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Income Tax Appellate Tribunal, ‘C’ BENCH, BENGALURU
Before: SHRI A.K. GARODIA & SHRI PAVAN KUMAR GADALE
O R D E R Per PAVAN KUMAR GADALE, JM: Both the assessee and the revenue have filed cross appeals against the order of the CIT(A)-II, Bengaluru, for the assessment year 2014-15 passed u/s 143(3) and 250 of the Income-tax Act,1961 ['the Act' for short]. The assessee has filed appeal against the order of the CIT(A)-II, Bengaluru, for the assessment year 2015-16, passed u/s 143(3) and 250 of . 318 & 537/Bang/2019 Page 2 of 10 the Act. Since all the three appeals are of the same assessee, they were heard together and consolidated order is being passed. For the sake of convenience, first we shall take up the assessee’s appeal for assessment year 2014-15 and the facts narrated therein.
The assessee has raised the following grounds of appeal:
“Ground I: Disallowance u/s 14A 1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in not disposing the appellant's ground no. 3 in regard to disallowance of Rs.45,02,57,576/- under section 14A rwr 8D and further erred in not directing the AO to restrict the amount of disallowance under section 14A rwr 8D(ii) to the extent of exempt income of Rs.5,86,500/- earned during the year as held by him while deciding ground no. 2 with respect to disallowance under Rule 8D(iii).
2. The CIT(A) has failed to appreciate and ought to have held that the Appellant had in the course of assessment proceedings by way of revised computation of income has claimed that disallowance under section 14A of the Act should be restricted to the extent of exempt income of Rs.5,86,500/- earned during the year based on the settled legal position.
The appellant therefore prays that the CIT(A) / Assessing Officer be directed to restrict the amount of disallowance U/s 14A rwr 8D to the extent of exempt income of Rs.5,86,500/- earned by the appellant during the year.
WITHOUT PREJUDICE TO THE ABOVE: Ground II: Disallowance u/s 14A 1. On the facts and in the circumstances of the case and in law, the overall amount of disallowance under section 14A rwr 8D cannot exceed the amount of exempt income earned during the relevant year. . 318 & 537/Bang/2019 Page 3 of 10 WITHOUT PREJUDICE TO THE ABOVE: Ground III: Disallowance u/s 14A 1. On the facts and in the circumstances of the case and in law, the amount of disallowance U/s 14A be restricted to the investments made out of borrowed funds on which exempt income was earned during the year. WITHOUT PREJUDICE TO THE ABOVE: Ground IV: Disallowance u/s 14A On the facts and in the circumstances of the case and in law, no disallowance U/s 14A is to be made on the investments made out of borrowed funds on which no exempt income was earned during the year.
WITHOUT PREJUDICE TO THE ABOVE: Ground V: Disallowance u/s 14A On the facts and in the circumstances of the case and in law. the learned CIT(A) has erred in confirming the disallowance of under rule 8D(iii) to Rs.5,86,500/- as against disallowance of Rs.1,23,079/- made by the appellant in the return of income having regard to the books of account.”
At the time of hearing, it was submitted that ground Nos.1 to 3 are in relation to disallowance under sec.14A r.w. rule 8D. Other grounds are alternative grounds.
