ESSEL INFRAPROJECTS LTD,MUMBAI vs. DCIT CIR 7(3)(1), MUMBAI

The assessee is engaged in the business of project consultancy services and infrastructure activities. During the year under consideration, the assessee declared dividend income of ` 149.07 lakhs and claimed the same as exempt. However, the assessee did not make any disallowance u/s. 14A of the Act. When questioned, the assessee submitted that it did not incur any expenditure for earning exempt income. The Assessing Officer did not agree with the assessee and accordingly computed the disallowance as per provisions of Rule 8D, which worked out to ` 766.91 lakhs. The learned CIT(A) also confirmed the same and hence the assessee has filed this appeal.

Learned AR submitted that the own funds & interest free funds available with the assessee were more than the value of investments and hence no disallowance under rule 8D(2)(ii) out of interest expenditure is called for. He further submitted that the assessee has brought forward most of the investments in the preceding year and further he assessee has received dividend income from two companies and one mutual fund. He further submitted that it has made major investments in its subsidiary companies. Accordingly, he submitted that the disallowance out of administrative expenditure should not have been computed as per Rule 8D(2)(iii) of the I.T. Rules.

On the contrary, learned Departmental Representative supported the order passed by the learned CIT(A).

We heard the parties and perused the record. We noticed from the financial statements that the own funds available with the assessee was ` 276.02 crores and ` 233.64 crores respectively as on 31.3.2009 and 31.3.2008. The value of investments available with the assessee stood at ` 226.54 crores and ` 198.10 crores as on 31.3.2009 and 31.3.2008 respectively. Admittedly, the interest free fund available with the assessee is more than the value of investments and hence, as per decision rendered by Hon'ble Bombay High Court in the case of HDFC Bank Ltd. (366 ITR 505), no disallowance is called for from out of interest expenditure. We noticed that the Assessing Officer has disallowed a sum of ` 664.08 lakhs out of interest expenditure and, in view of the foregoing discussions, the same is liable to be deleted. Accordingly, we set aside the order passed by the learned CIT(A) on this issue and direct the Assessing Officer to delete the disallowance of ` 664.08 lakhs made under rule 8D(2)(ii) out of interest expenditure.

With regard to the disallowance of administrative expenses, we noticed that the assessee, during the year under consideration has received dividend income only from two companies and one mutual fund. We further noticed

In the result, appeal filed by the assessee is partly allowed.