M/S SPAN HOLDINGS PVT. LTD.,NEW DELHI vs. ACIT, NEW DELHI

O R D E R PER PRASHANT MAHARISHI, A. M. This is an appeal filed by the assessee against the order of the ld CIT(A)- 1. XII, New Delhi dated 11.11.2013 and CIT(A) –XI, New Delhi for the Assessment Year 2009-10 confirmation of disallowance of Rs. 708469/- u/s 14A of the Act read with Rule 8D. The solitary issue raised in this appeal is confirmation of disallowance of the ld CIT(A) u/s 14Aapplying rule 8D of the Income tax Rules 1962. The assessee has raised the following grounds of appeal: “1. The CIT [A] has erred in confirming the disallowance of Rs7,08,469/- made by the learned AO under Rule 80 read with Section 14A of the Income Tax Act 1961

2. The CIT [A] has erred in confirming the disallowance u/s 14A made by the AO by mechanical application of Rule 8D without finding any fault in the earlier disallowance made by the CIT (A) in preceding appeals or in the later workings furnished by the Assessee.

3. That both the authorities below have not been able to find any specific fault in the allocation made by the appellant or the basis 4. interest charged u/s 234B is wrong 5. Interest withdrawn u/s 244A is wrong” 2. The brief facts of the case are that the assessee is a private limited company, filed its return of income on 30.09.2009. During the year it has earned dividend income of Rs. 8989455/- and the assessee did not make any disallowance u/s 14A of the Act. Therefore, the ld Assessing Officer raised the above query and with respect to that the assessee submitted that the activity of investment does not involve incurring of any specific or substantial expenditure and further there is no basis for justification of composite expenditure for disallowance. The ld Assessing Officer did not accede to the request of the assessee and made a disallowance u/s 14A of Rs. 708469/- applying Rule 8D of the Income Tax Rules 1962. The assessee carried the matter before the ld CIT(A), who in turn 3. confirmed the above disallowance and therefore the assessee is in appeal before us.

4. The ld AR submitted before us that it has substantial profit and share capital as well as reserve therefore it has substantial interest free funds available with it for investment in tax free income earning securities. In nutshell, it does not have any interest bearing borrowing; therefore no disallowance can be made on account of interest expenditure. He further submitted that in the past i.e. Assessment Year 2008-09 the ld CIT(A) has reduced the disallowance to Rs. 1 lakh which was made by the Assessing Officer of Rs. 1031067/- and he further submitted that this issue may be set aside to the file of Assessing Officer to recompute the disallowance accordingly. Against this the ld DR submitted that rule 8D is compulsory when the 5. assessee offers an explanation that it has not incurred any expenditure for earning exempt income. He further submitted that merely because the ld CIT(A) has deleted the disallowance and retained that to only Rs. 1 lakhs it cannot be said that it was correct order, though may not be challenged. He therefore submitted that the claim of the assessee that it has sufficient interest free funds does not hold water after introduction of Rule 8D.

6. We have carefully considered the rival contentions. Apparently during the year the assessee has earned tax free income in the form of dividend and profit on sale of investment with respect to which no disallowance u/s 14A have been made. On an explanation before the ld Assessing Officer it was submitted that it has not borrowed any funds and it has enough non- interest bearing borrowings, therefore no interest disallowance can be made. We do not agree with the above proposition of Hon’ble Delhi High Court as held in case of CIT Vs. Taikisha Engineering India Ltd. 370 ITR 338, wherein it has been held that argument of interest free funds available with the assessee and therefore the nexus is to be proved by the revenue is not a valid argument when the provision of Rule 8D are applied. After application of rule 8D the onus lies on the assessee to prove the nexus of the interest bearing fund utilized for earning taxable income. In the present assessment year it is not the case of the assessee that Rule 8D is not applicable in this year. Honorable Delhi high court in that decision has held that :-

“19. However, the decisions relied upon by the Tribunal in the case of Tin Box Co. (supra), Reliance Utilities and Power Ltd. (supra), Suzlon Energy Ltd. (supra) and East India Pharmaceutical Works Ltd. (supra) could not be now applicable, if we apply and compute the disallowance under rule 8D of the Rules. The said rule in sub-rule (2) specifically prescribes the mode and method for computing the disallowance under section 14A of the Act. Thus, the interpretation of clause (ii) to sub- rule (2) of rule 8D of the Rules by the Commissioner of Income-tax (Appeals) and the Tribunal is not sustainable. The said clause expressly states that where the assessee has incurred expenditure by way of interest in the previous year and the interest paid is not directly attributable to any particular income or receipt then the formula prescribed would apply. Under clause (ii) of rule 8D(2) of the Rules, the Assessing Officer is required to examine whether the assessee has incurred expenditure by way of interest in the previous year and, secondly, whether the interest paid was directly attributable to a particular income or receipt. In case the interest paid was directly attributable to any particular income or receipt, then the interest on loan amount to this extent or in entirety, as the case may be, has to be excluded for making computation as per the formula prescribed. Pertinently, the amount to be disallowed as expenditure relatable to exempt income, under sub rule (2) is the aggregate of the amount under clause (i), clause (ii) and clause (iii). Clause (i) relates to direct expenditure relating to income forming part of the total income and under clause (iii) an amount equal to 0.5 per cent. of the average amount of value of investment, appearing in the balance-sheet on the first day and the last day of the assessee has to be disallowed.”