3. Brief facts of the case are that the assessee is engaged in the business of finance and investment and filed the return of income for the assessment year 2014-15 on 30/9/2015 with total loss of Rs.324,46,90,494/-. Subsequently, the case was selected for scrutiny and notices u/s 143(2) and 142(1) of the Act were issued. In compliance, ld. AR appeared from time to time and submitted details. AO, on perusal of the financial statements found that the assessee . 318 & 537/Bang/2019 Page 4 of 10 has earned income from dividend and has claimed as exempt. The AO observed that the assessee had made certain investments and there is possibility that to maintain investments, managers, staff, administrative expenses must have been incurred. AO further mentioned at para.3.3 that the assessee has made disallowance of Rs.42,50,04,939/- under the provisions of section 14A r.w. rule 8D in determining the claim. AO, having applied the provisions and rules has calculated disallowance under rule 8D to the extent of Rs.45,02,57,576/-. Since the assessee has already disallowed Rs.42,50,04,939/-, AO restricted the disallowance to sum of Rs.2,52,52,640/-. Whereas the assessee has made submissions on 17/8/2016 explaining that the disallowance u/s 14A cannot exceed exempted income as the total exempt income received by the assessee in the said financial year is Rs.5,86,500/-. The AO relied on judicial decisions and assessed the income of Rs.1,84,46,860/- including disallowance u/s 14A of Rs.2,52,52,640/- and passed the order u/s 143(3) dated 31/10/2016.
Aggrieved by the order, the assessee has filed appeal with the CIT(A). Whereas the CIT(A) considering the grounds of appeal
and submissions of the assessee has given a categorical finding in respect of claims and dismissed the . 318 & 537/Bang/2019 Page 5 of 10 main grounds and allowed the alternative ground restricting disallowance u/s 14A to the exempt income. The CIT(A) also referred to submissions made by the assessee with supporting judicial decisions and finally concluded as under: “Respectfully following the Hon’ble jurisdictional tribunal’s decision I hereby allow the alternate round. Therefore, the grounds on disallowance of indirect expenses u/s 14A at Rs.2,54,08,001/- as against Rs.1,55,362/- (admin expenses of Rs.1,23,079/- and demat charges of Rs.32,283/-) made in the return of income are partly allowed directing the AO to restrict the disallowance to the exempt income.”
5. Aggrieved by the order, the assessee has filed appeal with the Tribunal. At the time of hearing, ld. AR submitted that the assessee-company is engaged in financing and investment in shares and securities and NFBC and has income by way of interest, dividend income and profit on redemption of units and profit on sale of investment. Whereas in the financial year 2013-14, relevant to assessment year 2014-15, the assessee has received dividend of Rs.5,86,500/-. The AO made disallowance in the course of assessment proceedings overlooking the revised the disallowance which is equal to dividend income. The AO and the CIT(A) have confirmed the disallowance u/s 8D(2) and 8D(2)(iii). But the AO made disallowance of Rs.2,54,08,001/- and the CIT(A) passed the order restricting to exempted income. The contention of the ld. AR that the . 318 & 537/Bang/2019 Page 6 of 10 assessee has made disallowance u/s 14A suo motu and revised in the course of assessment proceedings. Therefore, fresh disallowance under rule 8D shall be to the extent of Rs.5,86,500/- only. The ld. AR also placed on record judicial decisions and prayed that appeal of the assessee be allowed restricting disallowance to the extent of Rs.5,86,500/-. Contra, learned DR supported the orders of the CIT(A) on this disputed issue.
We heard rival submissions and perused material on record. The sole crux of disputed issue is in respect of disallowance made by the AO by applying rule 8D(2)(ii) and 8D(2)(iii). The contention of the ld. AR that the CIT(A) has not considered the submissions on the ground of appeal
No.2 and 3 before him in respect of disallowance suo motu made by the assessee. Ld. AR further emphasized that the assessee has made disallowance at the time of filing of return of income and referred to computation of income. Further in the course of assessment proceedings, the assessee has filed revised statement of income in disallowing expenditure to the extent of dividend income received. Whereas the CIT(A) has passed the order allowing the alternative ground. We find that the Hon’ble Delhi High Court in the case of Principal CIT vs. Caraf Builders & Constructions (P.) Ltd., . 318 & 537/Bang/2019 Page 7 of 10. (101 taxman.com 167) has dealt on this issue. The Headnote reads as under: “Section 14A of the Income-tax Act, 1961, read with rule 8D of the Income-tax Rules, 1962 – Expenditure incurred in relation to income not included in total income (Rule 8D) – Assessment year 2009-10 – Whether upper disallowance cannot exceed exempt income of relevant year – Held, yes – Whether where for year in question, finding of fact was that assessee had not earned any tax free income, corresponding expenditure could not be worked out for disallowance – Held, yes – Whether for computing disallowance under clause (ii) of rule 8D(2), numeral B in clause (ii) refers only to average value of entire investment that does not form part of total income – Held, yes (paras 25 and 26) (in favour of assessee).”
