ASST CIT 5(3)(2), MUMBAI vs. SPACO TECHNOLOGIES (I) P.LTD, MUMBAI

These two appeals are filed by the Assessee and Revenue against different orders of the Learned Commissioner of Income Tax (Appeals) –

First we take up the appeal of the assessee for the A.Y. 2013-14. The only issue in the appeal of the assessee is in respect of disallowance made u/s. 14A r.w. Rule 8D(2)(ii) and 8D(2)(iii) of I.T. Rules.

Briefly stated the facts are that, the Assessing Officer while completing the assessment noticed that assessee received dividend income of ₹.4,69,80,067/- and claimed as exempt u/s. 10(35) of the Act. He also noticed that assessee received interest of ₹.27,84,204/- on tax free bonds of NHAI and assessee disallowed ₹.5,36,000/- towards expenditure incurred against the said exempt income received by the assessee. In the course of the assessment proceedings assessee was required to explain as to why the provisions of section 14A r.w. Rule 8D should not be applied and the assessee vide letter dated 12.02.2016 submitted that it had sufficient reserves and surplus of ₹.230.45 Crores as against investment of ₹.190.16 Crores and whatever loan was taken was only for the purpose of business. Therefore, it was submitted that no interest cost could be attributed to the exempt income. It was further submitted by the assessee that dividend warrants received and deposited into bank account was only 26 in number. Assessee submitted that the 3 & 4034/MUM/2018 M/s Spaco Technologies (I) Private Ltd., time spent for accounting and documentation of the investment for purchase, sale, switch and passing relevant entries takes three days per month and as per this calculation the approximate salary of one Mr. S.N. Ursal who look after this portfolio works out to ₹.1,95,000/- and supervision charges of one Mr. Karkhanis works out to ₹.2,52,000/- and after loading overhead at the rate of 20%, all put together the total expenditure for earning the exempt income after rounding off to nearest thousand works out to ₹.5,36,000/- only. Therefore, keeping in view these facts it was requested that only ₹.5,36,000/- shall be taken as expenditure incurred for earning exempt income. Not convinced with the submissions of the assessee, the Assessing Officer invoking the provisions of Rule 8D r.w.s. 14A of the Act computed the disallowance at ₹.1,00,38,428/- comprising of direct expenses of ₹.5,36,000/- which the assessee disallowed on his own, interest of ₹.5,81,445/- and one and half percent of average value of investments i.e. being administrative expenses at ₹.89,20,983/-. However, he reduced ₹.5,36,000/- from ₹.1,00,38,428/- and arrived at net disallowance of ₹.95,02,428/-. On appeal the Ld.CIT(A) sustained the disallowance made by the Assessing Officer.

Ld. Counsel for the assessee referring to Page No. 79 of the Paper Book which is the order of the Tribunal in assessee’s own case for the A.Y. 2011-12 in ITA.No. 2882/Mum/2016 dated 22.01.2018 submits that 4 & 4034/MUM/2018 M/s Spaco Technologies (I) Private Ltd., identical issue came up before the Tribunal for the A.Y. 2011-12 and the Tribunal following the decision of the Hon'ble Bombay High Court in the case of CIT v. Reliance Utilities and Power Ltd. [313 ITR 340] and HDFC Ltd v. DCIT [383 ITR 529] deleted the interest expenses as the assessee had sufficient reserves and surplus more than the investments made. Ld. Counsel for the assessee referring to Page No. 6 of the Paper Book which is the balance sheet of the assessee company as on 31.03.2013 submits that for the current Assessment Year the assessee is having reserves and surplus to the extent of ₹.230.45 Crores and the investments stood at ₹.190.15 Crores. Therefore, it is submitted that since the reserves and surplus were more than the investments as on the date of 31.03.2013 the presumption is that the investments were made out of the interest free surplus funds and no interest disallowance is warranted under Rule 8D(2)(ii) of I.T. Rules. Reliance was placed on the decision of the Hon'ble Bombay High Court in the case of CIT v. Reliance Utilities and Power Ltd. [313 ITR 340] and HDFC Ltd v. DCIT [383 ITR 529] and the order of the Tribunal in assessee’s own case in ITA.No. 2882/Mum/2016 dated 22.01.2018.

In so far as the disallowance made under Rule 8D(2)(iii) of I.T. Rules is concerned the only submission of the Ld. Counsel for the assessee was that a direction may be given to Assessing Officer to reduce the suomoto

Ld. DR vehemently supported the orders of the authorities below.

We have heard the rival submissions, perused the orders of the authorities below. In so far as the disallowance of interest under Rule 8D(2)(ii) of I.T. Rules is concerned, we observe that the assessee has investments of ₹.190.16 Crores whereas the reserves and surplus stood at ₹.230.45 Crores as on 31.03.2013. Assessee filed audited balance sheet to substantiate his submissions. We find that identical issue came up before the Tribunal in assessee’s own case and the Tribunal deleted the interest disallowance in view of the ratio of the decision in the case of CIT v. Reliance Utilities and Power Ltd. (supra) and HDFC Ltd v. DCIT

In so far as the disallowance under Rule 8D(2)(iii) of I.T. Rules is concerned, we observe that Assessing Officer though ultimately reduced ₹.5,36,000/- and arrived at net disallowance of ₹.95,02,428/- u/s. 14A of the Act, we find that the Assessing Officer considered suomoto disallowance of ₹.5,36,000/- as direct expenses incurred under Rule 8D(2)(i) of I.T. Rules. It is the submission of the assessee that there are no direct expenses incurred by the assessee and the amount of ₹.5,36,000/- which the Assessing Officer considered as direct expense is nothing but the suomoto disallowance made by the assessee. The Ld. Counsel for the assessee further referring to Page No. 29 of the Paper Book which is the computation of income, submits that the assessee disallowed ₹.5,36,400/- as suomoto disallowance u/s. 14A of the Act. In view of the above and in the absence of any direct expenses the Assessing Officer is not justified in considering the said amount as direct expenses. Thus, we direct the Assessing Officer to reduce the suomoto

Coming to the appeal of the Revenue for the A.Y. 2014-15, the only ground raised by the Revenue is Ld.CIT(A) is not justified in directing the Assessing Officer to exclude investments in debt funds/liquid funds with growth options from average value of investments for disallowance under Rule 8D(2)(iii) holding the income from these investments are not exempt in the hands of the assessee.

Ld. Counsel for the assessee submits that identical issue came up for the A.Y. 2012-13 in ITA.No. 246/MUM/2017 dated 04.10.2018 wherein the Tribunal excluded those investments while computing the average value of investments for the purpose of disallowance under Rule 8D(2)(iii) of I.T. Rules following the decision of the Delhi Special Bench of the Tribunal in the case of ACIT v. Vireet Investments Private Limited [165 ITD 27]. Copy of the order is placed on record.

Ld. DR vehemently supported the orders of the Assessing Officer.

We have heard the rival submissions, perused the order of the Tribunal and noticed that the Tribunal directed the Assessing Officer to exclude the investments made in growth funds while computing the 8 & 4034/MUM/2018 M/s Spaco Technologies (I) Private Ltd., average value of investment since the growth funds do not yield any exempt income, similar is the ratio of the decision of the Delhi Special Bench in the case of ACIT v. Vireet Investments Private Limited (supra). In view of the decision of the Special Bench, we sustain the order of the Ld.CIT(A) in giving direction to exclude such investments while computing the disallowance under Rule 8D(2)(iii) of I.T. Rules. Ground of the Revenue is dismissed.

In the result, appeal of the assessee is partly allowed and appeal of the Revenue is dismissed.