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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
This appeal by the Revenue is arising out of the order of Commissioner of Income Tax (Appeals)-14, Mumbai [in short CIT(A)], in appeal No. CIT(A)-14/IT-22598/15-16 dated 28.02.2017. The Assessment was framed by the Income Tax Officer, Ward-8(2)(4), Mumbai (in short ‘ITO’) for the A.Y. 2012-13 vide order dated 28-03-2015 under section 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).
The only issue in this appeal of Revenue is against the order of CIT(A) deleting the disallowance made by AO on account of expenses
14A of the Act read with Rule 8D of the IT Rules (of the IT Rules, 1962) for the amount of ₹ 2,60,92,052/-. For this Revenue has raised the following ground: -
“(i) The Learned CIT(A) has erred oil fact and in law in deleting the disallowance amounting to Rs.2,60,92,052/- under section 14A r.w rule 80 by following the decision of Godrej & Boyce Mfg. Co. ltd, ignoring the facts that the disallowance worked out by following Rule 80 provides uniform mechanism for working out disallowance of expenses which are attributable to earning exempt income.
(ii) The Learned CIT(A) has erred on facts and in law in not appreciating the fact the asses has not produced any documentary evidence to correlate direct nexus of utilization interest bearing lurid for the purpose of construction work.
(iii) The Id. CIT (A) has erred on facts and in law in not looking into the fact that the assessee has not discharged onus by producing evidence in support of its statement submitted before CIT(A)."
Briefly stated facts are that the assessee is engaged in the business of construction and immovable properties. The AO during the course of assessment proceedings noticed that the assessee has earned dividend income amounting to ₹ 1,26,44,742/-, which does not form part of the total income. The assessee claimed the same as exempt. The assessee suo moto has disallowed the expenses relatable to earning of this exempt income at ₹ 1,07,91,681/-. The assessee has disallowed under Rule 8D(2)(iii) and the relevant computation reads as under: -
Particulars Amounts Opening as on 01.04.2011 3,00,000,000 Closing as on 31.03.2012 16,672,386 Average investments 158,336,193 Disallowance U/s 14A (Rule 8D) 791,681 4. The AO simply relying on Rule 8D computed the disallowance under rule 8D(2)(ii) regarding interest expenditure and made disallowance of ₹ 2,60,92,052/-. In fact the assessee challenged the disallowance of interest expenditure under Rule 8D(2)(ii) at ₹ 2,60,92,052/-. The assessee preferred the appeal before CIT(A), who deleted the disallowance after considering that only net interest expenditure of Rs. 29,621/- was claimed in the P & L account and rest of the interest expenditure of ₹ 9,10,77,635/- was capitalized in the work in progress. As regards to the AO reduced the work in progress on the basis of interest capitalized in the balance sheet, according to CIT(A), no such reduction can be made for the reason that interest capitalized with the cost of construction cannot be considered for the purpose of disallowance because no such claim is made. The CIT(A) observed in Para 4 and 4.1 as under: -
“4. As regards ground No. 1, the facts of the case is that the appellant has received dividend income of ₹ 1,26,44,724/- and claimed as exempt. The AO has discussed the issue and thereafter disallowed ₹ 2,60,92,052/- under Rule 8D(2)(ii) and ₹ 7,91,681/- under Rule 8D(2)(iii) of I.T. Rules 1962. The appellant has suo moto disallowed Rs 7,91,681/- in the Return of Income. On perusal of the assessment order and as per discussion/ submission, it is noted that the appellant has actually incurred interest expenditure of Rs 9,10,77,635/- in this year. Out of this, Rs 9,10,48,014/- is capitalized in V1P and net interest expenditure of Rs 29,621/- is claimed in P&L A/c.
Further out of Rs 9,10,48,014/- capitalized in WIP, Rs 1,26,44,724/- earned as dividend on surplus amount invested in Mutual Fund was reduced by appellant from %VIP. The AO has considered only Rs 9,10,48,014/- (capitalized amount) of interest and worked out the disallowance under Rule 8D(2)(ii) at Rs 2,60,92,052/- which however was not disallowed. He reduced the balance of Rs 1,34,47,328/- from WIP (Rs 2,60,92,052 - Ps 1,26,44,724). Copy of Balance Sheet and P&L A/c is submitted by the appellant.
4.1 During the course of appellate proceedings, the appellant firstly submitted that disallowance under Rule 8D(2)(ii) cannot be made on the amount not claimed in P&L A/c. The appellant relied on the decision in the case of ITO vs. Arihant Advertising P. Ltd in A.Y 2007-08 dated 04/03/2011 wherein it is held that the interest capitalize alongwith investment and not charged to P& A/c cannot be considered for disallowance u/s 14A. Similar finding is given in the case of Modern Info Technology Pvt. Ltd vs. ITO in ITA No. 4294/Del/2012 A.T 2009-10 dated 17/7/2012. Therefore, considering the fact of the case, I am of the opinion that the interest capitalized with the cost of construction cannot be considered for the purpose of disallowance under Rule 8D(2(ii) and only the interest claimed in the P&L A/c for the purpose of disallowance. In this connection, during the course of appellate proceedings, the Ld. A/R agreed under the provisions of Sec. 251(2) of I.T. Act that disallowance under Rule 81(2)(ii) can be made on the amount of interest actually claimed in P&L A/c. Therefore, the AO is directed to compute the disallowance under Rule 8D(2)(ii) of I.T. Rules 1962 considering only the interest actually claimed in P&L A/c.” Aggrieved, Revenue is in second appeal before Tribunal.
We have heard the rival contentions and gone through the facts and circumstances of the case. Even otherwise, the learned Counsel for the assessee before us demonstrated that the assessee’s investment in mutual fund is to the tune of ₹ 1,66,72,386/- as against the assessee’s interest free funds available are to the tune of ₹ 3,01,34,858/- being share capital. The AO has not recorded any satisfaction that the assessee has invested borrowed funds for investment in purchase of mutual funds. Once, nexus is not proved, and the funds in the shape of share capital is more than the investment, the presumption in view of the decision of the Hon’ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom), is in favour of assessee. Respectfully following the Bombay High Court decision and considering the facts of the case, we confirm the order of CIT(A). The appeal of Revenue is dismissed.
In the result, the appeal of Revenue is dismissed.
Order pronounced in the open court on 13-06-2018. AadoSa kI GaaoYaNaa Kulao mao idnaMk 13.06.2018 kao kI ga[- .