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Income Tax Appellate Tribunal, MUMBAI BENCH “A”, MUMBAI
Before: Shri Joginder Singh & Shri G Manjunatha
Date of hearing 04 -10-2018 Date of pronouncement 10 -10-2018 O R D E R
Per G Manjunatha, AM :
This appeal filed by the assessee is directed against order of the CIT(A)-24, Mumbai dated 19-01-2017 and it pertains to AY 2012-13.
The assessee has raised the following grounds of appeal:-
“1.1 On the facts and circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals) - 24, Mumbai ["the CIT(A)"] erred in confirming the action of the Assistant Commissioner of Income Tax - 15(1)(2), Mumbai ["the AO"] in disallowing the amount of Rs. 47,69,0007- u/s. 14A of the Income Tax Act, 196IC'the Act") read with Rule 8D of the Income Tax Rules ["the Rules"] without recording an objective satisfaction on the incorrectness of the suo- motu disallowance made by the Appellant. 1.2 The Learned CIT(A) erred in confirming the action of the AO in disallowing the expenses u/s. 14A(2) r.w.r. 8D without appreciating the fact that no deficiency was shown in the books of accounts of the Appellant and as such the genuineness of the claim made by the Appellant could not be doubted.
2 ITA 3369/Mum/2017
1.3 The Appellant prays that the disallowance to be restricted to Rs. 1,13,011/- Without prejudice to the above, 2.1 On the facts and circumstances of the case and in law, the Learned CIT(A) erred in confirming disallowance of interest expenses u/r. 8D(2)(ii) of the Rules by holding that no interest free fund was available with the appellant to make investment. 2.2 The Learned CIT(A) erred in not following the decision of the Appellant's own case for A.Y. 2008-09 (ITA No. 3694/Mum/201 1) and A.Y. 2009-10 (ITA No. ) in which it was held that Appellant had sufficient own funds and deleted interest disallowance made u/r. 8D (2)(ii) of the Rules. Without prejudice to the 1.1 to 1.3 3.1 On the facts and circumstances of the case and in law, the Learned CIT(A) also erred in confirming the action of the AO adopting the amounts from the consolidated financial statements of the Appellant Company while working out the average investment u/s 14AoftheAct. 3.2 The Appellant prays that the AO be directed to adopt figures from stand-alone financials of the Appellant and re-compute the disallowance u/s. 14A of the Act. 4.1 On the facts and circumstances of the case and in law, the Learned CIT(A) erred in confirming the action of the AO in not excluding those investments from which no income was earned during the year while calculating the "Average Value of Investments" for the purpose of making disallowance u/r. 8D(2)(iii) of the Rules. 4.2 The Learned CIT(A) erred in confirming the action of the AO in not excluding the investments made in group companies which are strategic in nature while calculating disallowance of disallowance u/r. 8D(2)(iii) of the Rules.. 4.3 The Appellant prays that the AO be directed to exclude such investments while computing the disallowance u/r. 8D(2)(iii) of the Rules. 5.1 The Learned CIT(A) erred in confirming action of A.O. in levying interest u/s. 234B and234CoftheAct.”
The brief facts of the case are that the assessee company is engaged in the business of manufacture of Amines and amine derivatives, filed its return of income for AY 2012-13 on 25-09-2012 declaring total income of Rs.17,47,33,060. The case has been selected for scrutiny and notices u/s 143(2) and 142(1) of the Act were issued. In response to notices, the authorized representative of the assessee appeared from time to time and filed various details, as called for.
During the course of assessment proceedings, the AO noticed that the assessee has received dividend income of Rs.89,34,017 which has 3 ITA 3369/Mum/2017 been claimed exempt u/s 10(34) of the Income-tax Act, 1961. The AO further noticed that the assessee has made suo moto disallowance of Rs.1,13,011 @0.5% of the average value of investments. In order to ascertain the correctness of claim made by the assessee towards disallowance of expenditure u/s 14A, the AO called upon the assessee to file necessary details. In response, the assessee has stated that it has not incurred any expenses in relation to exempt income and hence, no disallowance u/s 14A is called for. The AO, after considering relevant submissions of the assessee and also by relying upon various judicial precedents, invoked provisions of Rule 8D to determine disallowance contemplated u/s 14A of the Act and accordingly determined total disallowance of Rs.47,69,000.
Aggrieved by the assessment order, assessee preferred appeal before the CIT(A). Before the CIT(A), assessee has filed elaborate written submissions which have been reproduced at para 2.3.1. to 2.3.2 on pages 6 to 15 of order of CIT(A). The sum and substance of arguments of the assessee before the Ld. CIT(A) are that no further disallowance is called for over and above suo moto disallowance made by the assessee towards expenses in relation to exempt income, either on account of interest or other expenses as its investments in shares are fully covered out of interest free funds being share, capital & reserves
4 ITA 3369/Mum/2017 and also the suo moto disallowance made by the assessee being 0.5% of average value of investments is in accordance with the prescribed method provided for determination of disallowance.
