CRESCENT TRADING P. LTD,MUMBAI vs. ASST CIT CEN CIR 3(3), MUMBAI

The present appeal filed by the assessee is directed against the order passed by the CIT(A)-51, Mumbai, dated 22.11.2016, which in itself arises from the order passed by the A.O under Sec. 143(3) of the Income-tax Act, 1961 (for short ‘Act’), dated 25.03.2015 for A.Y. 2012-13. The assessee assailing the order of the CIT(A) has raised before us the following grounds of appeal:- “The Ground or grounds of appeal are without prejudice to one another: 1.a) On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in confirming the addition of Rs. 34,26,168/- made by the M/s Cresent Trading Pvt. Ltd. Vs. ACIT 3(3) – A.Y. 2012-13 2 AO to the income of the appellant by way of disallowing certain expenditure alleged to have been incurred relating to exempt income invoking the provisions of section 14A r.w.r. 8D mechanically. b) The ld. CIT(A) failed to appreciate that there is no reason and basisi in reaching to dissatisfaction with the correctness of the claim of the appellant that no expenditure was incurred in relation to dividend income which does not form part of the total income. c) In reaching to the conclusion and confirming such addition to ld. CIT(A) omitted to consider relevant factors, considerations, principles and evidences while he was overwhelmed, influenced and prejudiced by irrelevant consideration and factors. d) In any case the disallowance u/s. 14A r.w.r.8D cannot exceed the actual expenditure incurred and claimed by the appellant. The appellant craves leave to add, alter, amend or delete any or all of the above grounds of appeal.”

During the course of the assessment proceedings, it was observed by the A.O that the assessee who was in receipt of exempt dividend income of Rs. 4,56,909/- had disallowed only an amount of Rs. 1,500/- under Sec. 14A of the Act. The A.O not persuaded to subscribe to the aforesaid disallowance worked out the same as per Sec. 14A r.w. Rule 8D at an amount of Rs. 34,27,668/-, as under :

Disallowance under Sec. 14A r.w. Rule 8D(2)(iii) out Rs. 4,85,050/- of administrative expenses. Total Rs. 34,27,668/- After reducing the amount of Rs. 1,500/- that was suo motto offered by the assessee as a disallowance under Sec. 14A, the A.O made a further M/s Cresent Trading Pvt. Ltd. Vs. ACIT 3(3) – A.Y. 2012-13 3 disallowance/addition of the balance amount of Rs. 34,26,168/- in the hands of the assessee.

Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) after deliberating on the contentions advanced by the assessee did not find favour with the same and dismissed the appeal, observing as under : “7. I have considered the facts of the case, submissions and contentions of the appellant, as also the order of the A.O. It is gathered that during the year, the assessee had earned exempt income in nature of dividend of Rs. 4,56,909/-, It is further gathered that assessee has debited interest expenditure of Rs. 3,66,71,234/- on loan taken by it. It is also seen that assessee has made investments in shares, etc to the tune of Rs. 12,88,95,081/-. Therefore, the provisions of sec. 14A of the Act were clearly applicable. Infact the assessee has itself disallowed an amount of Rs. 1,500/- u/s 14A which also goes to establish that assessee itself accepted applicability of provisions of Sec. 14A. During the course of appellate proceedings, the Ld. AR could not produce any evidence to the effect as to how the disallowance was worked out by the AO in accordance with provisions of Rule 8D was unreasonable and unjustified. However, in my considered opinion, the applicability of provisions of Sec. 14A, read with Rule 8D of the I.T. Rules, has been examined and upheld by Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (328 ITR 81), wherein it was observed by the Hon’ble Court that disallowance under Rule 8D can be made in the cases involving exempted income, from A.Y. 2008-09 onwards. This issue has also been examined by the Special Bench of ITAT, Mumbai, in the case of Daga Capital Managements (P) Ltd. (2009) 117 ITD 169, wherein applicability of Rule 8D has been upheld for working of disallowance u/s. 14A. The Central Board of Direct Taxes (CBDT), vide circular No. 5 of 2014 dated 11/2/2014, has clarified that disallowance u/s. 14A is to be made, even if no exempted income has been earned by the assessee during the year. It is relevant to mention over here that assessee has made investment in shares, etc., to the tune of Rs. 12,88,95,081/- and earned dividend income from which is exempted from tax, Further, the assessee has debited a sum of Rs. 3,66,71,234/- towards interest, in the Profit & Loss Account, on loans taken by it. Though the assessee claimed that the investments were made out of surplus funds and no interest bearing funds were invested in shares, etc., however, it failed to make any direct co-relation in the investments made in the shares and surplus funds. Admittedly, the assessee has not been able to establish the facts that the entire investments have been made from their own funds and the assessee has incurred interest expenditure of Rs. 3.66 crores during the year. Considering the facts of the case, it cannot be said that no interest-bearing funds were invested in shares, etc. Similarly, it cannot be said that no expenditure as such was incurred for earning exempted income, because even for making investments in shares, the assessee has to carry out due diligence and has to maintain bare minimum man power, to look after the fluctuations in the value of shares, etc. Accordingly, I am of the view that M/s Cresent Trading Pvt. Ltd. Vs. ACIT 3(3) – A.Y. 2012-13 4 provisions of Sec. 14A read with Rule 8D are clearly applicable in the facts of the present case. In view of the same, the disallowance made by the AO of Rs. 34,26,168/- is upheld. This ground of appeal

