ACIT, GURGAON vs. M/S. DLF INFO CITY DEVELOPERS (KOLKATA) LTD., GURGAON

The Appellant, Assistant Commissioner of Income-tax, Circle 1 (1), Gurgaon (hereinafter referred to as ‘the Revenue’) by filing the present appeal sought to set aside the impugned order dated 16.12.2015 passed by the Commissioner of Income-tax (Appeals)-I, Gurgaon qua the assessment year 2011-12 on the grounds inter alia that :-

The Objector, M/s. DLF Info City Developers (Kolkata)

Assessee carried the matter by way of filing appeal before the ld. CIT (A) who has restricted the addition of Rs.43,67,640/- made by the AO under section 14A read with Rule 8D to company has come up before the Tribunal by way of filing appeal and cross objection respectively by challenging the impugned order passed by ld. CIT (A).

We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.

Undisputedly, the assessee company has earned dividend income to the tune of Rs.6,84,337/- which have been directly credited in the bank account of the assessee company. It is also not in dispute that AO has not given any computation of income to arrive at the disallowance of Rs.43,67,640/-.

Ld. DR for the Revenue contended inter alia that the AO, after duly recording his dissatisfaction, which is apparent from assessment order itself, worked out the disallowance under Rule 8D as per accounts rendered by the assessee company; that section 114 of the Evidence Act, 1872 raises presumption in favour of the Revenue that there was non-satisfaction of the AO and relied upon the order of the AO.

Ld. AR for the assessee company to repel the arguments addressed by the ld. DR for the Revenue contended inter alia that with Rule 8D without recording his satisfaction; that the assessee company has not incurred any expenses to earn the dividend income from investment of mutual funds; that the assessee company has substantial surplus funds; that all the investments in mutual funds out of which the assessee company has earned exempt income are old investment and in the earlier years, no disallowance was made; that ld. CIT (A) has erroneously sustained the addition of Rs.68,433/- by restricting the same to 10% of the exempt income on ad hoc basis without any basis.

First of all, the ld. AR for the assessee company to substantiate his contention that the assessee company has substantial reserve and surplus fund as on 31.03.2011 drew our attention towards balance sheet wherein reserve and surplus funds and shareholder’s funds / share capital are shown at Rs.61,46,85,927/- and Rs.25,00,000/- respectively as against investment of Rs.14,99,25,994/- made on March 31, 2010. As per balance sheet available on record, no investment has been made as on March 31, 2011 meaning thereby, the entire investment on which the assessee company has earned dividend was of earlier year. and surplus fund and shareholder’s funds / share capital to the tune of Rs.61,46,85,927/- and Rs.25,00,000/- respectively, though paid interest payment on some borrowed funds during the year under assessment, the disallowance cannot be made u/s 14A read with Rule 8D. More particularly when no investment has been made by the assessee during the year under assessment. So, in these circumstances, the presumption has to be raised in favour of the assessee that investments, if made, were made out of interest free funds available with the assessee company.

Hon’ble High Court of Bombay in case cited as CIT-2, Mumbai vs. HDFC Bank Ltd. – (2014) 49 taxmann.com 335 (Bombay) while dealing with the identical issue held that when the assessee’s own funds and other non-interest bearing funds were more than investment in tax free securities, no disallowance on account of interest payment under section 14A can be made.

Furthermore, the AO has not recorded his dissatisfaction as to the computation made by the assessee company that no expenditure has been made by the assessee company during the year under assessment to earn the interest free income rather proceeded mechanically by extracting the bare language of Rule 8D. controversy as to invoking of the provisions contained under Rule 8D of the Rules by observing as under :-

Hon’ble Delhi High Court in HT Media Limited vs. Pr. CIT in dated 23.08.2017 decided the issue in controversy in favour of the assessee by returning the following findings :-

The AO has not pointed out any defect in the computation made by the assessee company and as such, provisions contained u/s 14A read with Rule 8D are not attracted. Because sub-section (2) & (3) of section 14A with Rule 8D of the Rules has only prescribed a formula for determination of an expenditure to earn the income which does not form part of the total income under the Act, which can only be invoked if the AO is not satisfied with the claim of the assessee.

Furthermore, CIT (A) erred in sustaining the disallowance of Rs.68,433/- by restricting the same to 10% of the exempt income even despite agreeing with the assessee company that no satisfaction has been recorded by the AO that nil expenses has been incurred to earn tax free dividend income rather proceeded to sustain the addition of Rs.68,433/- on the basis of surmises and guesswork which is not sustainable. In the given circumstances, the contentions raised by ld. DR are not sustainable. the Revenue challenging to restrict the disallowance u/s 14A read with Rule 8D from Rs.43,67,640/- to Rs.68,433/- is dismissed being without merit. However, cross objections filed by the assessee are hereby allowed and addition of Rs.68,433/- is hereby ordered to be deleted. Order pronounced in open court on this 7th day of December, 2017.