The Ld.CIT(A), after considering submissions of the assessee and also on analysis of provisions of section 14A r.w.r. 8D held that although the assessee claims to have made investments out of its own funds, the fact remains that major investments have been made in financial years 2000-01 and 2001-02 where the assessee’s own funds is negative, therefore, the contention of the assessee that its investments are fully covered out of its own funds, is devoid of merit. The Ld.CIT(A) further held that the provisions of section 14A r.w.r. 8D(2) are clearly applicable in assessee’s case in view of the decision of Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg Co Ltd 328 ITR 81 (Bom), therefore, he opined that there is no infirmity in the findings of the AO and computation of disallowance u/s 14A of the Income-tax Act, 1961.
Accordingly, he dismissed appeal filed by the assessee. Aggrieved by the order of CIT(A), assesee is in appeal before us.
The Ld.AR for the assessee, at the time of hearing, submitted that the issue is squarely covered in favour of the assessee by the decision of ITAT, Mumbai Bench “A” in assessee’s own case for AY 2009-10, where under similar set of facts, the ITAT has directed the AO to restrict
5 ITA 3369/Mum/2017 the disallowance contemplated u/s 14A to the extent of suo moto disallowance made by the assessee. The Ld.AR further submitted that facts are identical and the investments on which the AO has determined disallowance are similar and there is no change in investments during the year under consideration and accordingly, a similar direction may be given for this year also.
5. The Ld.DR, on the other hand, strongly supporting the order of the CIT(A) submitted that the Ld.CIT(A) has negated the arguments of the assessee’s theory of own funds by analyzing the facts and figures of own funds and investments which clearly established that the assessee had no surplus funds in the year in which the investments in shares were made, therefore, the AO has rightly disallowed interest expense u/r 8D(2)(ii). Insofar as disallowance of administrative and other expenses u/r 8D(2)(ii), although the assessee claims to have made suo moto disallowance of Rs.1,13,011 which is equivalent to 0.5% of average value of investments, but the disallowance computed by the AO by applying the prescribed method provided u/r 8D(2)(iii) showed , there is a difference between amount quantified by the AO and the amount quantified by the assessee and accordingly, the issue may be sent back to the file of the AO for verification.
We have heard both the parties and perused the material available
6 ITA 3369/Mum/2017 on record. There is no dispute with regard to the fact that the assessee has earned exempt income being dividend from shares which was claimed as exempt u/s 10(34) of the Income-tax Act, 1961. There is also no dispute in respect of applicability of provisions of section 14A. The assessee has made suo moto disallowance of Rs.1,13,011 u/s 14A.
The only dispute is with regard to quantification of disallowance contemplated u/s 14A. Insofar as interest expenses, the matter has been examined by the ITAT for AY 2009-10 and held that once the assessee proves that it has sufficient own funds to cover up investments in shares, which yielded exempt income, there cannot be any disallowance towards interest u/r 8D(2)(ii). The ITAT, while arriving at the conclusion has followed the decision of Hon’ble Bombay High Court in the case of CIT vs HDFC Bank Ltd 366 ITR 505 (Bom) where it was categorically held that when there is mixed funds including own funds as well as borrowed funds, a general presumption is drawn in favour of the assessee that investments in shares and securities are made out of interest free funds. Therefore, we are of the considered view that the AO was erred in disallowing interest expenditure u/r 8D(2)(ii) and accordingly we direct the AO to delete addition made towards interest u/r 8D(2)(ii) of I.T. Rules, 1962.
Coming back to the disallowance of other expenses u/r 8D(2)(iii),
7 ITA 3369/Mum/2017 the assessee claims that it has made suo moto disallowance of Rs.1,13,011 which is equivalent to 0.5% of average value of investments. Therefore, further disallowance in respect of expenses does not call for. The Ld.AR for the assessee referring to the financial statements filed in paper book submitted that it has considered non current investments shown in balance-sheet for the purpose of computation of average value of investments and applied the formula prescribed u/r 8D(2)(iii) which resulted in disallowance of Rs.1,13,011.
We find that the assessee has shown non current investments of Rs.2,34,27,000 in its balance-sheet. The assesee has determined disallowance of Rs.1,13,011 by applying the prescribed method provided u/r 8D(2)(iii) whereas the AO determined disallowance of Rs.5,20,000 being 0.5% of average value of investments. Though the AO has arrived at Rs.5,20,000 disallowance, but no details has been given to prove disallowance. Although, both parties claims to have applied rule 8D(2)(iii), there is a difference between disallowance quantified by the assessee and the AO. Therefore, we are of the considered view that the issue needs to be re-examined by the AO in the light of divergent facts and accordingly, we set aside the issue to the file of the AO for the limited purpose of verification of computation of disallowance quantified u/r 8D(2)(iii). In case, it is found that the disallowance computed by the 8 ITA 3369/Mum/2017 assessee is in accordance with the prescribed method, then the AO is directed to restrict the disallowance to the extent of suo moto disallowance made by the assessee of Rs.1,13,011.
In the result, appeal filed by the assessee is allowed, for statistical purpose.
Order pronounced in the open court on 10th October, 2018.