DCIT 9(1)(2), MUMBAI vs. APTECH LTD, MUMBAI

PER PAWAN SINGH, JUDICIAL MEMBER:

"On the facts and in the circumstances of the case, the Ld. CIT-(A) erred in deleting the disallowance of interest expenses of ₹44,57,743/- u/s 14A without ignoring the fact that in the earlier year i.e.2009-10 & 2010-11 addition was confirmed by the CIT(A).

On the facts and in the circumstances of the case, the Ld. CIT-(A) erred in deleting the disallowance of interest expenses of ₹44,57,743/- u/s 14A without appreciating that sub-rule 8D(3) starts with heading "Formula for determination of expenditure" and the three steps prescribed under this sub-rule to compute the expenditure in relation to exempt income and shall be applied collectively. Therefore, the total disallowance u/s 14A has to - be the aggregate of the amounts determined so by applying three steps together and not in isolation as done by the Ld. CIT(A). On the facts and in the circumstances of the case, the Ld. CIT-(A) erred in deleting the disallowance of interest expenses of ₹44,57,743/- u/s 14A, thereby ignoring the principles as laid down by jurisdiction Hon'ble Bombay High Court in the case of Godrej and Boyce Limited and the Special Branch of Hon'ble Tribunal in the case of ITO V/s Daga Capital Management (P) Ltd (2009) 117ITD 169. On the facts and in the circumstances of the case, the Ld. CIT-(A) erred in ignoring the CBDT Circular No. 5 of 2014 dated 11.02.2014 wherein it has been clarified that the term "includible" in the Heading section 14A of the Act and the Heading to Rule 8D of I.T. Rules, 1962 indicates that for invoking disallowance u/s 14A, it is not material that the assesses should have earned such exempt income during the financial year under consideration."

The assessment order was passed on 26.03.2014 under section 143(3). During the assessment the assessing officer noted that in the profit and loss account the assessee has shown exempt income of Rs.6,81,498/-. The assessee suo motu disallowed Rs. 6,320/- under section 14A. The Assessing Officer (AO) invoked the provisions of Rule 8D and made the disallowance of Rs.64,04,866/- under section 14A. by invoking the provisions of Rule 8D. On appeal before the ld. CIT(A), the disallowance under section 14A was restricted to Rs.19,40,805/-.

The ld CIT(A) deleted the disallowance of Rs.44,57,743/- on his observation that the assessee has sufficient interest free funds available with it by following the decision of jurisdictional High Court in CIT vs. Reliance Utility in of 2008 dated 09.01.2008 and CIT vs. HDFC in ITA No. 330/2012 dated 23.07.2014. Thus, further aggrieved, the revenue has filed the present appeal before us.

4. We have considered the rival contentions of the ld. representatives of the parties and perused the material on record. We have noted that the coordinate bench of the Tribunal in assessee’s appeal for same assessment year restricted the disallowance of section 14A to the extent of exempt income earned by the assessee during the relevant period. The relevant portion of the order is extracted as under; “ 4. We have considered the rival contentions of the ld. Representative of the parties and perused the record.AO during the assessment proceeding, noted that assessee claimed the dividend income of Rs. 6,81,948/-( wrongly typed as Rs. 68,19,481/-). The assessee suo motto disallowed Rs. 6,320/- under section 14A. The AO issued show-cause notice as to why the provision of section 14A r.w. Rule 8D should not be applied. The assessee filed its reply dated 27.02.2014. In the reply the assessee contended that no specific expenditure has been incurred in connection with its investments for interest expenditure. The assessee contended that interest expenditure be netted for the purpose of taking the component of interest expenditure. The assessee furnished the working of suo motto disallowance under section 14A for Rs.6,320/-. The assessee also contended that the assessee earned dividend income of Rs. 6,81,498/- only and the disallowance under section cannot exceed to Rs. 6,81,948/-. The contention of assessee was not accepted by AO. The AO recorded his dissatisfaction about the correctness of claim of assessee and invoked the provisions of Rule 8D of Income Tax Rules, 1962. The AO made the disallowance under section 14A as per the provisions of Rule 8D. The assessing officer disallowed Rs. 6,320/- under clause-(i) of Rs. 44,57,743/- under clause (ii) and Rs. Rs. 19,40,805/- under Clause-(iii) of Rule 8D(2). Thus, the AO made the total disallowance of Rs. 64,04,868/-. On appeal before First Appellate authority the interest disallowance [under Rule 8D(2)(ii)] of Rs.44,57,743/- was deleted. The revenue has not challenged the order of First Appellate Authority for deleting the interest disallowance. In narrow compass the dispute before us is only with regard to disallowance under Clause-(iii) of Rule 8D(2).We have noted that the assessing officer has not recoded any reasons while disregarding the voluntary disallowance offered by assessee under section 14A. The Hon’ble Delhi High Court in case of Joint Investment Pvt. Ltd. vs. CIT in of 2015 held that by no stretch of imagination under section 14A or Rule 8D be interpreted so as to mean the entire tax exempt income is to be disallowed. The portion of tax exempt income surely cannot swallow the entire amount as has been happened in that case, the window for disallowance as indicated in section 14A is only to the extent of disallowing the expenditure incurred by assessee only to earn exempt income.

5. Thus, considering the fact of the present case and the submission made by ld. AR of the assessee, we direct the AO to restrict the disallowance to the extent of exempt income earned by assessee

during the Financial Year. In the result, grounds of appeal raised by assessee are allowed.