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Before: Shri A. Mohan Alankamony & Shri Duvvuru RL Reddy
आयकर अपील�य अ�धकरण, “सी” �यायपीठ, चे�नई IN THE INCOME-TAX APPELLATE TRIBUNAL ‘C’ BENCH, CHENNAI �ी ए. मोहन अलंकामणी, लेखा सद�य एवं �ी धु�वु� आर.एल रे�डी, �या�यक सद�य के सम� Before Shri A. Mohan Alankamony, Accountant Member & Shri Duvvuru RL Reddy, Judicial Member आयकर अपील सं./I T.A. No. 45/Mds/2017 �नधा�रण वष�/Assessment Year:2012-13 M/s. Sakthi Finance Limited, The Deputy Commissioner of 62, Dr. Nanjappa Road, Vs. Income Tax, Coimbatore 641 018. Corporate Circle 1, Coimbatore. [PAN: AADCS0656G] (Appellant) (Respondent) अपीलाथ� क� ओर से / Appellant by : Shri Vikram Vijayaraghavan, Advocate ��यथ� क� ओर से/Respondent by : Shri Asish Tripathi, JCIT सुनवाई क� तार�ख/ Date of hearing : 29.08.2017 घोषणा क� तार�ख /Date of Pronouncement : 21.09.2017 आदेश /O R D E R PER DUVVURU RL REDDY, JUDICIAL MEMBER: This appeal filed by the assessee is directed against the order of the ld. Commissioner of Income Tax (Appeals) 1, Coimbatore dated 26.10.2016 for the assessment year 2012-13. The first ground raised in the appeal of the assessee is that the ld. CIT(A) has erred in confirming the disallowance made under section 14A of the Income Tax At, 1961 [“Act” in short] r.w. Rule 8D. The second and third grounds raised in the grounds of appeal have
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been withdrawn by making an endorsement in the grounds of appeal as “withdrawn” and not pressed.
Brief facts of the case are that the assessee is a non-banking finance company engaged primarily in financing for used vehicles. The assessee filed its return of income on 26.09.2012 declaring total income of ₹.14,05,00,940/- and paid taxes thereon after claiming MAT credit of ₹.96,68,609/- pertaining to the assessment years 2010-11 and 2011-12. The case of the assessee was selected for scrutiny and notice under section 143(2) of the Act was issued. In response thereto, the assessee filed all details as called for. After verification of accounts and considering the written submissions of the assessee, the assessment under section 143(3) of the Act was completed on 24.03.2015 by assessing the total income of the assessee at ₹.14,47,37,422/- after making various disallowances.
The assessee carried the matter in appeal before the ld. CIT(A) and challenged the disallowances made by the Assessing Officer. After considering the submissions of the assessee, the ld. CIT(A) partly allowed the appeal filed by the assessee.
Against the confirmation of disallowance of ₹.29,08,163/- made under section 14A r.w. Rule 8D, the assessee is in appeal before the Tribunal. The ld. Counsel for the assessee vehemently argued that against earning of
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dividend income of ₹.2,52,975/-, the Assessing Officer has exorbitantly determined the disallowance of ₹.29,08,163/- as probable expenditure, wherein, the interest expenditure has no nexus with earning of exempt income is the investments on which exempt income is earned out of own funds. Moreover, there was no fresh investment in the financial year relevant to the assessment year under consideration and also submitted that the disallowance under section 14A read with Rule 8D cannot be exceeded the exempt income earned by the assessee as has been held by various Courts including the Tribunal and prayed that the disallowance shall be restricted to the extent of exempt income earned by the assessee. On the other hand, the ld. DR relied on the orders of authorities below.
