NEW INDIA RETAILING & INVESTMENT LIMITED ,KOLKATA vs. D.C.I.T.,CIRCLE-6(1), KOLKATA

The assessee in the present case is a Company, which is engaged in the business of trading of readymade garments and other materials and Assessment Year: 2015-2016 New India Retailing & Investment Limited investments etc. The return of income for the year under consideration was filed by it on 30.09.2015 declaring a loss of Rs.4,24,127/- In the said return, dividend income of Rs.1,62,44,179/- earned during the year under consideration was claimed to be exempt by the assessee-company. A disallowance of Rs.14,75,743/- on account of interest and other expenses incurred in relation to the said exempt income was also offered by the assessee-company under section 14A of the Act as computed by applying Rule 8D(2)(ii) and 8D(2)(iii). During the course of assessment proceedings, it was noticed by the Assessing Officer that while computing the disallowance under section 14A on account of interest and other expenses by applying Rule 8D(2)(ii) and 8D(2)(iii), the assessee-company has considered only the investments from which dividend income was received during the year under consideration. Although the assessee- company relied on the decision of the Tribunal in the case of REI Agro Limited (144 ITD 141) to support and substantiate the said computation, the Assessing Officer held by relying on the CBDT Circular No. 5/2014 dated 11.02.2014 that for invoking disallowance under section 14A, it was not material that the assessee should have earned such exempt income during the relevant year. He accordingly recomputed the disallowance to be made under section 14A by applying Rule 8D(2)(ii) and 8d(2)(iii) talking into consideration the entire investment made by the assessee in the shares at Rs.34,02,923/- on account of interest and Rs.17,04,892/- on account of other expenses aggregating to Rs.51,07,815/-, since the assessee-company had offered the disallowance of Rs.14,75,743/- only under section 14A, a further disallowance of Rs.36,32,072/- was made by the Assessing Officer under section 14A in the assessment completed under section 143(3) vide an order dated 31.07.2017.

Against the order passed by the Assessing Officer under section 143(3), an appeal was preferred by the assessee before the ld. CIT(Appeals) and after considering the submissions made by the assessee Assessment Year: 2015-2016 New India Retailing & Investment Limited as well as the material available on record, the ld. CIT(Appeals) accepted the computation of disallowance under section 14A as made by the assessee-company on account of other expenses by taking into consideration only the investments from which dividend income had been actually earned by the assessee during the year under consideration by relying on the decision of the Tribunal in the case of REI Agro Limited (supra). As regards the disallowance on account of interest expenses under section 14A, the ld. CIT(Appeals), however, agreed with the view taken by the Assessing Officer that the same was required to be computed as per Rule 8D(2)(ii) by taking into consideration the entire investment made by the assessee-company in the shares. Aggrieved by the order of the ld. CIT(Appeals), the assessee has preferred this appeal before the Tribunal on the following grounds:- “(1) That the Ld. Commissioner of Income Tax (Appeals)-2 [(CIT(A)] erred on facts and in law in confirming the working of disallowance in respect of indirect interest expenditure computed by the AO under sub-part (ii) of sub-clause (2) of Rule 8D of the Income Tax Rules, 1962 read with Section 14A of the Income Tax Act, 1961 by taking into consideration the average value of the total investments as appearing in the Balance Sheet of the appellant on the first day and the last day of the previous year. (2) That the Ld. CIT (A) erred on facts and in law in not appreciating the judgement of the Hon'ble Jurisdictional ITAT, 'A' Bench, Kolkata in case of the Commissioner of Income Tax, Central-II, Kolkata vs REI Agro Limited [(144 ITO 141 (2013)] as well as the other judicial pronouncements holding that for the purpose of computing the disallowance of indirect interest expenditure under Rule 8D(2)(ii), the average value of only those investments have to be considered on which the assessee has received exempt dividend income during the year. (3) That the Ld. CIT(A) erred on facts and in law in not appreciating that on perusal of Rule 8D it is clear that while computing the disallowance under Rule 8D(2), the amount of average value of investments computed under second part and third part of Rule 8D(2) shall be the same since the wordings narrated in Rule 8D(2)(ii) & (iii), in respect of average value of investments, is exactly the same and therefore, there shall not be any difference in the amount of average value of investment considered for disallowance under the second part and third part of Rule 8D(2)”.

I have heard the arguments of both the sides and also perused the relevant material available on record. As agreed by the ld. Representatives of both the sides, the decision of the Coordinate Bench of this Tribunal rendered in the case of REI Agro Limited (supra) is applicable even to the disallowance to be made on account of interest under section 14A by applying Rule 8D(2)(ii) as is clearly evident in para no. 7.1 of the order of the Tribunal, which is reproduced below:- “7.1. In any case, the working of the disallowance under sub- part (ii) of sub-clause (2) of rule 8D as made by the AO also suffers from a substantial error in so far as in the said rule in regard to the numerator B, the words used are the average value of the investment, income from which does not form or shall not form part of the total income as appearing in the balance-sheet as on the first day and in the last day of the previous year. Here the AO has taken into consideration the investment of Rs.103 crores made this year, which has not earned any dividend or exempt income. It is only the average of the value of the investment from which the income has been earned which is not falling within the part of the total income that is to be considered. This is why the question of satisfaction is provided in section 14A and rule 8D(1), that relates to the accounts of the assessee. Thus, it is not the total investment at the beginning of the year and at the end of the year, which is to be considered but it is the average of the value of investments which has given rise to the income which does not form part of the total income which is to be considered. A question may arise as to why the term "average of the value of investment" is then used. The term average of the value of investment would be to take care of cases where there is the issue of dividend striping. In any case, as we have already held that the assessee has not incurred any expenditure by way of interest during the previous year, which is not directly attributable to any particular income, the findings of the Id. CIT(A) on the issue stand confirmed and consequently the appeal filed by the Revenue stands dismissed”.

As held by the Tribunal in the case of REI Agro Limited (supra), for computing the disallowance to be made under section 14A on account of interest by applying Rule 8D(2)(ii), only the average value of investments, which has given rise to the exempt income during the relevant year, is required to be considered as rightly claimed by the assesese and not the entire investment as held by the Assessing Officer as well as by the ld. CIT(Appeals). I accordingly direct the Assessing Officer Assessment Year: 2015-2016 New India Retailing & Investment Limited to delete the disallowance made under section 14A on account of interest expenditure and allow this appeal of the assessee.

In the result, the appeal of the assessee is allowed. Order pronounced in the open Court on January 23, 2020.