DEPUTY COMMISSIONER OF INCOME TAX 2(2)(2), MUMBAI vs. NOVELTY PROPERTIES & INVESTMENT PRIVATE LIMITED, MUMBAI

आदेश / O R D E R PER R.C.SHARMA (A.M):

4. By the impugned order CIT(A) deleted the addition after observing that assessee is having no exempt income. The precise observation of the CIT(A) was as under:- The Appellant submits that while calculating the 'average value of investments' for the purpose of disallowance under Rule 8D(2)(iii) of the Rules the investments not yielding tax exempt income must be excluded. In the instant case, none of the investments have yielded any tax exempt income during the year under consideration and therefore, the 'average value of investments' shall be computed at NIL, thereby resulting into a 'NIL' disallowance under Rule 8D(2) (iii)of the Rules. In support of the said proposition, the Appellant would like to place its reliance on the decision of Hon'ble Delhi High Court in the case of ACB India Ltd. v. ACIT (ITA No.615/2014) wherein it was held that in computing 'the average value of investment', only the investments yielding non-taxable income have to be considered and not all investments. The relevant extract of the said decision is reproduced here under for ready reference; "The AO, instead of adopting the average value of investment of which income is not part of the total income i,e. the value of tax exempt, investment, chose to factor in the total investment itself. Even though the CIT(Appeals) noticed the exact value of the investment which yielded taxable income, he did not correct the error but chose to apply his own equity." Further reliance is also placed on the decision of REI Agro v/s DCIT (ITA No. 1331 & 1423/Kol/2011)(2013) wherein the Hon'ble Kolkata Tribunal held as under: "Thus, not all investments become the subject-matter of consideration when computing disallowance under section 14A read with rule 8D. The disallowance under section 14A read with rule 8D is to be in relation to the income which does not form part of the total income and this can be done only by taking into M/s. Novelty Properties & Investments Pvt. Ltd., which has form part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income. Under the circumstances, the computation of the disallowance under section 14A read with rule 8D(2)(iii), which is issue in the assessee's appeal, is restored to the file of the AO for recomputation in line with the direction given above. No disallowance under section 14A read with rule 8D(2)(i) and (if) can be made in this case." Also, the Hon'ble Mumbai Tribunal in the case of S. Krishnamurthy vs ACIT (ITA No. 6207/Mum/2012)(2016) held that the disallowance has to be worked out on the basis of investments which" yielded dividend during the year and not by factoring in the total amount of investments. In view of the above, the Appellant states that the investments not yielding any tax free income during the year under consideration, must not be taken into consideration for arriving at 'average value of investments' as required for computing disallowance under Rule 8D(2)(iii) of the Rules.

M/s. Novelty Properties & Investments Pvt. Ltd., 7. Furthermore, the proposition that no disallowance can be made u/s.14A in case there is no exempt income is also supported by the following judicial pronouncements.