DCIT, CIRCLE-4(2), KOLKATA, KOLKATA vs. M/S TRADE APARTMENTS LIMITED, KOLKATA

Per S.S. GODARA, JM This Revenue’s appeal for A.Y.2009-10, arises against the order of C.I.T.(A)- 6, Kolkata dated 17.06.2016 passed in Appeal No.415/CIT(A)-6/Kol/2015-16 reversing AO’s action disallowing proportinate interest and administrative expenditure of Rs.43,21,772/- and Rs.14,75,525/- respectively u/s 14A r.w.r.8D of the Income Tax Rules, 1962, in proceedings u/s 143(3) of the Income Tax Act, 1961 (Act).

2 ITA No.1813/Kol/2016 M/s Trade Apartments Ltd. A.Yr.2009-10 submission in which it was stated that expenses including interest of only Rs.82,83,964/- had been claimed as against which, interest income of Rs.66,44,110/ - was declared. The appellant on its own made a disallowance of Rs.16,39,854/- u/s 14A inclusive of net interest of Rs. 13,59,442/-. It was further contended as under:-

"It will therefore appear that the appellant had disallowed the entire expenses incurred during the previous year. The action of the AO in disallowing a sum of 14,75,525/- arbitrarily and mechanically without seeing that the appellant did not even claim deduction of expenses of Rs. 14,75,525/-. When there was no claim made by the appellant of even a single rupee as business establishmen expenses in the return filed, the AO was grossly unjustified in disallowing a sum of Rs.14,75,525/- over and above the sum of Rs. 2,80,412/-. The disallowance of Rs.14,75,525/- may therefore be deleted. In the present case, as stated hereinbefore, the appellant did not claim any interest expenditure or other expenses in its return filed and disallowed the entire expenses debited in its profit and loss account. The AO by mechanically applying the formula given in Rule 8D (2}(ii) and Rule 8D(2}(iii) disallowed a sum of Rs.57,97,297/- which was arbitrary and wrong. The appellant also submis that in the assessment the AO has computed under Rule 8D a sum of Rs. 57,97,297/- and disallowed the same u/ s. 14A. The said disallowance was over and above the disallowance of Rs. 16,39, 554/ - made suo moto by the appellant. In effect, the action of the AO results in double disallowance which is also not permissible in law. On these facts also the appellant submits that the disallowance of Rs.57,97,297/ - be deleted. The appellant therefore submits that the disallowance made by the AO under section14A ex-facie in excess of the expenditure actually incurred and claimed as deduction in arriving at the profits of the business. The appellant submits that the disallowance under Sec. 14A cannot exceed the actual claim of the assessee for the expenditure. The term "disallowance" in itself. means to disallow something what is claimed to be allowed. The AO cannot notionally assume and disallow imaginary expenditure which has never been incurred by the assessee. Section 14A of the Income-tax Act, 1961 read as follows: “For the purposes of computing the total income under this Chapter, no Deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. "

3 ITA No.1813/Kol/2016 M/s Trade Apartments Ltd. A.Yr.2009-10 Section 14A therefore provides for disallowance of expenditure incurred by the assessee. It does not provide for artificial enhancement of income by assuming incurrence of some presumptive expenditure. In the present case the common administrative expenditure incurred by the assessee and for which deduction was claimed, was Rs. 2,80,412/-. The disallowance, if any, under section 14A could not by any stretch of imagination exceed the common expenditure of Rs. 2,80,412/- incurred by the appellant. The AO in his impugned order without appreciating these facts arbitrarily computed disallowance under section 14A by mechanical application of Rule 8D(2)(iii)

The appellant further submits that in the appellant's own case for AY 2008-09, the jurisdictional Kolkata Tribunal in ITA No. 1277/Kol/2011 upholding the order of the Ld. CIT(A) held that disallowance under section 14A can come into play only out of expenses claimed for deduction and no further disallowance can be made. The Tribunal in this order held as under: "We have also noted that entire expenses incurred by the assessee have been offered for disallowance, and once that happens, nothing remains for further disallowance u/ s. 14A. The disallowance under section 14A can come into play only out of expenses claimed for deduction and expenses have been claimed for deduction, there cannot be any disallowance either. The conclusions arrived at by the CIT(A) are, therefore correct alld admit no interference by us. We, approve and confirm the order of the CIT(A). “

Similar view has also been expressed by the co-ordinate benches of Income-tax Appellate Tribunal at Delhi & Mumbai in the cases of Gillette Group Income Pvt. Ltd(ITA No. 267/ Del/2012) and Search Enviro Ltd(ITA No. 3464/ Mum/2011) respectively. Copies of these judgements are enclosed.

