JCIT, (OSD), CIRCLE - 6(1), KOLKATA , KOLKATA vs. M/S. ISG TRADERS LTD., , KOLKATA

Per A. T. Varkey, JM:

This is an appeal preferred by the revenue against the order of Ld. CIT(A)-2, Kolkata dated 08-04-2019 for the assessment year 2012-13.

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ii) disallowance u/s. 14A was computed in the assessment without considering the amount of Rs.7,08,49,326/- being interest expenses, while passing the assessment order and the disallowance was made only under Rule 8D(2)(iii) of the Rules. 4. Thereafter, the ld. Pr. CIT passed the order u/s. 263 of the Act with the following direction to the AO. “In view of the facts and circumstances as well as the judicial decision relied on by the assessee in its submission, the impugned order u/s. 143(3) is therefore set aside u/s. 263 of the I. T. Act and the AO is directed to pass a speaking order after providing adequate opportunity of being heard to the assessee after proper verification of all the documents and conducting the enquiries, if required.” 5. Thereafter, the AO in the reassessment proceedings issued notice to the assessee and in response to the said notice, the Ld. AR appeared and submissions were made. Pursuant to the order of Ld. Pr. CIT during the reassessment proceeding the AO observes that in respect of disallowance u/s 14A, the assessee submitted that “not all investments become the subject matter of consideration when computing disallowance u/s 14A read with Rule 8D. The disallowance U/s 14A read with Rule 8D is to be in relation to the income which does not form part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income". 6. The AO considered the assessee’s submission. However, according to AO, the CBDT Circular No-5/2014 dated 11.02.2014 clarifies the disallowance of expenses u/s 14A of the Act. As per AO, the Circular clarifies that it is not necessary that exempt income should necessarily be included in a particular years of income, for disallowance to be triggered. Also section 14A of the Act does not use the word 'income of the year' but 'income under the Act'. This indicates that for invoking disallowance under section 14A, it is not material that the assessee should have earned such exempt income during the financial year under consideration. Thereafter the AO computed the disallowance u/s. 14A read with rule 8D at Rs.5,27,95,595/- after adjusting the disallowance considered by the assessee at Rs.52,28,028/-. Aggrieved, assessee preferred an appeal before the Ld. CIT(A) who while partly allowing the assessee’s appeal has observed as under: “I have considered the grounds of appeal, statement of facts and submission of the authorized representative of the appellate company as well as the assessment order framed in the light of the materials available on record before the assessing officer during the assessment proceedings. The AO had worked out the disallowance u/s. 14A of the I. T. Act read with Rule BD of the LT. Rules.

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As regards to disallowance of the expenses under rule 8D (i), these are direct expenses relating the earning of the exempt income. I agree with the view as taken by the AO in the matter. Keeping in view of above, in the absence of any cogent material evidence, I do not find any infirmity in the order of the assessing officer and the same is hereby upheld. In view of above, this part ground of appeal is dismissed. As regards to disallowance of the expenses under rule 8D (ii) and rule 8D (iii), the Hon'ble jurisdictional ITAT in the case of REI Agro Ltd. vs. DCIT (144 ITD 141) has held that only the investments which actually yield exempt income has to be considered for the purposes of application of Rule 8D(2)(iii). The ITAT held that the investments which did not yield any tax-free income in the relevant year were not required to be considered for the purposes of application of Rule 8D. Keeping in view, of above and by following the judgement of Hon'ble jurisdictional ITAT, the AO is directed to recalculate the disallowance of those shares, which has yielded dividend income while taking the investment. In view of above, the appellant shall furnish before the AO the details in the matter. The AO is also directed to verify the same and accordingly re-compute the disallowance u/s 14A r.w. Rule 8D. The AO shall allow the appellant an opportunity of hearing before passing any order in this regard. This ground is therefore allowed for statistical purposes.

The AR of the appellate has also filed copy of Hon'ble supreme Court Judgement in the case of state bank of Patiala on last date of hearing and argued to restrict the disallowance to the extent of exempt income. As regards to restriction of disallowance to the extent of exempt income, in this regard the reliance is placed on the decision of the Delhi High Court in the case of Joint Investment Pvt. Ltd., Vs. CIT in ITA No. 117/2015 dated 25.02.2015 where the Court held that by no stretch of imagination can the disallowance u/s.14A exceed the amount of exempt income. Following the same identical view has been expressed by the jurisdictional ITAT, Kolkata in the cases of Patrex Vyapar Ltd Vs ITO (ITA No.1921/ Kol/2017) & Babcock Borsig Ltd. - (472/Kol/2016) wherein it has been held that disallowance under. Section 14A cannot exceed the exempt income earned during the year.

