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Income Tax Appellate Tribunal, PUNE BENCH “SMC”, PUNE
Before: SHRI D. KARUNAKARA RAO, AM
आदेश / ORDER PER D. KARUNAKARA RAO, AM
This appeal filed by the assessee is against the order of CIT(A)-1, Pune, dated 26-09-2016 for the A.Y. 2013-14.
The abridged grounds raised by the assessee are extracted as under :
“1. The Ld. CIT(A) erred in confirming disallowance of interest of Rs.16,01,364/- u/s. 14A r.w.r. 8D. 2. The Ld. CIT(A) erred in confirming disallowance of indirect expenditure of Rs.1,51,918/- u/s.14A r.w.r. 8D.
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Without prejudice, the assessee that if at all, any disallowance is warranted u/s.14A, the same should be restricted to the exempt income earned of Rs.11,347/-. 4. The Ld.CIT(A) erred in confirming an addition of Rs.68,053/- on account of interest income without appreciating that no such addition was warranted. 5. The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal.”
Briefly stated relevant facts include that the assessee is an
individual and is a doctor (Gynaecologist) by profession. Assessee filed
the return of income on 30-09-2013 declaring total income of
Rs.9,27,183/-. AO notice that assessee received interest from Cosmos
Cooperative Bank amounting to Rs.68,053/- and did not offer the
same for taxation. On perusal of the balance sheet, AO noticed that
assessee made investment in shares worth of Rs.2,93,39,573/- out of
total interest free funds of Rs.3,06,43,617/-. Assessee further debited
a sum of Rs.73,14,801/- to the profit and loss account towards
interest on capital. Eventually, at the end of assessment u/s.143(3) of
the Act, AO made couple of additions, i.e. (1) addition on account of
investment u/s.14A of the Act amounting to Rs.17,53,282/- ; and (2)
addition on account of interest received from Cosmos Cooperative
Bank amounting to Rs.68,053/-.
Aggrieved by the order of the AO, assessee contested these
additions before the First Appellate authority. Regarding the
disallowance of Rs.17,53,282/- made by the AO u/s.14A of the Act,
the CIT(A) upheld the action of the AO by observing as under :
“7. I have carefully considered the facts of the case as well as the reply of the appellant. In this case, the appellant claimed that shares of Oyester & Pearl Hospitals Pvt. Ltd. (ONP) was purchased for
3 ITA No.2958/PUN/2016 Avinash R. Phadnis
Rs.75,52,950/- from Phadnis Clinic Pvt. Ltd. (PCPL) out of loan of Rs.8 crores from Saraswat Coop. Bank Ltd. in F.Y. 2011-12 pertaining to A.Y. 2012-13. As the same was purchased out of business needs, section 14A is not applicable. This submission of the appellant is difficult to be appreciated as the appellant is a professional having professional income. He might be having interest in one or two companies but that in itself cannot prove commercial expediency as his professional interest cannot be treated like holding company required to maintain controlling interest in group companies. As far as appellant’s contention that disallowance should be restricted to dividend income earned, I do not find any merit in the submission as there is no provision to restrict the disallowance u/s.14A in the above manner. Accordingly, action of the AO in disallowing Rs.17,53,282/- is upheld and the ground is dismissed.”
Regarding the interest amount of Rs.68,053/- earned by the
assessee from Cosmos Cooperative Bank, the CIT(A) dismissed the
ground raised by the assessee by holding as under :
“9. I have carefully considered the facts of the case as well as reply of the appellant. The appellant claims that FD pertained to M/s. Phadnis Clinic Pvt. Ltd., however, the Bank erroneously put the name of the appellant and credited the interest in the appellant’s name. The appellant has not been able to demonstrate that the said F.D. has been reflected in the books of the said company and interest on the fixed deposit has also been offered in the return of the said company with evidence. Unless the same is demonstrated with evidence, the contention of the appellant cannot be accepted. Therefore, the submission of the appellant is rejected being devoid of merit and the ground is dismissed.”
Aggrieved with the order of CIT(A) confirming both the additions,
the assessee challenged the same before the Tribunal with the
aforesaid grounds above.
Before me, at the outset, Ld. Counsel for the assessee brought
my attention to Ground No.4 and submitted that the said ground is
not pressed considering the smallness of the issue. On hearing both
the parties, Ground Nos. 4 is dismissed as not pressed and Ground
No.5 is dismissed as general in nature.
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That leaves Ground Nos. 1 and 3 for adjudication and they
relate to the disallowance u/s.14A r.w.r 8D of the Act. It is the
submission of the Ld. Counsel for the assessee that consideration
various decisions on the subject, the disallowance may be restricted to
the exempt income included in the total income of the assessee for the
year under consideration. Mentioning that only Rs.11,347/- is the
exempt income earned by the assessee, making disallowance of
Rs.17,53,282/- u/s.14A r.w.r. 8D of the Act is not sustainable legally.
I heard both the parties on this issue. It is an undisputed fact
that the exempt income is only Rs.11,347/- whereas the disallowance
made by the AO is to the tune of Rs.17,53,282/-. On the faces of it
and considering the settled legal propositions, I find the disallowance
made by the AO is not legally sustainable. Various decisions are in
existence for the proposition that disallowance if any u/s.14A of the
Act should not exceed the exempt income which formed part of the
total income of the year under consideration. Considering these facts
and relying on the Hon’ble Bombay High Court in the case of Reliance
Utilities and Power Ltd. (supra), judgment in the case of CIT Vs.
