OLIVE BAR & KITCHEN P.LTD,MUMBAI vs. DCIT 13(1)(1), MUMBAI

This appeal has been filed by the assessee against the order dated 28/10/2016 passed by the Commissioner of Income Tax (Appeals)-21, Mumbai, for the assessment year 2012-13, whereby the Ld. CIT (A) has dismissed the appeal filed by the assessee against assessment order passed u/s 143(3) of the Income Tax Act, 1961 (for short ‘the Act’).

The brief facts of the case are that the assessee filed its return of income for the assessment year under consideration declaring the total income of Rs. 3,05,37,400/-. The return was processed u/s 143(1) of the Act. Since the case was selected for scrutiny notice u/s 143 (2) and 142(1) were issued and in response to the said notices the authorized representative appeared before the AO from time to time and filed details called for. It was noticed that assessee had made investments to the tune of Rs. 5,33,88,587/- and earned dividend income of Rs. 83,305/- and interest income of Rs. 84,759/-. Since, the 2 Assessment Year: 2012-13 assessee had claimed exemption in the computation of total income, AO the assessee to furnish the working of disallowance and further asked to show cause as to why the disallowance u/s 14A of the Act should not be made. The assessee submitted that the investments made are strategic investment for the purpose of acquiring control and not for the purpose of earning dividend income and since, no investment was made during the relevant assessment year no disallowance is required to be made u/s 14A of the Act. However, the AO rejecting the contention of the assessee worked out the disallowance u/s 14A of the Act at Rs. 2,68,943/-.

Aggrieved by the assessment order, the assessee challenged the same before the Ld. CIT (A). The Ld. CIT (A) after hearing the assessee confirmed the addition made by the AO and dismissed the appeal of the assessee. Against the said order, the assessee is in appeal before this Tribunal.

The assessee has preferred this appeal by raising the following effective grounds:-

Before us, the Ld. counsel for the assessee submitted that the assessee had made investments in shares of subsidiaries companies acquiring control and not for the purposes of earning dividend income, provisions of section 14A are not applicable in the assessee’s case. The Ld. counsel further submitted that the investments were made during the earlier years, however, no disallowance was made by the AO in scrutiny assessments u/s 143 (3) of the Act pertaining to the assessment year, 2009-10 and 2010-11. Alternatively, the Ld. counsel submitted that the appellant has earned dividend income only on shares of Soul Fry Bar and Kitchen Pvt. Ltd. and Moving Kitchen Pvt. Ltd., Therefore, the disallowance made under rule 8D (iii) should have been made on average investments of above shares on which dividend income was received during the assessment year. The Ld. counsel further relying on the decisions in the case of ACB India Ltd. Vs. ACIT (374 ITR 108), Delhi, M/s Uma Polymers Ltd. vs. DCIT and vice-versa, and others (Mumbai ITAT) and Delhi Special Bench decision in the case of AICT vs. Vireet Investments Pvt. Ltd. 154 DTR (Del) Special Bench, 241, submitted that as per 4 Assessment Year: 2012-13 the aforesaid decisions, disallowance u/s 14A cannot exceed the exempt income. The Ld. counsel further submitted that the impugned order is contrary to the findings of the Hon’ble Delhi High Court rendered in the case of Joint Investments Pvt. Ltd. vs. CIT 372 ITR 694 (Delhi), in which it has been held that disallowance u/s 14A cannot exceed the exempt income. Therefore, the Ld. CIT(A) has wrongly confirmed the addition made by the AO.

On the other hand, the Ld. departmental representative relying on the order passed by the Ld. CIT(A), submitted that since the addition has been made in accordance with the provisions of law, there is no merit in the appeal of the assessee.

We have heard the rival submissions and carefully gone through the orders passed by the authorities below as well as the cases relied upon by the assessee. The only issue raised by the appellant assessee is that the Ld. CIT(A) has wrongly confirmed the addition made by the AO u/s 14A read with Rule 8D the Income Tax Rules. We notice that the AO has computed disallowance @0.5% of the opening and closing balance of Rs. 5,37,88,577/- ignoring the fact that the investments were made in the earlier years and no fresh investment was made during the assessment year under consideration. The Ld. counsel has alternately submitted that the assessee has earned dividend income only on shares of Soul Fry Bar and Kitchen Pvt. Ltd. and Moving Kitchen Pvt. Ltd., therefore, the disallowance under rule 8D (iii) of the income Tax Rules can be made on average investment of above shares on which dividend income was received during the year. In the case of Joint Investments Pvt. Ltd. vs. CIT (supra), it has been held by the Hon’ble Delhi High Court that disallowance u/s 14A cannot exceed the exempt income. In the case of AICT vs. Vireet Investment Pvt. Ltd. (supra.) the Hon’ble Delhi Court has held that provisions of section 14A do not apply in computation of book profit u/s 115JB 5 Assessment Year: 2012-13 of the Act. However, we find that the AO has made disallowance in question without taking into consideration, the points raised by the assessee in the light of the judgments discussed in the foregoing para. Therefore, in our considered opinion, the Ld. CIT (A) has wrongly confirmed the disallowance made by the AO. We accordingly set aside the impugned order and restore the issue to the file of AO to decide the issue afresh in the light of the decision of the Hon’ble Delhi High Court rendered in Joint Investments Pvt. Ltd. vs. CIT (supra) after hearing the assessee. However, the AO is at liberty to verify the facts presented before the Tribunal while passing such order.