has not made any suo motu disallowance in the return of income. Therefore, the CIT(A) has directed the Assessing Officer to verify the actual administrative expenses incurred by the assessee as against the claim of Rs.36,23,034/- and restricted the disallowance under Section 14A read with Rule 8D(2)(iii) to that amount. There is no need to interfere with the findings of the CIT(A) and the same is based on judicial precedents as well as proper adjudication of the invocation of Section 14A read with Rule 8D. Thus, ground no.1 of Revenue’s appeal is dismissed.
As relates to ground no.2, related to addition of Rs.1,61,49,686/- to book profit due to disallowance under Section 14A of the Act in accordance with the provisions of Section 115JB(2) Clause (f) of Explanation-1, reliance of the decision in the case of Torrent Cable Limited vs. ACIT (ITA No.3178/Ahd/2011) by the Ld. AR is relevant. The decision of the Special Bench of the Tribunal in the case of ACIT vs. Vireet Investment Pvt. Ltd. (supra) is identical to the present case wherein it is held that the computation under Clause (f) of Explanation-1 to Section 115JB(2) is to be made without resorting to the computation as contemplated under Section 14A read with Rule 8D of the Income Tax Rules, 1962. Only those investments are to be considered for computing average value of investment which yielded exempt income during the year. If an investment has yielded exempt income in a particular year then it will enter
Page 4 of 4 the computation of average value of investments for the purpose of Rule 8D(2)(iii). But under Clause (f) to Exaplanation-1 of Section 115JB of the Act, there is no mechanism given to determine the expenses with respect to exempt income. Thus, it will be appropriate to direct the Assessing Officer to make disallowance at 1% of exempt income as per Clause (f) to Exaplanation-1 of Section 115JB of the Act. Thus, ground no.2 of Revenue’s appeal is partly allowed.
In the result, appeal of the Revenue is partly allowed.
Order pronounced in the open Court on this 20th day of July, 2022.