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Income Tax Appellate Tribunal, MUMBAI BENCHES “C”, MUMBAI
Before: SHRI G. MANJUNATHA (AM) & SHRI RAM LAL NEGI (JM)
O R D E R
PER RAM LAL NEGI, JM
This appeal has been filed by the revenue against the order dated 01.01.2018 passed by the Commissioner of Income Tax (Appeals)-2 (for short ‘the CIT(A), Mumbai, for the assessment year 2013-14, whereby the Ld. CIT(A) has partly allowed 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 company engaged in the business of trading of gold advancing loans and holding investments, filed its return of income for the assessment year under consideration declaring the total loss at Rs. 13,68,11,578/-. The AO passed assessment order u/s 143 (3) of the Act and determined the total loss at Rs. (-) 11,30,00,412/- after making disallowance u/s 14A r.w.r. 8D amounting to Rs. 2,38,11,166/-. The assessee challenged the assessment order before the Ld. CIT (A). The Ld. CIT (A) after Assessment Year: 2013-14 hearing the assessee restricted the disallowance to the exempt income of Rs. 10,74,603/- earned by the assessee during the previous year. The revenue is in appeal against the said findings of the Ld. CIT (A). 3. The revenue has challenged the impugned order passed by the Ld. CIT (A) on the following effective ground:- “On the facts and in the circumstances of the case and in law, the Ld. CIT (A) has erred in restricting the disallowance made by the AO u/s 14A r.w. Rule 8D of the I.T. Rules, by holding that the disallowance should not exceed the exempt income earned, by ignoring Board Circular No. 5 of 2014 dated 11.02.2014.”
Before us, the Ld. Departmental Representative (DR) submitted that the Ld. CIT (A) has wrongly restricted the disallowance to the exempt income earned by the assessee in contravention of Circular No. 5 of 2014 dated 11.02.2014 issued by the Central Board of Direct Taxes (CBDT). The Ld. DR further submitted that since the assessee has claimed certain income as exempt u/s 10 of the Act and also claimed expenses against the said income, the AO has rightly applied section 14A r.w.r. 8D and computed the disallowance at Rs. 2,38,11,166/-. Hence, the Ld. CIT (A) ought to have confirmed the disallowance made by the AO.
On the other hand, the Ld. counsel for the assessee relying on the order passed by the Ld. CIT (A) submitted that since this issue is covered in favour of the assessee by the judgments of the Hon’ble Supreme Court, various High Courts and the various Benches of the ITAT, there is no infirmity in the order passed by the Ld.CIT (A) to interfere with. The Ld. counsel further submitted that as per the settled law, the disallowance u/s 14A r.w. Rule 8D of the Income Tax Rules (the Rules) cannot exceed the exempt income earned by the assessee during the relevant previous year. The Ld. counsel relied on the following cases to substantiate his contention:- 1. Pr. CIT vs. State Bank of Patiala (2018) 99 taxmann.com 286 (SC) and Pr. CIT vs. State Bank of Patiala (2018) 99 taxmann.com 285 (P & H) (HC). Assessment Year: 2013-14
Joint Investments Pvt. Ltd. Vs. CIT (2015) (59 taxmann.com 295) (Del) (HC).
PCIT Vs. M/s Empire Package Pvt. Ltd. of 2015 (O&M) (P&H) (HC). 4. Daga Global Chemicals Pvt. Ltd. Vs. ACIT (ITA No. 5592/Mum/2012). 5. Pinnacle Brocom Pvt. Ltd. Vs. ACIT (ITA No. 6247/Mum/2012). 6. Kismet Exports & Investments Pvt. Ltd. vs. DCIT (ITA No. 3255/Mum/2017). 7. Vikrangee Ltd. vs. DCIT (ITA No. 5792/Mum/2016). 8. Future Corporate Resources Ltd. vs. Dy. CIT (OSD) (ITA No. 4658/Mum/2015). 6. We have heard the rival submissions and also perused the material on record including the cases relied upon by the Ld. counsel for the assessee. The only grievance of the revenue is that the Ld. CIT (A) has wrongly restricted the disallowance u/s 14A r.w.r. 8D of the Rules to the exempt income earned by the assessee during the previous year. The Ld. CIT (A) has restricted the disallowance to the exempt income holding as under:-
“6. Decision: The facts of the case have been perused. The contention of the Assessing Officer and the issue brought out are also seen. The grounds of appeal raised by the appellant, contentions brought out during the hearings & also submissions made have been examined. Ground no. 8 is general in nature and hence does not require separate adjudication. Therefore, this ground is treated as dismissed. 6.1 All the remaining grounds of appeal on which the assessee has sought relief is on disallowance u/s 14A r.w.r. 8D. The AO has applied both rule 8D(2)(i), 8D(2)(ii) and rule 8D(2)(iii) and computed direct expenses attributable and interest expenditure and 0.5% of average investments respectively. The direct expenses attributable have worked out at Rs. 34,399/-. Rule 8D(2)(ii) is concerned its Rs. 1,79,49,046/- and as far as Rule 8D(2)(iii) is concerned, 0.5% of the average investments is Assessment Year: 2013-14 computed at Rs. 58,27,721/-. Overall the AO computed rule 8D(2) precisely and arrived at Rs. 2,38,11,166/-. 6.2 The AO has followed the statute, CBDT circular and also relied upon Karnataka High Court decision in the cae of United Breweries Ltd. vs. DCIT (Dated of publication 17.08.2016) wherein it has been held that section 14A is applicable even where the motive of the assessee in acquiring the shares is to obtain controlling interest in a company and not to earn dividends. 6.3 The reliance placed by the appellant in plethora of judicial pronouncements. For the sake of brevity, those are not listed out here. 6.4 The submissions of the appellant have been carefully considered. The gist of various contentions brought out by the appellant is as under:- a) The AO wrongly made disallowance. b) Interest cost attributable to the investments in excessive. c) The disallowance under rule 8D (2)(iii) is not more than actual expenditure by the appellant. d) The AO be directed to restrict the disallowance under section 14A of the Act to exempt income of Rs. 10,74,603/- earned by the appellant. Upon respectfully following the ratio of the judicial pronouncements cited by the AO & the appellant and also analyzing the facts of the case, it emerges that the appellant derives exempt income and the most logical reasoning is that the appellant incurs expenditure to earn such exempt income. However, such disallowance shall not exceed the exempt income. The view expressed by Delhi High Court in the case of Joint Investments Pvt. Ltd. is relevant here, wherein it was held that the disallowance u/s 14A of the I.T. Act, 1961 cannot exceed the tax exempt income. The AO as computed strictly on the basis of Rule 8D(2) in order to arrive at the disallowance as per section 14A. However, as the appellant has sought relief stating in its submissions that without prejudice, the disallowance u/s 14A cannot exceed the dividend earned and hence should be capped at Rs. 10,74,603/-. As discussed supra Assessment Year: 2013-14 and also following judicial pronouncements, the AO is directed to restrict the disallowance of 14A to the tune of Rs. 10,74,603/-. Therefore, the grounds of the appeal are disposed off accordingly.”