HINDUSTAN PENCILS P.LTD,MUMBAI vs. ADDL CIT RG 2(1), MUMBAI
What did the Tribunal hold?
The Tribunal held that since the assessee's own funds were significantly higher than its investments, no disallowance of interest expenditure was warranted. This decision was based on the binding precedent of the Bombay High Court in CIT vs. HDFC Bank Ltd.
What were the facts?
The assessee received dividend income and claimed it as exempt. The Assessing Officer disallowed interest expenditure under Rule 8D(2)(ii) read with Section 14A, which was confirmed by the CIT(A). The assessee argued that its own funds exceeded its investments, negating the need for interest disallowance.
What were the issues?
Whether disallowance of interest expenditure under Section 14A is justified when the assessee's own funds exceed its investments. Whether this principle applies to disallowances for book profit computation under Section 115JB.
Which sections of the Income-tax Act were involved?
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “H” Bench, Mumbai
O R D E R Per B.R. Baskaran (AM) :-
The assessee has filed this appeal challenging the order dated 06-01- 2016 passed by Ld CIT(A)-4, Mumbai and it relates to the assessment year 2011-12. The assessee is aggrieved by the decision of Ld CIT(A) in confirming the disallowance made out of interest expenditure to the tune of Rs.43.43 lakhs u/r 8D(2)(ii) of the I.T rules read with sec. 14A of the Act.
We heard the parties and perused the record. The assessee is engaged in the business of manufacture and sale of Pencil items. During the year under consideration, it received dividend income of Rs.38.41 lakhs and claimed the same as exempt. The assessee made disallowance of Rs.9.59 lakhs from out of administrative expenses u/r 8D(2)(iii) r/w sec. 14A of the Act. The AO noticed that the assessee did not make any disallowance from out of interest expenditure as required under rule 8D(2)(ii) of the I.T Rules. Accordingly the AO computed the disallowance of interest expenditure at Rs.43.43 lakhs and disallowed the same u/s 14A of the Act while computing total income under normal provisions of the Act and also added the same to the book profit computed u/s 115JB of the Act. The Ld CIT(A) also confirmed the same and hence the assessee has filed this appeal.
Before us, the Ld A.R submitted that the own funds available with the assessee is in far excess of the amount of investments and hence no disallowance out of interest expenditure is called for as per the decision rendered by Hon’ble Bombay High Court in the case of CIT Vs. HDFC Bank Ltd (2016)(284 CTR (Bom) 409. He submitted that the very same principle will apply to the disallowance to be made while computing book profits u/s 115JB of the Act.
On the contrary, the Ld D.R supported the order of Ld CIT(A).
Having heard rival submissions, we are of the view that there is merit in the contentions of the assessee. A perusal of the Balance sheet filed in the paper book would show that the own funds available with the assessee stood at Rs.9152.64 lakhs and Rs.9026.57 lakhs respectively as on 31.3.2011 and 31.3.2010. The amount of investments on the same dates stood at Rs.1992.40 lakhs and Rs.1855.18 lakhs respectively. Thus we notice that the own funds available with the assessee are in far excess of the amount of investments in the beginning as well as at the end of the year. Hence, as per the binding decision rendered by Hon’ble Bombay High Court in the case of HDFC Bank (supra), no disallowance is required to be made out of interest expenditure. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the disallowance of interest expenditure made u/s 14A of the Act both under normal provisions as well as u/s 115JB of the Act.
In the result, the appeal of the assessee is allowed. Order has been pronounced in the Court on 20.11.2017.
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