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Income Tax Appellate Tribunal, MUMBAI BENCHES “C”, MUMBAI
Before: SHRI S. RIFAUR RAHMAN (AM) & SHRI RAM LAL NEGI (JM)
O R D E R
PER RAM LAL NEGI, JM
This appeal has been filed by the assessee against the order dated 23.03.2018 passed by the Commissioner of Income Tax (Appeals)-10 (for short ‘the CIT(A), Mumbai, for the assessment year 2014-15, whereby the Ld. CIT(A) has dismissed the appeal filed by the assessee against the assessment order passed u/s 143 (3) of the Income Tax Act, 1961 (for short the ‘Act’).
2. Brief facts of the case are that the assessee a non-banking finance company, engaged in the business of settlement/acquisition of stressed assets and investment in shares and consultancy services, filed its return of income for the assessment year under consideration declaring nil income. Since, the case was selected for scrutiny, the AO issued notice u/s 143 (2) and 142 (1) of the Act. In response to the said notices, the authorized representative appeared before the AO and filed the details called for and discussed the case. It was Assessment Year: 2014-15 noticed that the assessee had shown dividend income of Rs. 10,06,800 and claimed the same as exempt u/s 10(34) of the Act. Since, the assessee had made suo moto disallowance of Rs. 2,01,360/- towards the expenses incurred for earning exempt income, the AO asked the assessee to explain why the provisions of section 14A read with Rule 8D of the Income Tax Rules (Rules) should not be applied. The assessee contended that its case is the assessee had earned exempt income of Rs. 10,06,800/- which is covered in its favour by the orders of the ITAT pertaining to the earlier years in which the ITAT has directed the AO to reduce total investments to the tune of investment made in subsidiaries companies. However, the AO rejecting the contention of the assessee computed the total disallowance u/s 14A r.w.r. 8D amounting to Rs. 65,13,583/-. Against the said findings of the AO, the assessee filed an appeal before the Ld.CIT (A). The Ld CIT (A) after hearing the assessee dismissed the appeal and confirmed the disallowance made by the AO. The assessee is in appeal against the said findings of the Ld. CIT (A). 3. The assessee has challenged the impugned order passed by the Ld. CIT (A) on the following effective grounds:-
“1. Under the facts & circumstances of the case and in law, the order of Ld. CIT (A)-10, Mumbai dated 23.03.2018 is arbitrary, perverse and bad in law.
Under the facts & circumstances of the case and in law, Ld. CIT (A)-9, Mumbai has erred in: a. Confirming the disallowance of Rs. 63,12,223/- u/s 14A of the Act. b. Not appreciating that major investments of the Appellant are in its subsidiaries for the purpose of acquiring controlling stake and interest paid on borrowings, if any, made for acquiring controlling stake in subsidiaries is an allowable business expenditure u/s 36(1)(iii) of the Act. c. Neither appreciating nor giving any cognizance to the fact that in the earlier years Hon ITAT and CIT (appeals) have already decided in favour of appellant.’ Assessment Year: 2014-15
Although, the assessee has challenged the impugned order by raising the aforesaid grounds, however, at the time of arguments, the Ld. counsel without arguing on the said grounds, submitted that the findings of the authorities below are contrary to the ratio laid down by the Hon’ble Delhi High Court in the case of Joint Investments, as the disallowance confirmed by the Ld. CIT (A) is more than the exempt income earned by the assessee during the previous year. Accordingly, the Ld. counsel submitted that the disallowance may be restricted to the exempt income earned by the assessee.
On the other hand, the Ld. Departmental Representative (DR) relied on the concurrent findings of the authorities below. 6. We have heard the rival submissions of the parties. The only grievance of the assessee is that the Ld. CIT (A) has wrongly confirmed the disallowance made by the AO u/s 14A r.w.r. 8D of the Rules. As pointed out by the Ld. counsel for the assessee, the findings of the Ld.CIT (A) are not in accordance with the ratio of law laid down by the Hon’ble Delhi High Court in the case of Joint Investments vs. CIT, (2015) 59 taxmann.com 295, in which the Hon’ble Court has held that section 14A and Rule 8D cannot be interpreted to mean that the entire tax exempt income can be disallowed. The relevant para of the judgment reads as under:- “9. In the present case, the AO has not firstly disclosed why the appellant/assessee's claim for attributing Rs. 2,97,440 as a disallowance under s. 14A had to be rejected. Taikisha Engg. India Ltd. (supra) says that the jurisdiction to proceed further and determine amounts is derived after examination of the accounts and rejection if any of the assessee's claim or explanation. The second aspect is there appears to have been no scrutiny of the accounts by the AO-an aspect which is completely unnoticed by the CIT(A) and the Tribunal. The third, and in the opinion of this Court, important anomaly which we cannot be unmindful is that whereas the entire tax exempt income is Rs. 48,90,000, the disallowance ultimately directed works out to nearly 110 per cent of that sum, i.e., Rs. 52,56,197. By no stretch of imagination can s. 14A or r. 8D be interpreted so as to mean that the entire tax exempt income is Assessment Year: 2014-15 to be disallowed. The window for disallowance is indicated in s. 14A, and is only to the extent of disallowing expenditure "incurred by the assessee in relation to the tax exempt income". This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case.”
In the present case, the assessee has earned exempt income of Rs. 10,06,800/- on which the AO made disallowance of Rs. 63,12,223/- (excluding the suo moto disallowance of Rs. 2,01,360/- made by the assessee). In view of the ratio laid down by the Hon’ble Delhi High Court in the aforesaid case, the disallowance u/s 14A cannot exceed exempt income of the relevant year. Therefore, in our considered view, the findings of the Ld.CIT (A) are contrary to the law laid down by the Hon’ble Delhi High Court. Hence, following the ratio laid down by the Hon’ble Delhi High Court in the aforesaid case, we set aside the findings of the Ld. CIT (A) and direct the AO to restrict the disallowance to the exempt income earned by the assessee during the relevant year. In the result, appeal filed by the assessee for assessment year 2014- 2015 is partly allowed. Order pronounced in the open court on 9th December, 2019. (S. RIFAUR RAHMAN) (RAM LAL NEGI) ACCOUNTANT MEMBER JUDICIAL MEMBER म ुंबई Mumbai; दिन ुंक Dated: 09/12/2019 Alindra, PS आदेश प्रतितिति अग्रेतिि/Copy of the Order forwarded to : 1. अपील र्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 3. आयकर आय क्त(अपील) / The CIT(A)- 4. आयकर आय क्त / CIT 5. दिभ गीय प्रदिदनदि, आयकर अपीलीय अदिकरण, म ुंबई / DR, ITAT, Mumbai Assessment Year: 2014-15