We have heard both sides, perused the materials available on record and gone through the orders of authorities below. During the financial year 2011-12 relevant to the assessment year 2012-13 under consideration, the assessee earned dividend income of ₹.2,52,975/-. Moreover, there was no fresh investment in the year under consideration. The assessee has not admitted any administrative/managerial expenses incurred for earning the above exempt income towards maintaining the investments, even though the investments were made in the earlier years. To determine the expenditure component, the Assessing Officer, by invoking provisions of section 14A r.w. Rule 8D worked out the disallowance towards expenditure for earning
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exempt income at ₹.29,08,163/- and brought the same to tax. Without giving any elaborate findings, the ld. CIT(A) confirmed the disallowance made under section 14A r.w. Rule 8D. In similar facts and circumstances, the Hon’ble Delhi High Court, in case of Joint Investments Pvt. Ltd. v. CIT 372 ITR 694, decided the issue in favour of the assessee and the head-notes are as under: Income-Expenditure incurred in relation to income not includible in total income-Disallowance-Assessee was engaged in diverse investment activities and in the course of its business derived income from rent, sale of investments, dividend and interest-For AY 2009-10, assessee had reported a loss of specified amount-Assessee declared tax exempt income in the form of dividend to the tune of Rs.48,90,000-Assessee volunteered Rs.2,97,440 as attributable u/s14A for the purpose of disallowance-AO on the basis of his own understanding of Rule 8D of the Income Tax Rules disallowed the sum u/s 14A read with Rule 8D- Assessee claimed that the entire tax exempt income of Rs.48,90,000 was lower than the disallowance-CIT(A) and ITAT upheld AO's order-Held, in case of CIT(A) v. Taikisha Engineering India Ltd., it was held by present court that in view of the peculiar wording of Section 14A (2) that computation or disallowance of the assessee, or claim that no expenditure was incurred for earning exempt income should be examined with reference to the accounts and only if the assessee's explanation was unsatisfactory, can the AO proceed further-In the present case, firstly it was not disclosed by the AO that the appellant/assessee's claim for attributing Rs.2,97,440 as a disallowance u/s 14A had to be rejected-Secondly, there appears to have been no scrutiny of the accounts by the AO an aspect which was completely unnoticed by the CIT(A) and the ITAT-Thirdly, an important anomaly which instant court cannot be unmindful of was that whereas the entire tax exempt income was Rs.48,90,000, the disallowance ultimately directed works out to nearly 110 percent of that sum, that is Rs.52,56,197- By no stretch of imagination can Section 14A or Rule 8D be interpreted so as to mean that the entire tax exempt income was to be disallowed-The window for disallowance was indicated in Section 14A, and was only to the extent of disallowing expenditure "incurred by the assessee in relation to the tax exempt income"-This proportion or portion of the tax exempt income surely cannot swallow the entire
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amount as has happened in this case-ITAT as well as the AO and CIT(A) had escaped the mandate of Section 14A(2)-Impugned order of the ITAT was set aside-Question of law was answered in favour of the assessee-Order of the AO was set aside-Initiation of penalty proceedings also was set aside- Matter was remitted to the AO for fresh consideration in accordance with the above directions – Assessee’s appeal allowed.” 6. In the present case, the assessee has earned dividend income of ₹.2,52,975/- and the Assessing Officer has determined the expenditure at ₹.29,08,163/-. By taking into consideration of the facts and circumstances of the present case and keeping in view of the above decision of the Hon’ble Delhi High Court, we are of the opinion that the Assessing Officer is not justified in making excessive disallowance and at the most the disallowance should be restricted to the extent of exempt income earned by the assessee. However, in this case, the assessee has also claimed deduction of expenditure on borrowed capitals amounting to ₹.65,37,79,000/-. It was the submission of the assessee that it has not made any fresh investment in the current year and whatever investments made by the assessee in the earlier years were out of assessee’s own surplus and reserve and thus, the interest expenditure has no nexus with earning of exempt income. The assessee has not filed the balance sheet, profit and loss account, etc. of the relevant assessment years to verify the complete facts. Accordingly, we direct the Assessing Officer to verify the accounts of the assessee of earlier assessment years as to whether the assessee had sufficient surplus and reserve for making investments in securities and decide the issue in
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accordance with law by keeping in mind the decision in the case of Joint Investments Pvt. Ltd. v. CIT (supra) after allowing an opportunity of hearing to the assessee. Thus, the ground raised by the assessee is allowed for statistical purposes.
In the result, the appeal filed by the assessee is partly allowed for statistical purposes.
Order pronounced on the 21st September, 2017 at Chennai.
Sd/- Sd/- (A.MOHAN ALANKAMONY) (DUVVURU RL REDDY) ACCOUNTANT MEMBER JUDICIAL MEMBER Chennai, Dated, 21.09.2017 Vm/- आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant, 2.��यथ�/ Respondent, 3. आयकर आयु�त (अपील)/CIT(A), 4. आयकर आयु�त/CIT, 5. �वभागीय ��त�न�ध/DR & 6. गाड� फाईल/GF.