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Income Tax Appellate Tribunal, “ E”, BENCH
Before: SHRI M.BALAGANESH, AM & SHRI RAM LAL NEGI, JM
आदेश / O R D E R PER M. BALAGANESH (A.M): This appeal in A.Y.2015-16 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-24, Mumbai in appeal No.CIT(A)-24/DCIT 15(3)(1)/IT-314/2017-18 dated 11/06/2018 (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 19/12/2017 by the ld. Dy. Commissioner of Income Tax – 15(3)(1), Mumbai (hereinafter referred to as ld. AO).
Ground Nos. 1-5 raised by the assessee are with regard to disallowance made u/s.14A of the Act r.w.r. 8D of the rules.
We have heard rival submissions. We find that the assessee had earned dividend of Rs.8,87,867/- from mutual funds and claimed the same as exempt in the return of income. The assessee did not make any disallowance of expenses incurred for the purpose of earning such exempt income in the return of income. The ld. AO by applying the computation mechanism provided in rule 8D(2) of the rules arrived at the disallowance figure u/s. 14A of the Act as under:- (i) Under rule 8D(2)(ii) - Rs.15,70,404/- (ii) Under rule 8D(2)(iii) - Rs. 65,794/- -------------------- Total Rs.16,36,198/- ========== 3.1. We find that the ld. AR has argued that there were no investments with the assessee either at the beginning of the year or at the end of the year. Accordingly, the average value of investments cannot be worked out in the instant case. Hence, he argued that the computation mechanism provided in rule 8D(2)(ii) and rule 8D(2)(iii) would fail and accordingly, no disallowance under rule 8D could be made in the facts and circumstances of the instant case. He also brought to our notice that rule 8D has been changed with effect from A.Y.2017-18 to address this lacuna. He also drew our attention that assessee’s opening share capital and reserves and surplus was Rs.145.52 Crores and closing share capital and reserves and surplus were Rs.136.52 Crores. He also submitted that the maximum value of investments even as per the workings made by the ld. AO was only Rs.4.11 Crores which goes to prove that assessee was having sufficient own funds to make investments which had yielded exempt income. Accordingly, he pleaded that no disallowance of interest in terms of rule 8D(2)(ii) of the rules could be made in the instant case. We are in complete agreement with this argument of the ld. AR that assessee is having sufficient own funds to make investments and hence, there cannot be any disallowance of interest under second limb of rule 8D(2) of the rules. Reliance in this regard is placed on the decision of Hon’ble Jurisdictional High court in the case of Reliance Utilities and Power Ltd. reported in 313 ITR 340 and HDFC Bank Ltd. in 366 ITR 505.
3.2. With regard to disallowance under rule 8D(2)(iii), the ld. AO worked out average value of daily balance of investments at Rs.1,31,58,801/- which are enclosed in Annexure-B to the assessment order and applied 0.5% on the same and arrived at the disallowance of Rs.65,794/-. In this regard, we find that the Co-ordinate Bench of this Tribunal in assessee’s sister concern’s case in M/s. TD Toll Road Pvt. Ltd., vs DCIT in for A.Y.2013-14 dated 31/01/2019 had ignored the method of calculating average value of investments based on daily balances using product method as is done by the ld AO in the instant case which is enclosed in Annexure B to the assessment order. The relevant operative portion of the said tribunal order is reproduced as under:-
In view of the above disallowance we do not find any merit in the action of lower authorities for making disallowance in Rule 8D(2)(ii) and 8D(2)(iii) with respect to the average investment at the beginning and end of the month by ignoring the method of calculating investment is at the beginning of the year and at the end of the year.
3.3. Hence, from the aforesaid observations, it could be safely concluded that no disallowance u/s.14A of the Act could be made by applying the computation mechanism provided in rule 8D(2) of the rules in the peculiar facts and circumstances of the instant case. However, it cannot be denied that some expenses could have been certainly incurred by the assessee for the purpose of earning exempt income and hence, certain administrative expenses thereon need to be disallowed as otherwise the provisions of Section 14A of the Act which is introduced in the statute with retrospective effect from 01/04/1962 would become redundant. Hence, in our considered opinion, disallowance of administrative expenses at 10% of exempt income would meet the ends of justice in the peculiar facts and circumstances of the instant case. The ld. AO is accordingly directed to disallow Rs.88,787/- u/s.14A of the Act under normal provisions of the Act. Accordingly, the ground Nos.1-5 raised by the assessee are partly allowed.
The ground Nos.6-9 raised by the assessee are with regard to disallowance u/s.14A of the Act while computing the book profits u/s.115JB of the Act.
4.1. We have heard rival submissions. We find that the ld. AO had added the sum of Rs.16,36,198/- u/s.14A while computing book profits u/s.115JB of the Act by applying the computation mechanism provided in rule 8D of the rules. We find that the Special Bench of Delhi Tribunal in the case of Vireet Investments reported in 165 ITD 27 had held that the computation mechanism provided in rule 8D(2) of the rules cannot be imputed in Clause (f) of Explanation 2 to Section 115JB(2) of the Act. Respectfully following the said decision, we hold that no disallowance u/s.14A of the Act could be made by applying the computation mechanism provided in rule 8D (2) of the rules. However, we find that actual expenses debited to profit and loss account which are incurred for the purpose of earning of exempt income should be considered for the purpose of Clause (f) of Explanation-2 to Section 115JB of the Act. We direct the ld. AO accordingly. Accordingly, the ground Nos. 6-9 raised by the assessee are allowed for statistical purposes.
In the result, appeal of the assessee is allowed for statistical purposes.
Order pronounced in the open court on this 29/11/2019