KAMVAN CONSTRUCTION P. LTD,MUMBAI vs. ITO 3(2)(1), MUMBAI

O R D E R PER RAJESH KUMAR, A. M: This is an appeal filed by the assessee challenging the order of ld. CIT(A)-Mumbai, dated 1.6.2012, pertaining to the assessment year 2008-09.

3. Brief facts of the case are that the assessee filed return of income on 28.9.2008 declaring a total loss of Rs.14,74,150/-. The return was processed under section 143(1) of the Income Tax Act. Thereafter the case of the assessee was selected for scrutiny and the statutory notices u/s 143(2) and 142(1) were issued and served upon the assessee. We find from the record that the assessee has received dividend income of Rs.6,05,693/- which was claimed as exempt under the provisions of section 10(23)/(34) of the Act while not disallowing any expenditure attributable to earning of this exempt income. The assessee has total investment in shares and mutual funds Rs.1,60,17,613/-. The AO during the course of assessment proceedings came to the conclusion that the assessee has received exempt income whereas failed to disallow expenses attributable to earning of exempt income. Accordingly, the AO, vide ordersheet entry dated 23.11.2010 called upon the assessee to show cause as to why the disallowance u/s 14A r.w.r 8D of the rules should not be made, which was replied by the assessee by submitting that no expenditures were incurred on earning of exempt income. Ultimately, the AO framed the assessment under section 143(3) of the Act by assessing the total income of the assessee at an income of Rs.14,82,731/- by making disallowance of Rs.29,54,392/- by applying 0.5% of the average 14A r.w.r.8D of the Rules which worked out to Rs.80,023/- and interest disallowance of Rs.28,74,369/-. Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority who after considering the submissions and documents as submitted by the assessee also dismissed the appeal of the assessee by observing and holding as under : “4. I have considered the facts of the case and submissions of the assessee. Undisputedly the investment has been made in trading of shares and F&O and dividend income from all such investments is exempt from Income-tax and, therefore, it cannot be said that the borrowed funds have no nexus with the dividend income. It is immaterial whether dividend from a particular share is received or not, as long as the investment is in such securities from which if any dividend is received and the same is exempt then the interest is to be disallowed along with any other related expenditure and, therefore, A.O. has correctly disallowed the expenditure relating to interest paid. On account of other expenses the A.O. has correctly applied Rule 8D as the same is applicable from A.Y. 08-09 as has been held by Hon'ble jurisdictional Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. vs. CIT 328 ITR 81. Therefore, the ground of appeal of the assessee is rejected.”