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Income Tax Appellate Tribunal, “D” BENCH : KOLKATA
Before: Hon’ble Shri Waseem Ahmed, AM & Hon’ble Shri S.S.Viswanethra Ravi, JM]
Per Waseem Ahmed, AM
This appeal by the Assessee arises out of the order of the Learned Commissioner of Income Tax(Appeals)-1, Kolkata [in short the ld CIT(A)] dated 29.01.2016 against the order passed by the DCIT, Circle-1(1), Kolkata [ in short the ld AO] under section 143(3) of the Income Tax Act, 1961 (in short “the Act”) dated 29.03.2014 for the Assessment Year 2011- 12.
The assessee has raised the following grounds of appeal:
1. For that on the facts and circumstances of the case the Ld. CIT(A) was wrong in not considering the ground no.1(a) in respect of disallowance u/s 14A being proportionate interest of Rs. 39,57,254.- under Rule 8D(ii) though submission was made. He was wrong in not giving any decision on the said ground.
2. For that on the facts and circumstances of the case the Ld. CIT(A) should have found that disallowance made under Rule 8D(ii) of Rs. 39,57,254/- is not disallowable in view of the facts and submission made before him and assessing officer.
3. For that the appellant craves leave to adduce and/or alter further ground/s before hearing of the appeal.
2. The only issue raised by the assessee is that the Ld. CIT(A) erred in not adjudicating the disallowances made by the AO u/s 14A read with Rule 8D(2)(ii) of the Income Tax Rules, 1962 on account of interest expenses.
3. Briefly stated facts are that the assessee is a limited company and engaged in manufacturing of engineering and trading of agro goods. The assessee, during the year has earned dividend income of Rs. 12,74,558/- which was claimed exempted u/s 10(34) of the Act. However, the AO during the assessment proceedings observed that the assessee has not made any disallowance of expenses incurred in connection with such dividend income. Accordingly, the assessee was show caused for not making the disallowance of expenses against exempted income. The assessee in compliance with the notice submitted that the disallowance of expenditure can be made under rule 8D of the IT Rules, after considering only those investments which have given rise to the dividend income during the year.
4. However, the AO disregarded the contention of the assessee and made the disallowance after invoking the provision of section 14A read with Rule 8D as under: Sl No. Particulars Amount 1. Direct Expenses under Rule 8D(2)(i) Rs. NIL 2. Interest expenses under Rule 8D(2)(ii) Rs. 39,57,254/- 3. Indirect/administrative expenses Rs. 3,99,553/- Total Rs. 43,56,807/- In view of the above, the AO made the disallowance of Rs. 43,56,807/- and added to the total income of the assessee. 5. Aggrieved, assessee preferred an appeal before the Ld. CIT(A). The assessee before the Ld. CIT(A) submitted that no borrowed funds has been utilized in the investment of shares. Besides the above, the own fund of the assessee exceeds the amount of investment made in the shares. The amount of investment in the shares stands at Rs.13,23,68,527/- whereas its own fund stands for Rs.45,71,35,188/- as on 31.03.2011. The assessee also submitted that the indirect/administrative expenses can be disallowed only after considering those investments which have generated dividend income during the year as per the provision of section 14A read with Rule 8D of Income Tax Rules. The Ld. CIT(A) after considering the submission of the assessee allowed its appeal in part by observing as under: 2
“I have carefully considered the observation made by the AO in the assessment order and submission filed by the AR of the appellant. There is substance in the submission the argument of the AR of the appellant that disallowance of expenses to earn dividend can be made only to the extent of investment made in shares on which dividend is earned. The Ld. CIT(A), Central- II, Kolkata in the appellant in the case for assessment year 2008-09 decided the same issue, I also gone through the decision of Hon’ble ITAT, Kolkata in case of REI Agro Ltd.(Supra) it was held by the Hon’ble ITAT, Kolkata that not all investment became the subject matter of consideration when computing disallowance u/s 14A read with Rule 8D. The disallowance u/s 14A read with Rule 8D in relation to the income which does not form part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income. As mentioned above the value of investment from which the appellant company has earned dividend income was Rs. 12,74,558/- and thereof, in view the decision of the ITAT in case of REI Agro Ltd. and following the decision of the Ld. CIT(A), Central-II, Kolkata in the appellant own case for the assessment year 2008-09. The AO is directed to recomputed the amount of disallowance under Rule 8D(2)(ii) by considering only the investment made in such shares. However, the AO is directed to verify the value of investment in shares from which exempt income was earned while recalculating the disallowances. In view of the above, these grounds are partly allowed.”