HDFC Bank Ltd., 366 ITR 505 and the judgment of the Hon’ble Delhi
High Court in the said case Cheminvest Limited Vs. CIT 347 ITR 272
(Del.), I find it is obvious inference that assessee has adequate
interest free funds and assessee also earned profits in the current
year. All these interest free funds are sufficient enough to take care of
the exempt income yielding investments considering the principle of
presumption laid down by the various courts.
5 ITA No.2958/PUN/2016 Avinash R. Phadnis
Further, I find the Mumbai Bench of the Tribunal in the case of
M/s. Pest Control India Pvt. Ltd., Vs. DCIT and vice versa in ITA Nos.
5048 & ITA No.5608/Mum/2016, dated 31-10-2017 has restricted
the disallowance to the exempt income earned by the assessee. The
said finding of the Tribunal given in Para Nos. 7 to 11 is extracted
here as under :
“7. We have heard the rival submissions, perused the orders of the authorities below and the case laws relied upon. The Assessing Officer computed the disallowance u/s. 14A r.w. Rule 8D at ₹.38,43,918/- and the Ld.CIT(A) recomputed the disallowance at ₹.5,10,601/- which comprises of ₹.3,42,870/- under Rule 8D(2)(ii) and ₹ 1,67,731/- under Rule 8D(2)(iii). This calculation of the Ld.CIT(A) appears to be proper and justified.
Further, it has been held in various cases that the disallowance u/s. 14A r.w. Rule 8D cannot exceed the exempt income. The Hon'ble Punjab and Haryana High Court in the case of Principal Commissioner of Income Tax-I v. M/s Empire Package Pvt. Ltd in ITA.No. 415 of 2015 dated 12.01.2016, dismissed the appeal of the Revenue holding that there is no substantial question of law arise in the appeal on the following question raised by the Revenue: -
"Whether in the facts and circumstances of the case, the Hon'ble ITAT is justified in law to hold that the disallowance made under section 14A read with Rule 8D cannot exceed the exempt income, in the absence of any such restriction being there in the relevant section or rule?"
The Hon'ble High Court affirmed the order of the ITAT in holding that the disallowance u/s. 14A r.w. Rule 8D as worked out by the Assessing Officer is not in accordance with law for the reason that Assessing Officer has disallowed entire tax exempt income and this is not permissible in view of the judgment of the Hon'ble Delhi High Court.
The Hon’ble Delhi High Court in the case of Joint Investment Private Limited in ITA.No. 117/15 dated 25.02.2015 held that by no stretch of imagination can section 14A or Rule 8D be interpreted so as to mean that entire tax exempt income is to be disallowed.
Further, we find that considering the above two decisions the Coordinate Bench in the case of Sanghavi Exports International P. Ltd v. ACIT in ITA.No.3405/Mum/2015 dated 10.07.2017 held that disallowance should not be more than the dividend income by observing as under:
6 ITA No.2958/PUN/2016 Avinash R. Phadnis
We have perused the Assessment Order and find that the assessee earned exempt income of Rs. 1,70,000/- only during this Assessment Year and the Assessing Officer by invoking the provision of Section 14A made disallowance at Rs.54,66,813/-. The Hon’ble Delhi High Court in the case of Joint Investment Private Limited in ITA.No. 117/15 dated 25.02.2015 held that by no stretch of imagination can section 14A or Rule 8D be interpreted so as to mean that entire tax exempt income is to be disallowed. Similarly, Punjab and Haryana High court in the case of PCIT v. Empire Package Private Limited in ITA.No. 415/2015 held that disallowance should not exceed exempt income. In the case on hand since the assessee received dividend income of Rs.1,70,000/- as recorded in the Assessment Order the disallowance should not be more than Rs.1,70,000/-. Thus we direct the Assessing Officer to restrict the disallowance to the extent of dividend income i.e. Rs.1,70,000/- and delete the balance amount and compute the incomes accordingly.”
Thus, respectively following the said decisions, we direct the Assessing Officer to restrict the disallowance u/s. 14A r.w. Rule 8D to the extent of dividend income of ₹.1,83,000/- received for the Assessment Year 2012-13 and compute the income accordingly.”
Considering the above, in my view, the order of the CIT(A) on
this issue requires reversal on this issue. Accordingly, I direct the AO
to re-compute the disallowance made by the AO after granting
reasonable opportunity of being heard to the assessee. Further, the
AO shall consider the above cited legal proposition in the set-aside
proceedings. Thus, the ground Nos. 1 to 3 raised by the assessee are
allowed for statistical purposes.
In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced on 25th day of May, 2018.
Sd/- (डी.क�णाकरा राव/D. KARUNAKARA RAO) लेखा सद� / ACCOUNTANT MEMBER पुणे / Pune; िदनांक / Dated : 25th May, 2018. Satish
7 ITA No.2958/PUN/2016 Avinash R. Phadnis
आदेश की %ितिलिप अ'ेिषत / Copy of the Order forwarded to : अपीलाथ� / The Appellant. 1. ��थ� / The Respondent. 2. 3. The CIT(A)-1, Pune 4. The CIT-1, Pune िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, “एक-सद�” ब"च, 5. पुणे / DR, ITAT, “SMC” Bench, Pune. गाड% फ़ाइल / Guard File. 6.
आदेशानुसार/ BY ORDER,स
स(ािपत %ित //True Copy// Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune