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Income Tax Appellate Tribunal, BANGALORE BENCHES “A” BENCH: BANGALORE
Before: SHRI A.K. GARODIA & SHRI PAVAN KUMAR GADALE
ORDER
PER PAVAN KUMAR GADALE, JM.
The assessee has filed an appeal against the order of the CIT (A)-1, Bangalore, dated 26/09/2017 passed u/s 143(3) and u/s 250 of the IT Act, 1961 for the assessment year 2013-14. The assessee has raised the following grounds of appeal: “1. The order of the CIT (A) is bad and unsustainable in the eye of law as the same is passed contrary to the settled position of law & without proper application of mind.
2. The Ld CIT (A) ought to have appreciated that the AO having not recorded satisfaction before invoking provisions of section 14A and Rule 8D, the disallowance is unsustainable in law.
3. Without prejudice, the CIT (A) ought to have appreciated that the disallowance, if at all, could never be more than the alleged exempted income of Rs. 12,44,250/-; and hence the impugned orders suffer from serious legal infirmities.
4. Without prejudice, the CIT (A) grossly erred in sustaining the disallowance without appreciating the crucial fact that the appellant had made borrowings on which interest was paid, was for earning Short Term Capital Gains on which STT was paid and hence that STCG could never be held as an exempted income. To that extent at least, the order of the AO could not have been sustained.”
Brief facts of the case are that the assessee is engaged in the business of manufacturing of Ice Cream and share trading and filed its Return of income for the assessment year 2013-14 on 28/09/2013 disclosing total income of Rs. 2,78,98,208/-. Subsequently, the case was selected for scrutiny under CASS and notices u/s 143(2) and 142(1) of the Act were issued. In compliance, the Ld AR of the assessee appeared from time to time and furnished the details. The Assessing Officer on perusal of the Financial Statements of the assessee observed that the assessee has received a dividend income of Rs.12,44,250/- and claimed exemption u/s 10(34) of the Act. However, the assessee has not disallowed any amount as expenditure attributable for earning exempted income. Hence Assessing Officer applied the provisions of section 14A r.w.s 8D and has worked out the disallowance of Rs. 54,95,074/- referred at para 4.4 of the of the assessment order and Determined the total income of Rs. 3,33,93,284/- and passed order u/s 143(3) of the Act on 30/11/2015.
Aggrieved by the order, assessee has filed an appeal before the CIT (A) and CIT (A) has upheld the action of the Assessing Officer and dismissed the assessee’s appeal. Aggrieved by the CIT (A) order, assessee has filed an appeal before the Tribunal.
Before us, the Ld AR submitted that the Assessing Officer has erred in making disallowance u/s 14A r.w. Rule 8D whereas the assessee has obtained loan and paying interest on borrowings and Borrowed funds were utilized for the purpose of purchase of shares and are sold and income from sale of shares is offered as Short Term Capital Gains tax. The contention of the Ld AR that out of total claim of Finance Charges of Rs. 68,70,431/-, Rs. 50,02,234/- is attributable to the earning of Short Term Capital Gains and is outside the purview of section 14A of the Act. The Ld AR substantiated the claim with Judicial decisions and ….Contra, Ld DR relied on the order of the CIT(A).
We have heard the rival submissions and perused the material on record. The sole disputed issue being the disallowance made by the Assessing Officer applying provisions of section 14A r.w. Rule 8D. The Ld AR submitted that the assessee has obtained loan and paying interest and such loan was utilized for making investment in buying shares of M/s. Mind Tree Ltd. The Ld AR supported his submission with the copy of Ledger Account, Contract Note at page 10 to 13 of the Paper Book. The Ld AR further envisaged that out of the total payment of Rs. 68.70 lakhs, M/s. JM Financial Services Pvt Ltd was paid Rs 50.02 lakhs of interest and Vehicle Loan interest is Rs. 00.09 lakhs and Way2wealth was paid Rs. 18.59 lakhs. Therefore, the assessee has held the shares for Short Term purpose and accordingly Short Term Capital Gains were offered for taxation. We found that the assessee no doubt has traded in shares of particular company and has obtained borrowed funds and paid interest to M/s. JM Financials of Rs. 50.02 lakhs which is not disputed by the Revenue and the assessee has offered to tax the Short Term Capital Gains. We are of the opinion that when the disallowance has to be made as per the provisions of section 14A r.w. Rule 8D, exempted income yielding investments should be excluded for the purpose of calculation. We support our view with the decision of the Special Bench in the case of ACIT vs. Vireet Investments Pvt Ltd in dated 16/06/2017 where this issue of exclusion of exempt income yielded investments are being considered. When a query raised to the Ld AR what is the component of exempted investments, the Ld AR could not substantiate with evidence. We are of the opinion that the assessee has obtained loan for investment purpose and paying interest and offered Short Term Capital Gains. But none of the parties could explain the link of the loan transaction with purchase of the shares. We are of the opinion that the assessee should be provided an opportunity to explain the link of transactions of purchase to the Assessing Officer with evidence with borrowed funds. Accordingly, we remit this disputed issue to the file of the Assessing Officer to examine and verify and calculate the disallowance u/s 14A r.w. Rule 8D following the ITAT, Special Bench (Delhi) decision in the case of ACIT vs. Vireet Investments Pvt Ltd (supra) and accordingly allow the Grounds of Appeal for statistical purposes.
In the result, appeal filed by the assessee is allowed for statistical purposes.