UFO MOVIEZ INDIA LTD.,MUMBAI vs. ADDL.CIT-27, NEW DELHI

Facts in brief of the case are that the assessee is engaged in the business of digital cinema for AY 2014-15 under consideration. The case of the assessee was selected for scrutiny assessment and the Assessing Officer (“AO”) vide order dated 16.12.2016 passed assessment order u/s 143(2) of the Act, disallowed the expenditure by invoking the provision of section 14A of the Act r.w. Rule 8D of the Income Tax Rules, 1962 (“the Rules”). Thereby, the AO made disallowance of INR 5,82,53,034/-. However, he assessed the income of the assessee at book profit of INR 36,98,26,537/-.

Aggrieved against this, the assessee preferred appeal before Ld.CIT(A), who after considering the submissions, partly allowed the appeal of the assessee. Thereby, he restricted the disallowance u/s 14A of the Act to the extent of INR 27,61,157/-, being the dividend income earned by the assessee.

Aggrieved against the order of Ld.CIT(A), the assessee preferred appeal before the Tribunal.

Ld. Authorized Representatives of the parties categorically submitted that against the order of Ld.CIT(A), no appeal has been filed by the Revenue. In the light of the submissions, we proceed to adjudicate the present appeal, presuming that no cross appeal has been filed by the Revenue.

Apropos to grounds of appeal, Ld. Counsel for the assessee submitted that Ld.CIT(A) was not justified in restricting the disallowance to the extent of dividend income. He submitted that authorities below failed to appreciate the fact that no disallowance u/s 14A of the Act was called for. On account of the fact that the AO failed to record his satisfaction as to why suo moto disallowances made by the assessee are not correct having regard to the accounts of the assessee. Ld. Counsel for the assessee submitted that the lower authorities while computing the disallowance, grossly erred in taking the gross investments instead of restricting to the extent of investments which has earned dividend or exempt income. He further submitted that Ld.CIT(A) although accepting the contention of the assessee that only dividend yielding investments to be considered for computation of disallowance u/s 14A of the Act, in terms of the decision of Special Bench of the ITAT, Delhi Tribunal in the case of ACIT vs Vireet Investment Pvt.Ltd. where he restricted the disallowance to the extent of exempt income. He took us through the financial statement to demonstrate that the investments made on non-yielding exempt income and the investment in foreign entities which attracted taxation than the suo motto disallowance made by the assessee would be sufficient. He submitted that Ld.CIT(A) did not advert to the submissions of the assessee.

On the other hand, Ld. Sr. DR for the Revenue opposed these submissions and supported the orders of the authorities below.

We have heard Ld. Authorized Representatives of the parties and perused the material available on record and gone through the orders of the authorities below. Ld.CIT(A) after considering the various submissions made by the assessee, decided the issue partly in favour of the assessee. The relevant contents of the findings of Ld.CIT(A) are reproduced as under:- 5.1.5. “It is undisputed fact that the appellant has received dividend income amounting to Rs.2761157/- being claimed exempt in computation of total income for the previous year relevant to the AY 2014-15. The contention of the appellant that only dividend yielding investment be considered for computation of disallowance u/s 14A is quite logical and therefore requires to be accepted as has been held in the case of ACIT vs. Vireet Investment Pvt. Ltd. (ITAT Delhi) (Special Bench), supra. So far claim with respect to borrowing of the fund and its investment is concerned, the appellant has not controverted the finding of fact of the Ld. AO that it had a systematic investment over the period of time and therefore, the appellant contention that it has surplus find in the form of share capital and reserve and surplus being used for investment does not hold conclusive. It is also not the case of the appellant that investments made over the period of time has been through an exclusively independent investment account maintained separately for the purpose. 5.1.6. Since, the computation of disallowance u/s 14A made by Ld. AO has not factored in the above principle, it is optimum that disallowance be limited to the maximum of exempt income claimed by the appellant in its return of income for the previous year relevant to the AY 2014-15. This issue has been dealt with by the Hon'ble jurisdictional High Court in judgment cited as Joint Investments Pvt. Ltd. vs. CIT - (2015) 372 ITR 694 (Del.) as under: "........Disallowance under Section 14A read with Rule 80 volunteered Rs.2,97,440/- as attributable under Section 14A for the purpose of disallowance - AO on the basis of his own understanding of Rule 8D of the Income Tax Rules disallowed the sum of Rs. 52,56, 197/- Held that:- In the present case, the AO has not firstly disclosed why the appellant/assessee's claim for attributing Rs.2,97,440/- as a disallowance under Section 14A had to be rejected. In Taikisha [2014 (12) TMI 482- DELHI HIGH COURT) says that the jurisdiction to proceed further and determine amounts is derived after examination of the accounts and rejection if any of the assessee's claim or explanation. The second aspect is there appears to have been no scrutiny of the accounts by the AO - an aspect which is completely unnoticed by the CIT (A) and the ITAT. The third, and in the opinion of this court, important anomaly which we cannot be unmindful is that whereas the entire tax exempt income is Rs.48,90,000/-, the disallowance ultimately directed works out to nearly 110% of that sum, i.e., Rs. 52,56, 197/-. By no stretch of imagination can Section 14A or Rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in Section 14A, and is only to the extent of disallowing expenditure "incurred by the assessee in relation to the tax exempt income". This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case......"

The contention of the assessee is that had the AO excluded the non- dividend bearing investments and investment made out of non-interest bearing 6 | P a g e fund, no disallowance would have been called for. The Ld.CIT(A) has sustained the additions to the extent of exempt income without adverting to the contentions of the assessee regarding exclusion of investments that did not earn dividend income, investments that earned taxable income and investments that were made out of interest free own funds. There is no ambiguity under the law that Section 14A of the Act casts statutory obligation on the Assessing Authority to verify and satisfy itself about the correctness of claim of the assessee regarding suo-motto disallowance or no disallowance at all in relation to expenditure incurred for earning of exempt income. If the AO fails to give clear finding, he would be failing into statutory obligation. In the present case, the AO had not adverted to the objections of the assessee and did not accept the suo- motto disallowance made by the assessee. Looking to the facts of the present case, the AO failed to take into account that the assessee was having interest free fund. Certain investment did not earn exempt income and some investment in foreign entities were amendable to tax in India. Further, AO did not give any cogent reason for rejecting the suo-motto disallowance. We therefore, are considered view in the absence of such finding under the facts of the present case, disallowance made by AO and restricted by Ld.CIT(A) to the extent of exempt income, is not justified. We therefore, direct the AO to delete the impugned addition. The ground raised by the assessee is accordingly, allowed.

In the result, the appeal of the assessee is allowed. Order pronounced in the open Court on 20th February, 2024.