SYNGENE INTERNATIONAL LTD.,BENGALURU vs. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE - 6(1)(2), BENGALURU

The assessee is aggrieved by the decision of ld CIT(A) in confirming the disallowance made by the AO u/s 14A of the Act.

The assessee is engaged in the business of manufacturing of organic compounds and is also undertaking research and development activities. During the year under consideration, the assessee received dividend income of Rs.114.95 lakhs and claimed the same as exempt. The AO noticed that the assessee has not disallowed any expense u/s 14A of the Act. The AO took the view that the provisions of sec. 14A of the Act are attracted and accordingly worked out disallowance u/s 14A by applying provisions of Rule 8D. The AO disallowed interest expenses under Rule 8D(2)(ii) of the Rules at Rs.2,42,930/- and further made disallowance out of administrative expenses under Rule 8D(2)(iii) at Rs.65,498/.- In aggregate the AO disallowed a sum of Rs.3,08,428/- u/s 14A of the Act. The ld CIT(A) confirmed the same and hence the assessee has filed this appeal before us.

The ld AR placed reliance on the decision rendered by the Hon’ble Bombay High Court in the case of Reliance Utilities and Power Ltd., 313 ITR 340 and submitted that the assessee is having own funds in excess of the value of investments and hence no disallowance out of interest expenditure is called for.

We have gone through the financial statement furnished by the assessee and noticed that the assessee is having own funds of 224.50 crores and 302.20 crores as at the beginning and end of the year respectively. The value of investments held by the assessee as at the beginning and end of the year was 2.60 crores and 10 lakhs respectively. Admittedly the own funds available with the assessee is more than value of investments and hence as per the decision rendered by Hon’ble Bombay High Court in the case of HDFC Bank Ltd., 383 ITR 529 no disallowance out of interest expenditure is called for. Accordingly we set aside the order passed by the ld CIT(A) on this issue and direct the AO to delete the disallowance made in Rule 8D(2)(ii) out of interest expenditure.

With regard to the disallowance made out of administrative expenses, the ld AR submitted that the assessee has made a investment only in units of mutual fund and dividend was earned from out of mutual funds only. The ld AR further submitted that the mutual fund has not charged any amount towards expenses upon the assessee and further the assessee has also not incurred any expenditure for earning the dividend income. The ld AR further submitted that the AO has not recorded his dissatisfaction over the claim of the assessee that it did not incur any expenditure for earning dividend income. Accordingly, the ld AR, by placing reliance on the coordinate bench decision rendered in the case of Biocon Research Ltd., Vs. Addl. CIT (ITA Nos.1229 and 1329/Bang/2016 dated 18/2/2017), submitted that the no disallowance u/s 14A is called for.

We have heard the ld DR on this issue and perused the record. From the financial statements, we notice that the assessee has held units in ICICI prudential Liquid fund to the tune of 2.60 crores as at the beginning of the year and the same has been sold during the year under consideration. Further, during the year under consideration, the assessee has also made fresh investment of 10 lakhs in its subsidiary named M/s Clinigene International Ltd. The assessee has also received dividend income of 114.95 crores during the year under consideration. Thus, we notice that there has been certain amount of activities in the investment portfolio of the assessee. The above said activities, in our view, could not have been undertaken without using the establishment of the assessee. However, in the facts and circumstances of the case, we are of the view that it may not be practicable to apply provision of Rule 8D(2)(iii) of the IT Rules but at the same time some disallowance is called for out of administrative expenses for the reasons mentioned above. Accordingly, in the facts and circumstances of the case, we are of the view that a disallowance of Rs.10,000/- out of administrative expenses may be estimated to take care of provisions of Rule 14A of the Act and the same would put this issue at rest. Accordingly we set aside the order passed by the ld CIT(A) on this issue and direct the AO to make disallowance of Rs.10,000/- out of administrative expenses u/s 14A of the Act.

In the result, the appeal filed by the assessee is partly allowed.