PHULCHAND EXPORTS PVT. LTD.,MUMBAI vs. ACIT- 3(2)(2), MUMBAI

In grounds no.1 to 4, the assessee has challenged the disallowance made under section 14A of the Income Tax Act, 1961 (for short "the Act") r/w rule 8D of the Income Tax Rules, 1962.

Brief facts are, the assessee, a company, is engaged in the business of trading in iron ore, metals and commodities. For the assessment year under dispute, the assessee filed its return of income on 21st November 2014, declaring total income of ` 1,55,60,400. In the course of assessment proceedings, the Assessing Officer on verifying the materials on record, noticed that the assessee had invested ` 66,07,87,447, in non–current investment and earned dividend income of ` 38,900, which was claimed as exempt. Whereas, the assessee has made a disallowance of ` 6,165, towards expenditure attributable to earning of exempt income. Therefore, the Assessing Officer called upon the assessee to justify that the disallowance made by it is in accordance with Rule–8D. Though the assessee submitted its explanation stating that the voluntary disallowance made by it is the amount which could be disallowed under section 14A of the Act, however, the Assessing Officer did not find merit in the submissions of the assessee and proceeded to compute the disallowance under Rule– 8D(2), which, ultimately was worked out to ` 20,61,307, comprising of disallowance of interest expenditure amounting to ` 5,87,980, under Rule–8D(2)(ii) and administrative expenditure of ` 14,73,327, under Rule 8D(2)(iii). The assessee challenged the aforesaid disallowance before the first appellate authority.

Learned Commissioner (Appeals), however, restored the issue to the Assessing Officer with a direction to compute the disallowance keeping in view the decision of the Hon'ble Supreme Court in Maxopp Investment Ltd. v/s CIT, 91 taxmann.com 154.

The learned Authorised Representative submitted, the first appellate authority has no power under the Act to restore the issue to the Assessing Officer. As regards the merits of the disallowance made, learned Authorised Representative submitted, no disallowance of interest expenditure under Rule–8D(2)(ii) can be made as the assessee had sufficient interest free funds available with it to make the investment. Drawing our attention to the Balance Sheet of the Company, he submitted, as against the surplus fund available with the assessee by way of capital and reserve amounting to ` 92.30 crore, the investment amounted to ` 66.07 crore. Thus, he submitted, the disallowance of interest expenditure under Rule–8D(2)(ii) is unsustainable. In support of his contention, he relied upon the following decisions:–

As regards disallowance of administrative expenditure under Rule–8D(2)(iii), the learned Authorised Representative submitted, only

Without prejudice to the aforesaid submissions, learned Authorised Representative submitted, under no circumstances, the disallowance under section 14A of the Act can exceed exempt income earned during the year. For such proposition, he relied upon the following decisions:–

The learned Departmental Representative submitted, after assessment year 2008–09, disallowance under section 14A of the Act has to be made in accordance with Rule 8D.

We have considered rival submissions and perused the material on record. Insofar as the disallowance of interest expenditure of ` 5,87,980 under rule 8D(2)(ii) is concerned, it is seen from the balance sheet of the assessee that as against surplus fund available with the assessee amounting to ` 92.30 crore, the investment made in exempt income yielding asset amounted to ` 66.07 crore. Thus, it is evident, the assessee had sufficient surplus funds available with it to make the investment in shares, mutual funds, etc. That being the case, no disallowance of interest expenditure under Rule–8D(2)(ii) could have been made. As regards the disallowance of administrative expenditure, under Rule–8D(2)((iii), it is the contention of the assessee from the assessment stage itself that the investment on which the assessee had earned dividend income of ` 38,900, is ` 5,39,000. The aforesaid fact has not been controverted by the Departmental Authorities. Now it is well settled that while computing disallowance under rule 8D(2)(iii), the Assessing Officer can consider only those investments which have yielded dividend income during the year under consideration. Therefore, the disallowance of expenditure under rule 8D(2)(iii) has to be made with reference to the investment of ` 5,39,000, which yielded dividend income of ` 38,900. This view of ours is as per the ratio laid down in the decision of the Hon'ble Delhi High Court in Cheminvest Ltd. (supra) and the Special Bench decision of the Tribunal, Delhi

Before us, the learned Authorised Representative has submitted that if the disallowance under Rule–8D(2)(iii) is computed with reference to the investment of ` 5,39,000, it will work out to ` 2,696. In view of the aforesaid factual position, we direct the Assessing Officer to restrict the disallowance u/s 14A of the Act to ` 6,161, the amount already disallowed by the assessee. The grounds are allowed.

In ground no.5, the assessee has challenged the disallowance of interest expenditure of ` 12,03,782, under section 36(1)(iii) of the Act.

Brief facts are, during the assessment proceedings the Assessing Officer noticed that in the year under consideration, the assessee had made investments in jewellery amounting to ` 3,65,47,393, and in shares of M/s. Anjani Commercial Corporation amounting to ` 4,857. Being of the view that the assessee has diverted interest bearing funds for non–business purpose by investing in jewellery and shares, the Assessing Officer disallowed interest expenditure of ` 12,03,782, under section 36(1)(iii) of the Act. Though, the assessee challenged the aforesaid disallowance before learned Commissioner (Appeals), however, he sustained the disallowance made by the Assessing Officer.

The learned Authorised Representative submitted, since the assessee had sufficient interest free funds available with it, presumption would be that the investments made in jewellery and shares were out of such funds. Therefore, no disallowance under section 36(1)(iii) could be made. In support of such contention, he relied upon the decision of the Hon'ble Jurisdictional High Court in CIT v/s Reliance Utility and Power Ltd., [2005] 313 ITR 340 (Bom.) and the decision of the Hon'ble Supreme Court in CIT v/s Reliance Industries Ltd., [2005] 410 ITR 466 (SC). Besides the above, learned Authorised Representative also relied upon the decision of the Hon’ble P&H High Court in CIT v/s Holyfaith International Pvt. Ltd., [2018] 407 ITR 445 (P&H).

The learned Departmental Representative relied upon the observations of the learned Commissioner (Appeals) and the Assessing Officer.

We have considered rival submissions and perused the material on record. From the facts and material available on record, it is evident that the assessee had surplus fund of ` 92.30 crore available with it. Therefore, as per the ratio laid down in the decisions cited by the learned Authorised Representative, the presumption would be, the investments in jewellery and shares must have been made out of the 8 Phulchand Exports Pvt. Ltd.

Grounds no.6 and 7 being general in nature do not require adjudication.

In the result, appeal is allowed. Order pronounced in the open Court on 24.05.2019