EWART INVESTMENTS LTD,MUMBAI vs. DCIT 2(1)(2), MUMBAI

The captioned appeal has been filed at the instance of the assessee against the order of the Commissioner of Income Tax (Appeals)-6, Mumbai, (‘CIT(A)’ in short), dated 15.06.2017 arising in the assessment order dated 17.02.2016 passed by the Assessing Officer (AO) under s. 143(3) of the Income Tax Act, 1961 (the Act) concerning AY 2013-14.

Addressing the first issue towards disallowance under s.14A under the normal provisions of the Act, the learned AR pointed out that the assessee has made suo motu disallowance of Rs.64,61,002/- computed under Rule 8D(2)(iii) of the IT Rules r.w. Section 14A of the Act. However, in the course of assessment proceedings, the assessee realized its mistake and revised the disallowance at Rs.34,21,118/-. The cause for downward revision in quantum of disallowance is that the assessee while filing the return had wrongly taken all investments in equity shares for the purposes of computation of disallowance regardless of whether the equity has actually yielded tax free income or not. However, the law in this regard has been interpreted by judicial decisions rendered subsequently whereby it was held that the disallowance under Rule 8D(2)(iii) is required to be made only with reference to the average equity investment which has actually yielded tax free income not susceptible to tax. It was thus submitted that the investments not giving rising to tax free income shall not be reckoned for the purposes of computation of disallowance. The learned AR in this context also pointed out that the AO was duly informed about its stand for downward revision by letter dated 24.01.2016 as annexed in the page nos. 5 to 9 of the paper book.

We have considered the rival submissions on the issue and perused the orders of the authorities below. We straightway notice that identical issue has been adjudicated by Delhi Special Bench in the case of ACIT vs. Vireet Investment (P.) Ltd. 165 ITD 27 (Del) wherein [Ewart Investment Ltd. Vs. DC IT] A.Y. 2013-14 - 3 - it has been held by the Special Bench that investments not yielding any income during the year has to be excluded while calculating the average investments and the disallowance has been to be worked out only thereafter on the basis of investment actually yielding tax free income. We therefore find substantial merit in the case of the assessee. We also notice that identical issue has been adjudicated in favour of the assessee in its own case concerning AY 2011-12 in ITA No. 414/Mum/2017 dated 24th July, 2018. At this stage, we also observe that the assessee was entitled to claim revision of disallowance notwithstanding higher disallowance suo motu made in the return of income in the light of the decision of Hon’ble Bombay High Court in case of CIT vs. Pruthvi Brokers and Shareholders P. Ltd. (2012) 349 ITR 336 (Bom.). We accordingly set aside the order of the CIT(A) and direct the AO to restrict the disallowance to Rs.34,21,118/- instead of Rs.67,40,873/-. The issue is accordingly resolved in favour of the assessee.

Second issue pertains to adjustments in book profit under s.115JB with respect to disallowance under s.14A of the Act. In the light of decision of Special Bench in Vireet Investment (supra) and in view of findings given by the co-ordinate bench in assessee’s own case concerning AY 2012-13 in we find substantial merit in the plea of the assessee to restrict the adjustments to the extent of Rs.34,21,118/- in respect of disallowance relatable to exempt income notwithstanding higher adjustments made by the assessee. The AO is directed to redo the computation of book profit under s. 115JB of the Act accordingly. The second issue is accordingly resolved in favour of the assessee.

Third issue relates to disallowance of bad debts of Rs.1,52,395/- in respect of unrealized rent. [Ewart Investment Ltd. Vs. DC IT] A.Y. 2013-14 - 4 - 7. We have considered rival submissions and perused the orders of the authorities below in this regard. We find that the issue is squarely covered in favour of the assessee in view of the express statutory provision in terms of Explanation below Section 23 r.w. Rule 4 of the IT Rules, 1962. The Explanation clearly provides for deduction of unrealized rent while computing the annual value under s.23 of the Act. Rule 4 expounded the aforesaid Explanation whereby the unrealized rent lost as irrecoverable is required to be reduced from the chargeable annual value. It is not necessary that unrealized rent should be related to the same year. We therefore find merit in the plea of the assessee on this issue as well. The issue is thus resolved in favour of the assessee.

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