SANGAM SPINFAB LTD.,MUMBAI vs. I.T.O. WARD 8(3)(1), MUMBAI

The issue in dispute in the present appeal is confined to disallowance of ` 12,62,933, made under section 14A of the Income Tax Act, 1961 (for short “the Act”) r/w rule 8D of the Income Tax Rules, 1962.

Brief facts are, the assessee company is engaged in the business of manufacturing and trading of fabrics. For the assessment year under dispute, the assessee filed its return of income on 29th January 2012, declaring total income of ` 28,74,440. In course of the assessment proceedings, the Assessing Officer noticed that in the relevant previous year, the assessee has earned exempt income by way of dividend amounting to ` 1,68,082. Whereas, the assessee has disallowed an amount of ` 43,632, towards expenditure attributable to earning of dividend income. On examining the Balance Sheet of the assessee, the Assessing Officer found that the opening and closing investment in shares amounted to ` 1,97,47,939 and ` 2,69,02,785 respectively. Therefore, he called upon the assessee to explain why expenditure under section 14A of the Act should not be disallowed. In response, though, the assessee submitted that the voluntary disallowance made by it is the actual expenditure attributable to earning of exempt income, however, the Assessing Officer rejecting the explanation of the assessee proceeded to disallow an amount of ` 12,62,933, comprising of interest expenditure of ` 11,44,745 under rule 8D(2)(ii) and administrative expenditure of ` 1,16,627, under rule 8D(2)(iii). Being aggrieved of such disallowance, the assessee preferred appeal before the first appellate authority. The learned Commissioner (Appeals) after considering the submissions of the assessee directed the Assessing Officer to reduce interest on car loan

The learned Authorised Representative, though, contested the disallowance sustained by the learned Commissioner (Appeals) on various grounds including non–recording of satisfaction by the Assessing Officer, however, he ultimately submitted, if the disallowance under section 14A r/w rule 8D is restricted to the exempt income earned during the relevant previous year, assessee will have no grievance.

The learned Departmental Representative relied upon the observations of the learned Commissioner (Appeals).

I have considered rival submissions and perused materials on record. Undisputedly, in the relevant previous year, the assessee has earned exempt income by way of dividend amounting to ` 1,68,082. It is also a fact that the assessee has voluntarily disallowed an amount of ` 43,632 under section 14A of the Act. Whereas, the Assessing Officer has disallowed an amount of ` 12,62,933 under section 14A r/w rule 8D which is more than the exempt income earned during the year. In my view and as per the settled legal principle, disallowance under section 14A r/w rule 8D cannot exceed the amount of exempt income

In the result, assessee’s appeal is partly allowed. Order pronounced in the open Court on 12.09.2018