ACIT, CHENNAI vs. EL FORGE LIMITED, CHENNAI

This appeal filed by the Revenue is directed against the order of the Commissioner of Income Tax (Appeals) 6, Chennai dated 17.03.2016 relevant to the assessment year 2010-11, wherein, the only effective ground raised in the appeal of the Revenue is that the ld. CIT(A) has erred in restricting the disallowance under section 14A of the Income Tax Act, 1961 [“Act” in short] to the exempt income earned by the assessee.

Brief facts of the case are that the assessee is engaged in the business of manufacturing rough steel forgings and filed its return of income on 09.10.2010 admitting a loss of ₹.9,25,93,975/- under normal provisions and a loss of ₹.2,74,63,801/- as per books of accounts. The return filed by the assessee was selected for scrutiny and notice under section 143(2) of the Act was issued and served on the assessee on 05.09.2011. In response thereto, the assessee filed all details. After considering the details filed by the assessee and on verification of the accounts as well as considering the submissions of the assessee, the assessment under section 143(3) of the Act was completed on 28.12.2012 by making various additions.

The assessee carried the matter in appeal before the ld. CIT(A) and raised two grounds with regard to disallowance of interest under section 201(1A) of the Act as well as disallowance under section 14A r.w.r. 8D. After considering the submissions of the assessee and by following High Court’s decision, the ld. CIT(A) partly allowed the appeal filed by the assessee.

On being aggrieved, the Revenue is in appeal before the Tribunal against restriction of disallowance made under section 14A r.w. Rule 8D. The ld. DR has submitted that even though the assessee, in a particular year, has not earned any exempt income, the expenditure component has to be determined as per the provisions of Rule 8D and liable to be disallowed. Therefore, the ld. CIT(A) was incorrect to restrict the disallowance to the extent of exempt income earned by the assessee.

On the other hand, the ld. Counsel for the assessee strongly supported the order passed by the ld. CIT(A) on this issue.

We have heard both sides, perused the materials available on record and gone through the orders of authorities below. From the balance sheet, the Assessing Officer has noticed that the assessee holds investments valued at ₹.4,71,04,000/- 9as per books.). Out of these investments, the assessee earned dividend income of ₹.523/- and claimed the income as exempt under section 10(34) of the Act. During the course of assessment proceedings, the assessee was asked to furnish investment details such as date of investment, source for making the investment and also to give full details of loans outstanding in order to ascertain whether any part of loan was utilized for investment purposes. However, the assessee has not furnished any details. From Schedule 16 to Profit and Loss account, the Assessing Officer has observed that the assessee has incurred expenditure towards interest on other loans to the extent of ₹.5,98,52,000/-. In the absence of breakup details of interest and investment, as per the provisions of Rule 8D, the Assessing Officer has determined the expenditure component towards investment at ₹.45,26,385/- and disallowed the same in the computation by following the decision of Mumbai Benches of the Tribunal in case of Sanchayita Mercantile Pvt. Ltd. v. ACIT 25 SOT 47(Mum). On appeal, the ld. CIT(A) restricted the disallowance to the extent of exempt income earned by the assessee. On perusal of the assessment order, we find that the Assessing Officer has determined the expenditure component as per the mode of computation provided under the provisions of Rule 8D since the assessee has failed to furnish the details with regard to investments. In view of the above facts and circumstances, we direct the assessee to file complete details with regard to the investment, whether made in subsidiaries or any borrowed funds have been utilized for investment or not before the Assessing Officer for verification. Accordingly, the Assessing Officer is directed to verify the details as may be filed by the assessee and decide the issue afresh in accordance with law after allowing an opportunity of being heard to the assessee. Thus, the ground raised