WELSPUN STEEL LTD,MUMBAI vs. DCIT CEN CIR 3(3), MUMBAI

The above titled appeals one by the assessee and the other by the Revenue have been preferred against the order dated 04.10.2017 of the Commissioner of Income Tax (Appeals)

The facts in brief are that the AO observed during the course of assessment proceedings that assessee has earned exempt income by way of dividend of Rs.15,37,572/-. The AO further noted that assessee has investments in shares of Rs.635.62 crores as on 31.03.2014 whereas no disallowance was made by the assessee of expenses attributable to exempt income. The assessee submitted before the AO that no expenditure was incurred in relation to earning of the exempt income and submitted that if provisions of section 14A applied, only the disallowance would work out to Rs.80,196/-. The AO brushing aside the contentions of the assessee applied the provisions of section 14A read with rule 8D working out the disallowance at Rs.5,58,67,588/- comprising interest of Rs.1,99,28,763/- under rule 8D(2)(ii) and Rs.3,59,38,825/- under rule 8D(2)(iii) by applying 0.5% of the average investments.

In the appellate proceedings, the Ld. CIT(A) deleted the disallowance under rule 8D(2)(ii) of Rs.1,99,28,763/- by following the decision of jurisdictional Hon’ble Bombay High Court in the case of HDFC Bank Ltd. 366 ITR 505 (Bom.) and “CIT vs. Reliance Utilities and Power Ltd.” (2009) 313 ITR 340 (Bom) and also decision in the case of assessee’s own case in A.Y. 2008-09 in ITA No.6373/M/2014 whereas the disallowance under rule 8D2(iii) of Rs.3,59,38,825/- was directed to be calculated by reducing the investments which have not yielded exempt income during the year or only calculate the disallowance by taking those investments which yielded exempt income of Rs.15,37,572/- by following the decision of Chem Investment 67 Taxmann.com 118.

After hearing both the parties and perusing the material on record, we observe that the disallowance under section 14A read with rule 8D can not exceed the amount of exempt income as has been held by the Hon’ble Bombay High Court in the case of Pr. CIT vs. Ballarpur Industries in of 2016 order dated 13.10.2016 wherein it has been held that the disallowance can not exceed the amount of exempt income. Accordingly, we direct the AO to restrict the disallowance under section 14A read with rule 8D(iii) to Rs.15,37,572/-.

So far as the addition on disallowance made under section 14A read with rule 8D to the book profit is concerned, the same has been decided by the Special Bench in the case of ACIT vs. Vireet Investments Pvt. Ltd. (2017) 82 taxmann.com 415 (Delhi – Tribunal SB) wherein it has been held that while computing the book profit under clause (f) of Explanation 1 to section 115JB no 4 & ITA No.223/M/2018 M/s. Welspun Steel Ltd. addition can be made in respect of disallowance under section 14A read with rule 8D. Accordingly, we direct the AO to delete the disallowance while computing the book profit. The appeal of the assessee is allowed.

We find that the Ld. CIT(A) has deleted the disallowance by following the decision in the case of CIT vs. HDFC Bank Ltd. (supra) on the ground that assessee’s surplus funds were more than the investments in the shares. Therefore, we do not find any infirmity in the order of Ld. CIT(A) and accordingly the same is upheld by dismissing the appeal of the Revenue.

In the result, the appeal of the assessee is allowed and the appeal of the Revenue is dismissed.