The ITAT, Bench “B”, Kolkata ITA No. 388/Kol/2008 in the case of West Bengal Infrastructure Development has held as under:

“97……….. We are however of the view that the disallowance under Sec.14A of the Act cannot be in excess of the tax-free income earned by the Assessee during the previous year We therefore hold that the disallowance uls.14A of the Act be restricted to the tax-free income earned by the Assessee.” The High Court of Punjab and Haryana in the case of Principal Commissioner of Income- Tax, Patiala v. State Bank of Patiala reported [2018] 99 taxmann.com 285 IT Appeal No. 359 of 2017 dated November 14, 2017 has held as under: -

“4. It is not disputed by the learned counsel for the appellant-revenue that the issue involved in the present case stands concluded against the revenue in ITA No. 270 of 2016, Pr CIT v. State Bank of Patiala [2017] 393 ITR 476/88 taxmann.com 667 (Pun). & Har.) decided on 27.02.2017 wherein after considering the relevant provision and the case law on the point, it was recorded as under: - "After hearing learned counsel for the parties, we notice that the issue on merits has been decided in favour of the assessee in State Bank of Patiala's case (supra) [(2017) 78 Taxman.com 3]. The amount of disallowance under Section 14A was restricted to the amount of exempt income only and not at a higher figure.”

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The Hon'ble Supreme Court vide order dated 08.11.2018 in the case of State Bank of Patiala vs Pr. CIT, Patiala reported under (2018) 99 taxmann.com 286 (SC) has dismissed the SLP filed by the department against the order of the Hon'ble Punjab and Haryana High Court reported 99 taxmann.com 285. The High Court vide order dated 14.11.2017 upheld the order of the ITAT holding that the amount of disallowance under section 14A could be restricted to amount of exempt Income only and not a higher figure. Considering the submissions of the AR of the appellant and by following the order of the Hon'ble Supreme Court as mentioned supra, I am of the view that the disallowances made by the AO under Section 14A Rule 8D in excess of the exempt income of the appellant is not justified and be restricted the tax-free income earned by the appellate. This ground of appeal is partly allowed.”

Aggrieved, revenue is in appeal before us. 7. We have heard rival submissions and gone through the facts and circumstances of the case. During the previous year relevant to this assessment year, it is noted that the assessee had earned dividend income of Rs.30,31,550/- from various companies, which was claimed as exempt u/s. 10(34) of the Act. In respect of the aforesaid dividend income, the assessee had filed revised computation of total income when the assessee computed disallowance u/s. 14A read with Rule 8D of the Rules amounting to Rs.52,28,028/- as expenses attributable to earning of the aforesaid exempt income. In the assessment order under appeal, the AO did not accept the computation of disallowance made u/s. 14A read with Rule 8D by the assessee amounting to Rs.52,28,028/- in which the assessee had computed the disallowance u/s. 14A taking into consideration only the shares on which dividend income was earned and claimed as exempt. The AO has computed the disallowance u/s. 14A read with Rule 8D at a sum of Rs.5,80,23,623/- taking the entire investments held by the assessee as on 31.03.2011 and 31.03.2012, resulting in enhancement of the disallowance by Rs.5,27,95,595/-. On appeal the Ld. CIT(A) has given relief to the assessee by holding that the amount of disallowance u/s. 14A should be restricted to the amount of exempt income only and not a higher figure. Against this decision of the Ld. CIT(A), the revenue has preferred this appeal. We note that the decision impugned in the factual back-drop could not be disputed by the Ld. DR. This issue we note is no longer res integra and as rightly noted by the Ld. CIT(A), the Hon’ble Supreme court has upheld similar view of the Hon’ble High court of Punjab & Haryana in PCIT Vs. State Bank of Patiala (supra) and the Ld. CIT(A) has relied on the decision of the coordinate bench of this Tribunal in the case of West Bengal Infrastructure Development (supra) to come to the decision that disallowance u/s. 14A of the Act to be restricted to the amount of exempt income only and not at a higher

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figure. Therefore, we find no infirmity in the order of the Ld. CIT(A) and therefore, we confirm it. 8. Before parting, it is noted that the order is being pronounced after ninety (90) days of hearing. However, taking note of the extraordinary situation in the light of the COVID-19 pandemic and lockdown, the period of lockdown days need to be excluded. For coming to such a conclusion, we rely upon the decision of the Co-ordinate Bench of the Mumbai Tribunal in the case of DCIT vs. JSW Limited in ITA No. 6264/Mum/2018 & 6103/Mum/2018, Assessment Year 2013-14, order dt. 14th May, 2020. 9. In the result, the appeal of revenue is dismissed. Order is pronounced in the open court on 5th June, 2020. Sd/- Sd/- (P. M. Jagtap) (Aby. T. Varkey) Vice President Judicial Member Dated :5th June, 2020 Jd.(Sr.P.S.) Copy of the order forwarded to: 1. Appellant – JCIT(OSD), circle-6(1), Kolkata. Respondent – M/s. ISG Traders ltd., 2nd Floor, Duncan House, 31, 2 Negtaji Subhas Road, BBD Bag, Kolkata-700 001. 3. CIT(A)-2, Kolkata (sent through e-mail) 4. CIT- , Kolkata. 5. DR, ITAT, Kolkata. (sent through e-mail) By order,

/True Copy, Assistant Registrar