Further co-ordinate bench decision in the case of M/s. Renaissance Holdings & Developers Pvt.Ltd. vs. ACIT in held at para.6 as under:
“6. We heard rival submissions and perused the material on record. The only issue involved is whether the AO is justified in making disallowance of Rs.24,87,246/- under clause (iii) of rule 8D of the IT Rules. There is no dispute about the applicability of the provisions of sec.14A of the Act. The contention of the assessee is two-fold. The first limb of argument is that disallowance cannot exceed exempt income and secondly, for the purpose of working out disallowance under clause (iii) of rule 8D, the only investments which yielded dividend income or exempt income alone should be considered. This issue is now covered by the decision of the Special Bench of Tribunal (Delhi) in the case of Vireet Investment (P) Ltd. (supra). The relevant paragraph is extracted hereunder: “11.16. Therefore, in our considered opinion, no contrary view can be taken under these circumstances. We, accordingly, hold that only those investments are to be considered for computing average value of investment which yielded exempt income during the year.”
. 318 & 537/Bang/2019 Page 8 of 10 Thus the proposition that the amount of disallowance cannot exceed exempt income is settled. Accordingly, we hold that the disallowance cannot exceed the amount of exempt income. On the second limb of argument that only investments which yielded exempt income should alone be considered, in the light of the decision of the Special Bench of Tribunal in the case of ACIT vs. Vireet investment Pvt. Ltd. & anr (165 ITD 27) (SB), the contention of the assessee is accepted. Accordingly, we restore the issue back to the file of the AO for disallowance u/s 14A by restricting the amount of disallowance to the lower of exempt income or amount arrived at by prescribed formula under rule 8D clause (iii) by taking into only those investments which yielded exempt income.”
By applying the ratio of the above decisions, we restore the disputed issue to the file of the AO for limited purpose to restrict the disallowance u/s 14A to the extent of exempt income and allow the grounds of appeal are allowed for statistical purposes.
Now we shall take up the revenue appeal in ITA No.537/Bang/2019. The revenue has raised the following grounds of appeal: i. “CIT(A) has erred in law and facts in restricting the disallowance u/s 14A of the IT Act, against the provisions of Rule 8D(2)(iii) of the I.T. Rules to the quantum of the exempt income of Rs. 5,86,500/ -, though the disallowances u/s 8D(2)(i) and 8D(2)(ii) were made as per the provisions of these rules without any such restriction and dispute. ii. Without prejudice to the above ground, CIT(A) did not adjudicate the alternate ground taken before him that the maximum disallowance of the expenditure u/s 8D(2)(iii) cannot exceed the expenditure of Rs. 53,C9,622/- which is the total indirect expenditure claimed by the assessee in the return of income.” . 318 & 537/Bang/2019 Page 9 of 10. At the time of hearing, the learned DR relied on the order of AO. Since we have restored the assessee appeal to the file of AO on the connected issue, we consider it appropriate to remit this issue to the file of AO and accordingly the Revenue appeal is allowed for statistical purposes.
The assessee has filed appeal in for assessment year 2015-16 where the facts and grounds of appeal are similar to assessment year 2014-15 and the decision as discussed above shall apply with mutatis mutandis. Accordingly, this appeal is also restored to the file of the AO for limited purpose to calculate disallowance under sec.14A r.w. rule 8D to the extent of exempt income and the grounds of appeal are treated as allowed for statistical purposes.
In the result, the assessee’s appeals and Revenue appeal are allowed for statistical purposes.
Order pronounced in the open court on 15th July, 2019.