K.V.RAMANA SHETTY,CHENNAI vs. DCIT CORPORATE CIRCLE 2(2), CHENNAI

The assessee filed this appeal against the order of the Commissioner of Income Tax (Appeals)-6, Chennai in dated 08.08.2018 for the assessment year 2012-13.

Shri Ramana Shetty, R.V., the assessee, is director of M/s. G K Chetty Builders Pvt. Ltd. While making the assessment for the assessment year 2012-13, the AO noticed, inter-alia, that the assessee admitted dividend income of Rs.5,55,56,416/- as an exempt income against which the assessee had made a disallowance of Rs.2,23,464/- only. Invoking Rule 8D(ii) & (iii), the AO made a disallowance of Rs.19,95,122/- & Rs.26,08,441/-, respectively, and after adjusting the disallowance made by the assessee at Rs.2,23,464/-, he made a total disallowance of Rs.43,80,099/-. Aggrieved against that order, the assessee filed appeal before the CIT(A). The Ld.CIT(A) partly allowed the appeal. Aggrieved against that order, the assessee filed this appeal.

The ld.AR submitted that on the disallowance made U/s.14A read with rule 8D(ii), the ld.CIT(A) held that if the assessee’s own funds are more than tax free investments made during the year then the disallowance U/s.14A read with Rule 8D(ii) is to be deleted as per Para 4.3.12 of his order, otherwise the disallowance under Rule 8D(ii) will stand confirmed. On the disallowance made U/s.14A read with rule 8D(iii), the Ld.CIT(A) held that the overall disallowance cannot exceed the total expenditure debited in the books and also cannot exceed the exempt income claimed by the assessee during the year under consideration as per Para 4.3.19 of his order.

The ld.AR also pleaded to admit the following additional grounds of appeal on the plea that due to inadvertence the assessee did not raise these grounds and which are not intentional:- “Ground No.9 : For that, without prejudice to other grounds, the Commissioner of Income Tax (Appeals) failed to appreciate that the Assessing Officer erred in computing the disallowance under the third limb of Rule 8D at Rs.26,08,441/-.

The ld.AR submitted that the total expenses admitted claimed in the books are at Rs.39,64,573/-. Out of which, the interest expenses alone are at Rs.36,44,092/-. The assessee has already disallowed Rs.2,23,464/- towards the exempt income. This leaves the balance sum that could be considered for disallowance under Rule 8D(iii) at Rs.97,017/- only. Therefore, the only plea of the ld.AR before us was that while computing the disallowance under Rule 8D(iii), the sum, if any, disallowed under Rule 8D(ii) should not be included at all. Per contra, the ld.DR supported the orders of the lower authorities.

We heard the rival submissions and find merit in the submissions made by the ld.AR. The assessee submitted that the total expenses claimed in the books are Rs.39,64,573/-. Out of which, the interest expenses alone are Rs.36,44,092/-. The assessee has already disallowed expenses towards earning of exempt income at Rs.2,23,464/-. This leaves the balance sum of Rs.97,017/- only towards other expenditures. Therefore, while making the disallowances under Rule 8D(iii), the amount already considered under Rule 8D(ii) as modified by the ld.CIT(A) should not be taken for computing the disallowance. Therefore, the AO would reduce the interest disallowance made U/s.8D(ii) as modified by the ld.CIT(A), from the total expenses claimed in the books and arrive the balance. From which, the quantum of disallowance to be made under Rule 8D(iii) as per the Rule should be arrived out. From such amount, the AO would reduce Rs.2,23,464/-, the amount already disallowed by the assessee, and the balance sum, if any, should alone be further disallowed under Rule 8D(iii). To this extent, the assessee’s appeal is allowed.

In the result, the assessee’s appeal is treated as partly allowed.