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These two appeals re filed by the Revenue as well as by the assessee against the order dated 19/11/2013 passed by CIT(A)-XXXI, New Delhi.
The grounds of appeal are as under:-
The order of Ld.CIT (A) is not correct in law and facts.
2. On the facts and in the circumstances of the case, Ld.CIT (A) has erred in deleting the addition of Rs.38,13,814/- made by AO u/s 14A of I.T.Act r.w.r
8D of IT Rules 1962. 3. On the facts and in the circumstances of the case, Ld.CIT (A) has erred in accepting the additional evidences without providing any opportunity to the AO which is in contravention to Rule 46A of IT Rules 1962. 4. The appellant craves leave to add, amend any/all the grounds of appeal before or during the course of hearing of the appeal.”
(A) That on the facts and circumstances of the case the learned ITO and the CIT(A) erred in : 1) Upholding the Assessment & addition of Rs. l,91,945/-u/s 14Ainspite of the fact that the Assessment for the year had abated in terms of section 153A & no incriminating material was unearthed in the course of search & seizure operations. 2) Disallowing Rs. 1,91,945/- u/s 14A of the Act. 3) Disallowing the expenditure u/s 14A without the Assessing Officer giving any finding in the assessment order regarding the amount of actual expenditure incurred by the assessee to earn tax-free income. 4) Not following the orders of the jurisdictional High Court in this matter.
(B) The Assessee craves leave to add, alter or amend the grounds of appeal at and before the hearing.
3. The assessee is a private Limited company doing the business of trading network equipment. Pursuant to search carried out in the case of the assessee on 24/9/2009 proceedings u/s 153 of the Income Tax Act, 1961 were initiated for Assessment Year 2004-05 to 2009-10 and for Assessment Year 2010-11 u/s 143(3)/153A of the Income-tax Act, 1961. In respect to the notice, the assessee filed return of income declaring income of Rs.3,40,202/-. The assessment was completed on 29/11/2011 making an addition of Rs.40,05,759/- u/s 14A of the Income-tax Act, 1961.
Being aggrieved by the assessment order, the assessee filed appeal before the CIT(A). The CIT(A) partly allowed the appeal of the assessee.
The Ld. DR submitted that the CIT(A) erred in deleting the addition of Rs.40,05,759/- and made disallowance of Rs.1,91,945/- u/s 14A read with Rule 80 which is 0.5% of the average investment during the year. The Ld. DR further submitted the CIT(A) has accepted the additional evidences but did not provide opportunity to the Assessing Officer which is in contravention to Rule 46A of the Income-tax Rules 1962. The Ld. DR relied upon the decision of the Hon'ble High Court in case of India bulls Financial Services Ltd. Vs. DCIT (2016) 76 taxmann.com 268.
The Ld. AR submitted that the Tribunal in the assessee’s own case for Assessment Year 2007-08 has allowed the appeal of the assessee on the similar line.
We have heard both the parties and perused the material available on record. The CIT(A) held as under:- “4.1.1 The AO has made a disallowance of Rs. 40,05,759/- u/s 14A. From the assessment order it is noted that the AO has made the disallowance by merely stating that the assessee has made investment of Rs. 4.17 crores during the year and earned dividend from the same (Rs. 39,76,961/-) and that S. 14A(1) provides for disallowing expenditure incurred by the assessee on such income which is not included in the total income. I do not find any merit in the disallowance made by the AO on such lines. The AO has not given a finding that he was not satisfied with the appellant’s claim that no expenditure was incurred on the investment activity. The AO has mechanically applied Rule 8D on the ground that the appellant had received dividend income. This is not tenable as held in the judicial pronouncement relied upon by the AR. Therefore, I do not agree with the AO’s disallowance. 4.1.2. The AR’s submissions have been noted. He states that the company had taken Rs. 18 lakhs loan from Rakam Money Matter Pvt. Ltd. and transferred the said amount on the same day to Golf Technologies Pvt. Ltd. is sister concern. On this loan the appellant has earn interest of Rs. 1,26,91,530/- and has paid interest of Rs. 1,08,63,079/-. He argued that the interest debited to P&L account entirely relates to the amount borrowed from the said party and the same has nothing to do with the investments made by the appellant. I find merit in- the AR’s submissions that the interest debited to P&L account as above does not relate to the investments' made by the appellant.
4.1.3. It is, however, noted that the main business of the assessee appears to be investment activity. The assessment records of the Tulip group have been perused by me. The appellant and other similar companies of the group are direct or indirect investors in the flag ship company of the group.' Even though the appellant has accounted sales of Rs. 4.72 Crores there is hardly any income before tax from the trading activity. The net profit before tax was Rs. 43.16 lakhs which almost entirely consisted of dividend income of Rs. 39.76 lakhs and net interest of Rs. 1.8 lakhs earned from his sister concerns on the loan mentioned in the previous paragraph. All the sales are mostly among the group companies. As against this, the appellant has made investment of Rs. 4.17 Crores in the Tulip group companies inspite of having a capital base of just Rs. 2.64 Crores and no bank loans at all. Thus, I am of the view that the appellant’s main activity is the investment activity and it cannot therefore be denied that considerable manpower and resources have been utilized for investment activity. The appellant has not come forward to provide the lively breakup of expenses relating to manpower and other resources used for investment activity, the income from which is not included in the total income. In view of this it has to be held that there is no substance in the appellant’s submissions that no expenditure was incurred towards investment activity. Such submission is therefore, liable to be rejected. Rule 8D is applicable for the current assessment year. The funds employed in the business and in the investment activity are mixed in nature. Therefore, I am of the view that, disallowance of rs.1,91,945/- u/s 14A r.w. Rule 8D can be made which is 0.5% of the average investment during the year.. Hence, the A.O’s action is confirmed only to this extent though for different reasoning/ground. The balance disallowance on the issue is hereby deleted.”
It is pertinent to note that the assessee made investment of Rs. 4.17 Crores in the Tulip group of companies, inspite of having a capital base of just Rs. 2.64 Crores and no bank loans was taken by the Assessee. The CIT(A) rightly held that the assessee has not come forward to provide the lively breakup of expenses relating to manpower and other resources used for investment activity, the income from which is not included in the total income. The CIT(A) has given detailed finding as to why the 0.5% has to be added to the income of the assessee u/s 14A read with Rule 8D. The CIT(A) has given a reasoned order. Therefore, there is no need to interfere with the findings of CIT (A). The assessee has also filed appeal. The appeals of the Revenue as well as the assessee are dismissed.
In result, both the appeals are dismissed.
Order pronounced in the Open Court on 11th June, 2018.