ACIT, CIRCLE - 40, KOLKATA, KOLKATA vs. ASSAM BENGAL CARRIERS, KOLKATA

The assessee in the present case is a partnership firm which filed its return of income for the year under consideration on 31.07.2014 declaring a loss of Rs. 1,36,90,063/-. In the said return, dividend income of Rs. 14,52,314/- was claimed to be exempt by the assessee and a disallowance of Rs. 14,521/- was offered u/s 14A for expenses incurred in relation to the said exempt income. During the course of assessment proceedings, the assessee was required by the A.O. to furnish the computation of disallowance offered by the Assessment Year: 2014-15 Assam Bengal Carriers assessee u/s 14A. The assessee was also required by the A.O. to explain the treatment given by it to the substantial interest expenditure while computing the disallowance u/s 14A. In this regard, it was submitted by the assessee that the major amount of dividend income was earned by it from M/s. ABC India Ltd. and the investment in ABC India Ltd. being strategic one, there was hardly any expenditure required to be incurred for the same. This explanation of the assessee was not found acceptable by the A.O. According to him, investment decisions were for complex in nature and there was huge investment in shares and consequent blocking of funds. He also observed that the raising of capital involved cost and the element of such cost was represented by interest. He, therefore, did not accept the claim of the assessee that the dividend income could be earned by incurring no or nominal expenditure and by applying Rule 8D, he computed the expenses incurred by the assessee in relation to the exempt income at Rs. 1,36,16,682/-. Since the disallowance of Rs. 14,521/- was already offered by the assessee u/s 14A, the balance amount of Rs. 1,36,02,161/- was disallowed by the A.O. u/s 14A.

The disallowance made by the A.O. u/s 14A read with Rule 8D was challenged by the assessee before the Ld. CIT(A) and after considering the submissions made by the assessee as well as material available on record, the Ld. CIT(A) directed the A.O. to recompute the disallowance u/s 14A without taking into consideration the strategic investment made by the assessee in the shares of ABC India Ltd. and accordingly restricted the disallowance vide paragraph 4.3 of his impugned order which is reads as under:

I have heard the arguments of both the sides and also perused the relevant material available on record. As contended by the learned DR, the relief allowed by the Ld. CIT(A) to the assessee on the issue of disallowance u/s 14A by holding that such disallowance cannot be made in respect of strategic investment is contrary to the latest decision of the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. vs CIT (Civil Appeal Nos. 104 -109 of 2015 dated February 12, 2018). As held by the Hon’ble Supreme Court in the said case, the dominant purpose for which the investment into shares is made by the assessee is not the relevant factor in determining the issue relating to u/s 14A. It is held that when dividend income earned by the assessee is not taxable, the expenditure which is attributable to the dividend income has to be disallowed. It is held that when the strategic investment made in the shares generates dividend income which is not taxable, section 14A becomes applicable which is based on the theory of apportioning of expenditure between taxable and non-taxable of income. It is held that the expenditure incurred in acquiring the shares as strategic investment therefore will have to be apportioned depending on facts of each case. Relying on this decision Assessment Year: 2014-15 Assam Bengal Carriers of Hon’ble Supreme Court in the case of Maxopp Investment Ltd.. (supra), the learned DR has contended that this issue has to go back to the A.O. for re-computation of the disallowance of u/s 14A. The learned counsel for the assessee, on the other hand, has not disputed that the decision of Hon’ble Supreme Court in the case of Maxopp Investment Ltd.. (supra) is applicable and the expenditure for the purpose of disallowance u/s 14A in relation to the strategic investment has to be computed on proportionate basis as held by the Hon’ble Supreme Court. He, however, has contended that the Assessing Officer was required to record his satisfaction in the assessment order for not having accepted the disallowance offered by the assessee u/s 14A and in the absence of such satisfaction, the further disallowance made by him u/s 14A was not sustainable. He has contended that this issue was specifically raised by the assessee during the course of appellate proceedings before the Ld. CIT(A) but the same has not been considered and decided by him. I am unable to accept this contention of the learned counsel for the assessee. A perusal of the order of the A.O. clearly shows that the claim of the assessee of having earned the dividend income by incurring nominal expenditure was rejected by the A.O. and reasons for such rejection were also specifically given by him. In my opinion, the findings / observations recorded by the A.O. in this regard are sufficient to show his satisfaction and the contention raised by the learned counsel for the assessee by relying on the absence of such satisfaction cannot be accepted. I, therefore, set aside the impugned order of the Ld. CIT(A) on this issue and restore the matter to the file of the A.O. for re- computing the disallowance to be made u/s 14A in the light of the Assessment Year: 2014-15 Assam Bengal Carriers decision of the Hon’ble Supreme Court in the case of Maxopp Investment Ltd.. (supra).

In the result, the appeal of the revenue is treated as allowed. Order Pronounced in the Open Court on 24th May, 2018.