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Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: SHRI A.MOHAN ALANKAMONY & SHRI DUVVURU RL REDDY
आदेश / O R D E R
Per A. Mohan Alankamony, AM:-
This appeal by the Revenue is directed against the order passed by the learned Commissioner of Income Tax(Appeals)-11, Chennai, order dated 27.09.2017 in 17 for the assessment year 2014-15 passed U/s. 250(6) r.w.s. 143(3) of the Act.
The Revenue has raised several grounds in its appeal however the crux of the issue is that the Ld.CIT(A) has erred in directing the Ld.AO to exclude the investments made from own interest free funds and the investment which did not earn dividend income while computing disallowance U/s.14A of the Act.
The brief facts of the case are that the assessee is a limited company, filed its return of income for the assessment year 2014-15 on 29.11.2014 admitting total income of Rs.832,89,61,630/-. Thereafter notice U/s.143(2) & 143(1) of the Act was issued to the assessee on 31.08.2015 and 08.08.206 respectively. Finally assessment order was passed U/s.143(3) of the Act on 31.12.2016 wherein the Ld.AO made addition of Rs.8,10,21,643/- towards disallowance U/s.14A r.w.r. 8D of the Rules and Rs.12,48,344/- towards disallowance U/s.35(2AB) of the Act.
With respect to disallowance U/s.14A of the Act, the Ld.CIT(A) had granted relief to the assessee by observing as under:- In view of the above judgements, if it is established that the own funds are more than the invested funds yielding exempt income, the presumption is in favour of the assessee that the invested funds yielding exempt income are out of own funds, accordingly no disallowance is required to be made u/ s 14A of the Act LW. Rule 8D(2)(ii) of IT Rules, 1962. Therefore, the AO is directed to verify whether the own funds are more than the invested funds as submitted by the appellant, if so, the computation of disallowance under Rule 8D(2)(ii) of IT Rules r.w.s. 14A requires modification.
The appellant also contended in the grounds of appeal that the investments from which no dividend income was received should not be considered for the purposes of computing the disallowance u/s 14A and relied on the decision in the case of Computer Age Management Services (P) Ltd. v ACIT, to 1261jMdsj2014. Since the decision cited is from jurisdictional ITAT, Chennai, the AO is directed to follow the decision and accordingly work out the disallowance under Rule 8D by excluding those investments from which no exempt income was earned.”
5. Aggrieved by the above direction of the Ld.CIT(A), the Revenue is now on appeal before us.
6. At the outset, we find that with respect to disallowance U/s.14A of the Act, we had held in & 1730/Chny/2016 in the case M/s. Sthithi Insurance Services Pvt. Ltd., vide order dated 18.06.2018 that application of Rule 8D is not automatic. If the assessee computes to the satisfaction of the Ld.Revenue Authorities the expenses incurred by it with respect to investments earning exempt dividend then the same should be disallowed. Only when such computation is not possible Rule 8D should be applied for computing the disallowance U/s.14A of the Act. The relevant portion of the order is reproduced herein below for reference:- “5.2 We have heard the rival submissions and carefully perused the materials on record. It is apparent from the facts of the case, that the assessee has made huge investments in shares which earn dividend income exempt from tax. According to Section 14A of the Act the expenditure incurred towards earning exempt income cannot allowed as deduction from the taxable income of the assessee. In the case of the assessee, it is evident that for the process of decision making as to which shares the assessee has to invest, dis-invested, and at what point of time etc., will involve cost. Such expenditures incurred towards earning dividend income which is exempt from tax cannot be claimed as deduction from the taxable profit of the assessee company. As per the provisions of the Act, the assessee is bound to compute the actual expenses incurred by it towards investment that would earn exempt income and disallow the same. In the case of the assessee, such computation is neither made nor the expenditure towards earning exempt disallowed by the assessee. Therefore we are of the view that the Ld.AO was right in his realm to invoke the provisions of Section 14A r.w.r.8D of the Rules. Further it is pertinent to mention that there is no correlation between the dividend income earned by the assessee and the expenditure incurred by the assessee towards investment that earns exempt income. For example:- during a particular year the assessee would not have earned any dividend income though it has made heavy investments during the previous year or the earlier years, but the assessee is bound to incur cost for acquiring / maintaining /dis- investing such investments. Hence it cannot be inferred that the dividend income would be directly proportional to the expenditure incurred on the investment earning exempt income. Therefore we do not find any merit in the order of the Ld.CIT(A) for having restricted the disallowance U/s.14A of the Act to the extent of exempt income earned by the assessee. However since the assessee has not computed its actual expenditure incurred towards the investment that earns exempt income, in the interest of justice, we remit back the matter to the file of Ld.AO for both the assessment years thereby affording one more opportunity to the assessee to work out the actual expenditure incurred by it towards the investment that earn exempt income and disallow the same. We further hereby direct the Ld.AO to verify the computation submitted by the assessee for both the assessment years and thereafter decide the matter in accordance with law and merit.”
Following the same ratio we hereby remit back the matter to the file of Ld.AO with similar directions.
In the result, the appeal filed by the Revenue is allowed for statistical purpose as indicated herein above.
Order pronounced on the 27th August, 2018 at Chennai.