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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
This appeal filed by the Revenue is arising out of the order of Commissioner of Income Tax-10, Mumbai [in short CIT(A)], in appeal No. CIT(A)-10/DCIT-5(1)/58/2014-15, order dated 30.11.2015. The Assessment was framed by the Deputy Commissioner of Income Tax, Circle5(1), Mumbai (in short ‘DCIT/ AO’) for the A.Y. 2011-12 vide order dated 10.03.2014 under section 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).
The only issue in this appeal of Revenue is against the order of CIT(A) deleting the disallowance of expenses added by AO of expense relatable to exempt income added under section 14A of the Act read with Rule 8D of the Rules of Income Tax Rules 1962, (hereafter the ‘Rules’). For this Revenue has raised the following grounds: - “1(a) On the facts and in the circumstances of the case, the Ld. CIT(A) erred in holding that no interest expenditure has been incurred towards earning the exempt dividend income and consequently erred in directing that the disallowance made by invoking limb (ii) of Rule 8D(2) be withdrawn.
1(b) On the facts and in the circumstances of the case, the Ld. CIT(A) failed to appreciated that the assessee had failed to establish that the investment in shares yielding exempt dividend income was out of the interest free borrowings from the directors/ shareholders of the assessee company.
1(c) On the facts and in the circumstances of the case, the Ld. CIT(A) failed to appreciated that the Hon'ble Mumbai 'D' Bench of the ITAT has vide its order dated 23.09.20 16 in the case of HDFC Bank Ltd. v. DCIT-2(3), Mumbai(2015) 155 lTD 765 (Mumbai-Trib.) for the assessment year 2008-09 held that interest is liable to be disallowed u/s. 14A on proportionate basis even if the current deposits of the assessee bank exceeded its investments yielding tax-free returns and the assessee-bank cannot escape disallowance of interest u/s. 14A by taking the plea that its interest-free funds (own funds or current account deposits) exceeded the amount of its tax-free income yielding investments in shares and mutual funds.”
We have heard rival contentions and gone through the facts and circumstances of the case. We find that the AO has made disallowance by invoking the provisions of section 14A of the Act read with Rule 8D i.e. the expenses relatable to exempt income under Rule 8D(2)(i)(ii)(iii). The AO noted that the assessee has earned exempt income i.e. in the shape of dividend amounting to ₹ 55,50,563/-. The assessee made suo moto disallowance for a sum of ₹ 19,15,937/- and stated that the provisions of section 14A of the Act are applicable vide letter dated 18.12.2013. Accordingly, the AO recomputed the disallowance vide Para 4.4 as under: - “4.4 In view of the above facts and findings and legal position on the issue, the expense as worked out below has been disallowed out of the expenses claimed in the profit and loss account.
Sr. Particulars Amount No. 1. The amount of expenditure directly relating to 54,609 income which does not form part of total income - Rule 8D(2)(i) expenses on long term shares 2. Expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt an amount computed in accordance with the following formula, namely: A X B/C 36052715 x 371905553 7639,052
1755218327 A=The amount of expenditure by way of interest other than amount of interest included in clause (i) incurred during the previous year. 36052715 B the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee on the first day and the last day 371905553 of the previous year C= the average of total assets as appearing in the balance sheet of the assessee, on the first 1755218327 day and the last day of the previous year -Rule i r 3. i. Average value of investments- Opening balance of investments + closing balance of investments / 2 34078349+709732757 = Rs.371905553 2 ii. Disallowance An amount equal to one half per cent of the average of the value of investment income from which does not or shall not form part of the total income as appearing in the balance sheet of the assessee on the first day and the last day of the previous year. iii. 0.5% of 371905553 18,59,528/- 4. Total disallowance 95,54,989 4. Aggrieved, assessee preferred the appeal before CIT(A), who deleted the disallowance by observing that the assessee has interest free funds available with it from the directors of the company and moreover, the assessee itself has offered the disallowance of ₹ 19,15,937/- under Rule 8D(2)(i) and (iii). For this the CIT(A) observed in Para 4.1 and 4.2 as under: - “4.1 During the course of appellant proceedings the learned AR has submitted that no interest expenditure relatable to earning of dividend income was incurred during the year. He has argued that the investments from the company have gone directly for purchase of shares in BSE. For the investment in the above shares amounts were borrowed by the company from the directors and the shareholders free of interest. Therefore, the interest disallowed by invoking limb (ii) of rule 8D(2) is uncalled for.
4.2. I have carefully considered the facts of the case and the submissions of the Id AR. As seen from the facts of the case there is no dispute with regard to application of s.14A and application of rule 80. This is evident from the working of the appellant wherein it has offered the disallowance of Rs.19,15,937/- by invoking limb(i)and (iii) of rule 80(2). The only dispute is with regard to disallowance made by the AO under limb (ii) of rule 80(2). It is evident that the source of the investment was explained as borrowings from Shri Anuj Mehta, Shri Akshay Mehta and Shri Arnav Mehta who are the directors/shareholders of the company which is interest free as seen from the Ledger extracts of these persons in the company books. It is also evident that the amounts borrowed from these individuals have directly gone for investment in shares in BSE. Therefore, I hold that there is no interest incurred for earning dividend income from the purchase of shares in BSE. I hereby direct the AO to withdraw the disallowance made by invoking limb (ii) of rule 80(2). The ground is allowed.”
Aggrieved, Revenue is in appeal before us.
We have gone through the assessment year and the order of CIT(A) and noticed that the CIT(A) has nowhere pointed out that how the interest free funds are available and how much. Secondly, no details are discussed, hence, we set aside the order of CIT(A) to the extent deleting the disallowance of interest under Rule 8D(2)(ii) by CIT(A). As regards to the deletion of addition under Rule 8D(2)(i) & (iii) are concerned, the assessee itself has made disallowance of ₹ 19,15,937/- which will meet the requirement. Hence, this appeal of Revenue is allowed.
In the result, the appeal of Revenue is allowed.
Order pronounced in the open court on 09-10-2018. AadoSa kI GaaoYaNaa Kulao mao idnaMk 09-10-2018 kao kI ga[- .