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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI B.R. BASKARAN
Date of hearing : 26.09.2019 Date of Pronouncement : 27.09.2019 O R D E R
Per N V Vasudevan, Vice President
This appeal by the assessee is against the order dated 28.07.2017 of the CIT(Appeals), Bengaluru, relating to assessment year 2013-14.
The only issue that arises for consideration in this appeal by the assessee is with regard to disallowance of expenses incurred in earning income which does not form part of total income under Chapter III of the Income-Tax Act, 1961 [“the Act”] by invoking the provisions of section 14A of the Act.
The assessee is a company engaged in the business of financing as well as investment in shares and securities. For the AY 2013-14, the assessee filed a return of income on 21.9.2013 declaring income of Rs.3,75,18,920.
In arriving at the total income, the assessee had made a disallowance of Rs.24,88,20,868 u/s. 14A of the Act. The AO after making a reference to the provisions of section 14A of the Act and Rule 8D of the Income-tax Rules, worked out the disallowance u/s. 14A of the Act as follows:-
4.6 The disallowance u/s. 14A r.w.r. 8D is worked out as below:
Amount S.No Particulars Amount 1 Total amount of Interest Expenses 62,30,95,648 Less Interest Expenses incurred for earning 36,38,53,740 Interest Income Less : Interest Expenses 1,04,21,040 37,42,74,780 disallowed U/s 36(1)(iii) Balance Interest 24,88,20,868 2 Investments as on March 10,27,34,88,684 31, 2012 6,41,37,500 Less: Investments earning taxable Income
Opening Investments 10,20,93,51,184 3 Investments as on March 31, 2013 10,23,11,65,430 7,96,87,866 Less : Investments earning taxable Income
Amount S.No Particulars Amount
Closing Investments 10,15,14,77,564 4 Average Investments 10,18,04,14,374 (2+3)2 5 Opening Total Assets 10,52,41,04,976 6 Closing Total Assets 12,49,50,77,936 7 Average Total Assets (5+6) / 2 11,50,95,91,456 A 22,00,85,965 Interest disallowance U/s 14A as per Rule 8D = 1X4/7 B Admin Expenses: 0.5% of Average 5,09,02,072 Investments
27,09,88,037 Total Disallowance U/s 14A
The difference between the disallowance made by the AO and the disallowance made by the assessee in the computation of income viz., a sum of Rs.2,21,67,169 was added to the total income of the assessee by way of disallowance u/s.14A of the Act. On appeal by the assessee, the CIT(Appeals) restricted the addition u/s. 14A of the Act of Rs.24,90,96,229 as against the disallowance u/s. 14A made by the AO of Rs.27,09,88,037. Still aggrieved by the order of CIT(Appeals), the assessee has preferred the present appeal before the Tribunal. Though the assessee has raised several grounds of appeal before the Tribunal, at the time of hearing, the ld. counsel for the assessee restricted his argument for a limited relief of restricting the disallowance u/s. 14A of the Act to the extent of income which does not form part of the total income under Chapter III of the Act. In this regard, the ld. counsel for the assessee filed before us a copy of the decision of ITAT Bangalore Bench in assessee’s own case in & 318/Bang/2019 for the AY 2014-15 and 2015-16, order dated 15.7.2019 wherein the Tribunal after referring to several decisions directed the AO to restrict the disallowance u/s. 14A of the Act to the extent of exempt income earned by the assessee. Following were the relevant observations of the Tribunal:-
“6. 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. (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.” 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.”
6. We have perused the aforesaid decision of the Tribunal and are of the view that disallowance u/s. 14A of the Act in the present assessment year should also be restricted to the income earned by the assessee, which does not form part of the total income under the Act, which is a sum of Rs.4,11,628 being dividend income exempt u/s. 10(34) & (35) of the Act and long term capital gain of Rs.2,06,84,487 earned on sale of Kotak shares which is exempt u/s. 10(38) of the Act. We hold and direct accordingly.
In the result, the appeal of the assessee is partly allowed.
Pronounced in the open court on this 27th day of September, 2019.