DCIT (LTU), DELHI vs. M/S. MAWANA SUGARS LTD., NEW DELHI

1. On the facts and the circumstances of the case and in law, the learned ,Commissioner of Income Tax(Appeals) has, erred in restricting the disallowance made u/s 14A of the I.T. Act from 1,84,75,469/- to Rs. 16,78,600/-

The facts in brief are that the assessee company is engaged in the business of manufacturing and sale of industrial chemicals and manufacture and sale of sugars and power. The assessee company filed its e-return declaring loss of Rs. 51,32,78,189/- on 29.09.2010 which was processed u/s 143(1) of the Income-tax Act, 1961 (for short “the Act”). Subsequently, notices under section 143(2) & 142(1) of the Act were issued and assessment was completed at loss of Rs. 47,61,82,321/- after making additions for disallowance of interest of Rs. 1,86,20,400/- and disallowance under section 14A of the Act amounting to Rs. 1,84,75,469/-. The learned Commissioner of Income-tax (Appeals), following the orders of his predecessor in assessment years 2008-09 and 2009-10 deleted the addition for disallowance of interest and allowed part relief to the assessee against the disallowance made under section 14A of the Act. Aggrieved with the relief granted to the assessee against the disallowance under section 14A of the Act, the Revenue is in appeal before the Tribunal raising the grounds as reproduced above.

The learned Senior Departmental Representative supporting the order of the Assessing Officer submitted that the disallowance made under section 14A might be sustained. 4. On behalf of the assessee, none represented. 5. We have heard learned Sr. Departmental Representative and perused the material on record including the orders of the authorities below. The facts in respect of issue in dispute are that the Assessing Officer observed investment in assets amounting to Rs. 2,774.70 lacs which could generate tax 14A of the Act should not be made in the case of the assessee. It was submitted by the assessee that: (i) there was no dividend income during the year which had been claimed as exempt. (ii) The assessee had not incurred any direct expenditure in connection with maintenance of the investment. (iii) All the investments made were from own funds and no interest-bearing funds were utilized. (iv) Investment was made in the share of group companies. (v) The investments have been made by the assessee prior to 30/09/2006 i.e. the merger of erstwhile Mawana Sugars Ltd with the assessee company, however the loans increased due to merger and these loans are not anyway attributable to the investment of the company.

The Assessing Officer did not accept the contention of the assessee on the ground that no separate account for exempt income and the business income were maintained by the assessee and, therefore, it was not possible to accept that only assessee’s own funds were utilized in investments. Accordingly, invoking Rule 8D of the Income Tax Rules, he made disallowance of Rs. 1,70,86,869/- under Rule 8D(2)(ii) for proportionate interest expenses and Rs. 13,88,600/- under rule 8D(2)(iii) for administrative expenses at the rate of 0.5% of the average investments. Thus, he made total disallowance of Rs. 1,84,75,469/-under section 14A of the Act.

The learned Commissioner of Income-tax (Appeals), following the findings of his predecessor in assessment years 2008-09 and 2009-10, held that the investment under