SAHARA ONE MEDIA & ENTERTAINMENT LTD.,GURGAON vs. DCIT, NEW DELHI

Upon careful consideration, we note that the additional ground raised is having legal issue and goes to the root of the matter, hence we admit the aforesaid ground.

In this case, assessee declared a sum of Rs.12,84,187/- as dividend income from its investment made in companies. He also claimed exemption under section 10 (34) of the Income-tax Act, 1961 (for short ‘the Act’). In a query in this regard, assessee responded that the assessee company had suo motu made disallowance of Rs.12,842/- being 1% of dividend income under section 14A of the Act read with Rule 8D of the Income-tax Rules, 1962 (for short ‘the Rules’) in respect of the pro-rata expenses attributable to earning of dividend. However, AO was not satisfied. He made a disallowance u/s 14A read with Rule 8D totalling to Rs.9,95,294/-.

Against this order, assessee appealed before the ld. CIT (A). Ld. CIT(A) elaborately noted the submissions of the assessee but he was not convinced. He upheld the order of AO.

Against this order, assessee is in appeal before us. We have heard both the parties and perused the records.

Ld. Counsel for the assessee submitted that assessee has sufficient own funds to make the investment. Hence, he pleaded that no disallowance under Rule 8D(ii) is permissible.

Per contra, ld. DR for the Revenue submitted that there is no one to one connection with the interest free funds and the investment.

Upon hearing both the parties and perusing the records, we are of the considered view that assessee has sufficient interest free funds. No disallowance under Rule 8D (ii) is to be made. Right of attribution lies with the assessee. There is no one to one connection required. This proposition finds support from the order of Hon’ble Bombay High Court in the case of CIT vs. Glenmark Pharmaceutical Ltd. 85 DTR (Bom.) 169. Accordingly, we direct the AO in this regard to examine whether assessee has sufficient interest free funds and if that be so, no disallowance under Rule 8D(ii) be made.

As regards addition under Rule 8D (iii), assessee filed aforesaid additional ground that disallowance should be made only with regard to exempt income.

Per contra, ld. DR for the Revenue relied upon the orders of the authorities below.

Upon careful consideration, we find considerable cogency in the submissions of the ld. Counsel for the assessee. It was held by Special Bench of the ITAT in the case of ACIT vs. Vireet Investment (P) Ltd. (2017) 188 TTJ 1 that for the purpose of disallowance under clause (ii) and (iii) of Rule 8D, only those investments which yielded exempt income should be considered while calculating average value of investment. We order accordingly. AO is directed to compute disallowance under Rule 8D (iii) by considering only investments which have earned exempt income. Needless to add on both the issues, AO should pass an order in accordance with our above directions after providing an opportunity of being heard to the assessee.

In the result, the appeal filed by the assessee is allowed for statistical purposes.