In view of the foregoing the appellant submits that the disallowance computed by the AO under Section 14A read with Rule 8D was grossly unjustified and bad in law. The very fact that the disallowance computed under Rule 8D resulted in a figure of Rs.57,97,297/- far in excess of Rs. 16,39,854/- being the actual expenditure incurred and claimed as deduction for the profits of the business shows the absurdity of the prescribed mode of computation of disallowance under Rule 8D. The appellant therefore prays that the disallowance made by the AO under section 14A read with Rule 8D deserves to be deleted in full. 3

4 ITA No.1813/Kol/2016 M/s Trade Apartments Ltd. A.Yr.2009-10

The appellant theefore submits that the disallowance of the sum of Rs. 57,97,297/- made u/s. 14A in the assessment is arbitrary and highly excessive and the same is liable to be deleted in full.”

4.1. I have considered the facts and the appellant's submissions. I find that the appellant has claimed total expenses of Rs. 82,83,964/ - including gross interest of Rs. 80,03,552/ Thus, expenses which could have been considered for disallowance under Rule 8D(2)(iii) could not have exceeded Rs. 2,80,412/-. The appellant has suo-moto disallowed this amount in its return of income but the AO has disallowed an additional amount of Rs. 14,75,525/ - although no such expenses have been incurred. Hence, the disallowance of Rs. 14,75,525/ - is deleted. As regards interest expenses, the net interest expenditure after reducing interest income of Rs. 66,44,110/- claimed by the appellant amounts to Rs. 13,59,412/-. The appellant has disallowed this amount u/s 14A as a part of the total disallowance of Rs. 16,39,854/-. However, the AO made a disallowance of Rs. 43,21,772/- out of interest expenses under Rule 8D(2)(ii) over and above the isallowance made by the appellant on the basis of the gross interest claim of Rs.80,03,552/-. It is the stand of the appellant that only net interest expenditure should be the basis of the disallowance. In the appellant's own case in ITA No.1277 /Kol/2011 for the A.Y. 2008-09, the Hon'ble ITAT, Kolkata has held in its order dated 30.03.2012 that there cannot be any disallowance under section 14A. The same view has been taken by Hon'ble ITAT, Kolkata in its order dated 06.03.2013 in ITA No. 1682/Kol/2011 in the case of Biswanath Pasari v ACIT, Circle-34, Kolkata after referring to the above decision andthe judgement of Hon'ble Calcutta High Court in the case of ISG Traders Ltd. v CIT(2001-TIOL - 621-HC-Kol). Respectfully following the decision of the Hon'ble Tribunal in the appellant's own case for A.Y. 2008-09 and the other judgements, it is held that only net interest can be considered for disallowance under Rule 8D(2)(ii). Since the appellant has already disallowed the entire net interest of Rs.13,59,442/-, no further disallowance of interest was called for. Hence, the disallowance of interest of Rs. 43,21,772/- made by the AO is also deleted.”

5 ITA No.1813/Kol/2016 M/s Trade Apartments Ltd. A.Yr.2009-10 record that the ld. Coordinate Bench (supra) in assessee’s own case has held that such a disallowance is to be made on “netting “ formula. The assessee has already disallowed entire net interest expenditure of Rs.13,59,442/- on the very lines. The said co-ordinate bench further concludes regarding administrative expenditure that the same would be exigible to disallowance if only claimed as deduction and not otherwise. Learned DR is unable to refer to any material indicating such expenditure actually claimed as incurred. We therefore adopt judicial consistency in the impugned assessment year as well to confirm the CIT(A)’s findings under challenge. Revenue’s sole substantive grievance is declined.

Order pronounced in the Court on 02.05.2018.

Sd/- Sd/- [M.Balaganesh] [ Satbeer Singh Godara ] Accountant Member Judicial Member

Dated : 02.05.2018. [RG Sr.PS]

Copy of the order forwarded to: