DCIT CIR 13(2)(2), MUMBAI vs. NENSHI L. SHAH, MUMBAI

O R D E R Per G Manjunatha, AM : This appeal filed by the revenue is directed against the order of CIT(A)-21, Mumbai dated 18-07-2016 and it pertains to AY 2012-13. The revenue has raised the following grounds of appeal:-

1. “Whether, on the facts and circumstances of the case and in law, the Ld. CIT (A) erred in restricting the disallowance u/s.14A r.w.Rule 8D from Rs.38,01,190/- to Rs.3,36,322/-, in spite of the facts that disallowance under Rule 8D(2)(ii) has been rightly made by the AO as well as by the assessee though there is difference in quantum but not in principle.

2. Whether, on the facts and circumstances of the case and in law, the Ld. CIT (A) erred in restricting the disallowance u/s.14A r.w.Rule 8D from Rs.38,01,190/- to Rs.3,36,322/-, in spite of the facts that the assessee failed to prove nexus between the investments in shares and its source being interest free funds.

3. The appellant prays that the orders of the CIT (A) on the grounds be set aside and that of the Assessing Officer be restored.”

2. The brief facts of the case are that the assessee is an individual, filed his return of income for the AY 2012-13 on 31-10-2012 declaring total income of Rs.97,59,530. The case was selected for scrutiny and notices u/s 143(2) and 142(1) of the Act were issued. In response to notices, the authorized representative of the assessee attended from time to time and filed the details, as called for. During the course of assessment proceedings, the AO noticed that the assessee has huge investments in shares and also claimed interest expenditure of Rs.1,26,43,992 in the P&L account. Therefore, called upon the assessee to justify why disallowance u/s 14A r.w.r. 8D should not be made. In response, the assessee, as per order sheet noting dated 02-03-2015 submitted that in the computation of income, he has disallowed interest of Rs.13,17,286.

However, stated that there is a calculation mistake and the correct disallowance to be made u/s 14A r.w.r 8D is Rs.24,83,903. The AO, considering the explanation of the assessee observed hat though the assessee claims to have investment in shares out of its own funds, failed to prove one to one nexus between investment and its own funds. It is also an admitted fact that the assessee has paid huge interest. In the absence of any co-relation between investment and own funds and also the fact that there is no requirement of earning exempt income for disallowing expenditure incurred in relation to the exempt income, invoked rule 8D and worked out disallowance of Rs.38,01,190.

In the process, the AO has taken support from the decision of Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg Co Ltd 234 CTR 1 and ITAT, Delhi Special Bench in the case of Chemivest Ltd vs ITO 317 ITR 86 (Del)(SB).

Aggrieved by the assessment order, assessee preferred appeal before CIT(A).

7. It is seen that this is not a case where there is no exempt income. However, from details filed, it is seen that the investments in shares have been made in earlier years and not in current year. Further there is interest income as well as interest expenses and net interest income is offered to tax. Thus, the allocation of interest in Rule 81)(2)(ii) is not warranted in this case. There is nothing to indicate that the investments are strategic. The appellant is not reflecting the investments as business assets which will give rise to business income on its sales and not long term capital gains exempt from tax. If these were strategic investments, the appellant should be willing to accept these as current investments as business assets. The disallowance is therefore restricted to Rs 3,36,322/- as per Rule 8D(2) (iii).”

6. Having heard the Ld.DR, we find that the assessee has paid interest of Rs.1,26,43,992. At the same time, the assessee has earned interest income of Rs.1,29,66,95. We further notice that the assessee has disallowed Rs.13,17,286 in computation of total income. Thus, in total assessee has offered to tax net interest income of Rs.15,28,223. Therefore, we are of the view that once facts on record clearly indicates that the interest expenditure incurred by the assessee is less than the interest income earned in the relevant financial year, the AO was incorrect in coming to the conclusion that interest expenditure incurred by the assessee is towards investment in shares. Hence, we are of the view that the AO was erred in disallowing interest by invoking Rule 8D(2)(ii); however, the facts remain that though the assessee has suo moto disallowed interest of Rs.13,17,286, the AR of the assessee has agreed before the AO that actual disallowance to be made u/s 14A r.w.r. 8D(2) is at Rs.24,83,904. This fact has been ignored by the Ld.CIT(A) while deleting addition made by the AO towards interest disallowance u/s 14A r.w.r.8D(2). Therefore, we are of the view that the issue needs to be re-examined by the AO in the light of the fact that the AR of the assessee has admitted for disallowance of Rs.24,83,904 towards interest, hence, we set aside the issue to the file of the AO and direct him to consider

the issue after affording an opportunity of hearing to the assessee.