We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record. We find that the CIT(A) after deliberating on the contention of the assessee that as the investments in the exempt income yielding shares were made out of the surplus funds and no part of the interest bearing funds were channelized for the same, thus no disallowance of any part of the interest expenditure was called for under Rule 8D(2)(ii), however declined to accept the same. On a careful perusal of the order of the CIT(A), it emerges that the latter observed that as the assessee had failed to establish a direct nexus between the investments made in the shares and the interest free surplus funds available with it, thus for the said reason its claim that no disallowance in respect of the interest expenditure was liable to be made did not merit acceptance.

We have given a thoughtful consideration to the issue before us and are unable to persuade ourselves to subscribe to the aforesaid observations of the CIT(A). We are of the considered view that as it emerges from the record that the assessee had sufficient interest free surplus funds available with it to explain the investment made in the exempt dividend income yielding shares, therefore, no disallowance under Sec. 14A r.w. Rule 8D(2)(ii) in respect of the interest expenditure could have been validly made in the hands of the assessee. We find that our aforesaid view is fortified by the M/s Cresent Trading Pvt. Ltd. Vs. ACIT 3(3) – A.Y. 2012-13 6 judgment of the Hon’ble High Court of Bombay in the case of CIT Vs. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom). The Hon’ble High Court had in the said case had observed that where an assessee is having sufficient interest free funds available with it to explain the exempt income yielding investments, then no disallowance in respect of the interest expenditure under Sec. 14A r.w. Rule 8D(2)(ii) could validly made in the hands of the assessee. We are of the considered view that as the assessee admittedly had sufficient interest free funds available with it to explain the investments made in the exempt income yielding shares, thus no disallowance of any part of the interest expenditure was called for in its hands under Sec. 14A r.w Rule 8D(2)(ii). We thus, in terms of our foresaid observations delete the disallowance of Rs. 29,42,617/- made by the A.O in respect of the interest expenditure under Sec. 14A r.w. Rule 8D(2)(ii).

We shall now advert to the disallowance made by the A.O in respect of the administrative expenses under Sec. 14A r.w. Rule 8D(2)(iii) of Rs. 4,85,050/-. We are persuaded to subscribe to the claim of the assessee that the disallowance under Sec. 14A cannot exceed the amount of the exempt income. We find that our aforesaid view stands fortified by the view taken by the Tribunal in the assesses own case for A.Y. 2013-14. The Tribunal while disposing off the appeal of the assessee for A.Y. 2013-14 viz. M/s Cresent Trading Pvt. Ltd. Vs. DCIT (ITA No. 995/Mum/2018, dated 08.05.2018), had held that the disallowance under Sec. 14A cannot exceed the amount of the exempt dividend income, observing as under :

In view of the above decision of Hon’ble Delhi High Court in the case of Cheminvest Limited (supra), we direct the AO to restrict the disallowance at Rs. 1,82,371/-. This issue of assessee’s appeal is partly allowed.”

We have given a thoughtful consideration to the issue before us and find ourselves to be in agreement with the view taken by the Tribunal in the assesses own case for A.Y. 2013-14. We thus, finding no reason to take a different view, respectfully follow the view taken by the Tribunal in the case of the assessee for A.Y. 2013-14 and restrict the disallowance under Sec. 14A to the amount of the exempt dividend income of Rs. 4,56,909/-. The A.O is directed to restrict the disallowance under Sec. 14A to an amount of Rs. 4,56,909/-.

The appeal filed by the assessee is partly allowed in terms of our aforesaid observations.