SPEED TEX P.LTD,MUMBAI vs. DCIT 2(3), MUMBAI

The present appeal filed by the assessee is directed against the order passed by the CIT(A)-6, Mumbai, dated 11.12.2015, which in itself arises from the assessment order passed by the A.O under Sec. 143(3) of the Income Tax Act, 1961 (for short ‘Act’) for AY 2011-12.

Briefly stated, the facts of the case are that the assessee company which is engaged in the business of trading in shares, securities activities and commodity trading had filed its return of income for A.Y 2011-12 on 27.09.2011, declaring total loss of Rs. 31,89,430/-. The return of income filed by the assessee was processed as such under Sec. 143(1) of the Act. The case of the assessee was thereafter selected for scrutiny assessment under Sec. 143(2).

During the course of the assessment proceedings it was inter alia observed by the A.O that the assessee company had during the year under consideration earned dividend income of Rs.85,528/- which was claimed as exempt. The A.O taking cognizance of the fact that though the assessee had incurred interest expenditure of Rs.28,32,659/-, however, it had disallowed only an amount of Rs.1,89,883/- under Sec. 14A. The A.O not persuaded to accept the disallowance offered by the assessee under Sec. 14A, therefore, reworked the expenses which were attributable to the earning of the aforesaid exempt dividend income of Rs.86,528/- as per the P a g e | M/s Speed Tax Private Ltd. Vs. DCIT-2(3) methodology contemplated under Rule 8D of the Income tax Act, 1962, as under:-

Aggrieved, the assessee assailed the assessment framed by the A.O before the CIT(A). The CIT(A) after deliberating on the contentions of the assessee in the backdrop of the facts of the case observed that the disallowance worked out by the A.O under Sec. 14A r.w. Rule 8D of Rs.8,98,299/- was in conformity with the methodology of computing the said disallowance as provided under the law. The CIT(A) in order to fortify his aforesaid view placed reliance on the judgment of the Hon’ble High Court of Bombay in the case of Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT (2010) 328 ITR 81 (Bom). Thus, the CIT(A) in the backdrop of his aforesaid conviction that no infirmity did emerge from the working of the disallowance by the A.O under Sec. 14A r.w. Rule P a g e | M/s Speed Tax Private Ltd. Vs. DCIT-2(3) 8D at Rs.8,98,299/- therefore, affirmed the order of the A.O and dismissed the appeal of the assessee.

The assessee being aggrieved with the order of the CIT(A) had carried the matter in appeal before us. The ld. Authorized Representative (for short ‘A.R’) for the assessee Sh. Nitesh Jain at the very outset of the hearing of the appeal submitted that the CIT(A) had erred in mechanically sustaining the disallowance of Rs.8,98,299/- made by the A.O under Sec. 14A r.w. Rule 8D. It was the contention of the ld. A.R that as the dividend income earned by the assessee during the year under consideration was Rs.86,528/-, therefore, no disallowance in excess of the said exempt income was called for in the hands of the assessee. The ld. A.R in the backdrop of his aforesaid submissions averred that the disallowance under Sec. 14A r.w. Rule 8D in the hands of the assessee could not have exceeded the amount of the dividend income of Rs.86,528/- which was claimed as exempt by the assessee. Per contra, the ld. Departmental Representative (for short ‘D.R’) relied on the orders of the lower authorities. It was submitted by the ld. D.R that as the disallowance under Sec. 14A was worked out by the A.O as per the methodology contemplated under Rule 8D, therefore, no infirmity as regards the quantification of the disallowance under Sec. 14A did emerge from his order. It was submitted by the ld. D.R that as the CIT(A) had rightly upheld the disallowance made by the A.O under Sec. 14A r.w. Rule 8D, therefore, the appeal filed by the assessee was devoid of any force and as such was liable to be dismissed. 6. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record. We find that our indulgence in the present appeal has been sought for adjudicating as to whether the quantification of P a g e | M/s Speed Tax Private Ltd. Vs. DCIT-2(3) the disallowance under Sec. 14A made by the A.O, which thereafter had been sustained by the CIT(A) is right in law, or not. We find that it remains as a matter of fact that the assessee during the year under consideration had earned exempt dividend income of Rs.86,528/. The A.O while framing assessment had re-worked out the disallowance under Sec. 14A at an amount of Rs.8,98,299/- by resorting to the machinery provisions contemplated under Rule 8D for computing the disallowance. We have deliberated on the contentions of the assessee in the backdrop of the facts of the case and find substantial force in the same. We are of the considered view that the issue that the disallowance of expenditure under Sec. 14A of the Act has to be worked out in the backdrop of the exempt income earned by the assessee and cannot be allowed to exceed the same had been deliberated upon by the Hon’ble High Court of Delhi in the case of Joint Investment Pvt. Ltd. Vs. CIT (2015) 372 ITR 0694 (Delhi). The Hon’ble High Court being of the view that the disallowance of expenditure under Sec. 14A of the Act has to be worked out in the backdrop of the exempt income of the assessee had held as under:- “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.”