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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Dy. Commissioner of Income Tax, M/s Godavari Corporation Central Circle-4(1), Ltd. R. No. 1916, 19th Floor, Air Vs. Industry House, 159, Backbay India Building, Nariman Point, Reclamation, Churchgate, Mumbai-400 021 Mumbai-400 020 Appellant .. Respondent PAN No. AAACG1850D Revenue by .. Shri Sunil Kumar Agarwal, DR Assessee by .. Miss Aarti Vissanji, AR Date of hearing .. 10-04-2017 Date of pronouncement .. 10-04-2017 O R D E R PER MAHAVIR SINGH, JM:
This appeal by the Revenue is arising out of the order of CIT(A)-2, Mumbai, in appeal No. CIT(A)-2/IT/53/2011-12 dated 01-03-2016. The Assessment was framed by ITO ward No. 1(1)(4), Mumbai for the A.Y. 2009-10 vide order dated 17-11-2011 u/s 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).
The only issue in this appeal of Revenue is against the order of CIT(A) deleting the disallowance of expenses under section 14A of the Act read with Rule 8D of the Rules qua exempted income claimed by assessee. For this Revenue has raised following two grounds: -
"1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A), Mumbai erred in estimating disallowance u/s 14A without appreciating the fact that Rule 8D is specifically inserted in the law to calculate disallowance on a logical and reasonable basis and same is also valid prior to insertion of Rule 8D, as same is reasonable basis."
M/s Godavari Corporation Ltd. AY:09-10 2. On the facts and in the circumstances of the case and in law, the IA. CIT(A), Mumbai erred in restricting disallowance u/s 14A to 2% of total exempt income and thereby computing adjusted total income under section 115A on revised value of disallowance u/s 14A."
Briefly stated facts are that the assessee company is engaged in the business of trading, investment and power generation. The assessee is following mercantile system of accounting. During the year under consideration the AO while framing the assessment noticed that the assessee has claimed dividend income of Rs. 25,18,274/- as exempt. According to the AO, the assessee has disclosed investment in balance sheet in quoted and unquoted shares at Rs. 54,76,37,054/-. According to AO, the assessee has debited various expenses on account of interest at Rs. 1,22,41,332/-and other bank charges but disallowed only a small amount of Rs. 3,38,840/- qua exempted income under section 14A of the Act read with rule 8D of the Rules. The AO was of the view that in view of the rule 8D the total disallowance should have been at Rs. 80,91,518/- and accordingly, balance was disallowed at Rs. 77,52,678/- because the assessee has already disallowed a sum of Rs. 3,38,840/-. The AO computed the income under section 115JB of the Act because the total income under the normal provisions comes to Rs. Nil where taxable profit under section 115JB of the Act comes to Rs. 12,22,928/-. Aggrieved against the disallowance of interest and other expenses relatable to exempted income at Rs. 77,52,678/-, assessee preferred the appeal before CIT(A), who restricted the disallowance at Rs. 25,18,274/- under the normal provisions as well as under the provisions of book profit under section 115JB of the act to the extent of exempt dividend income claimed by assessee at Rs. 25,18,274/-. For this the CIT(A) relied on the decision of the Hon'ble Delhi High Court in the case of Joint Investment P. Ltd v. CIT (2015) 372 ITR 694 (del) : -
“7.During the course of hearing, counsel for the petitioner had relied upon a decision of this Court in Commissioner of Income Tax VI v. Taikisha Engineering India Ltd., (ITA 115/2014, decided on 25.11.2014). The M/s Godavari Corporation Ltd. AY:09-10 court had, in that judgment, highlighted the necessity 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 is unsatisfactory, can the AO proceed further.
The Court in Taikisha Engineering (supra) pertinently observed: -“Thus, Section 14A(2) of the Act and Rule 8D(1) in unison and affirmatively record that the computation or disallowance made by the assessee or claim that no expenditure was incurred to earn exempt income must be examined with reference to the accounts, and only and when the explanation/claim of the assessee is not satisfactory, computation under sub Rule (2) to Rule 8D of the Rules is to be made.
We need not, therefore, go on to sub Rule (2) to Rule 8D of the Rules until and unless the Assessing Officer has first recorded the satisfaction, which is mandated by sub Section (2) to Section 14A of the Act and sub Rule (1) to Rule 8D of the Rules.”
In the present case, the AO has not firstly disclosed why the appellant/assessee’s claim for attributing `2,97,440/- as a disallowance under Section 14A had to be rejected. Taikisha says that the jurisdiction to proceed further and determine amounts is derived after examination of the accounts and rejection if any of the assessee’s claim or explanation. The second aspect is there appears to have been no scrutiny of the accounts by the AO an aspect which is completely unnoticed by the CIT (A) and the ITAT. The third, and in the opinion of this court, important anomaly which we cannot be unmindful is that whereas the entire tax Page 3 of 5
M/s Godavari Corporation Ltd. AY:09-10 exempt income is `48,90,000/-, the disallowance ultimately directed works out to nearly 110% of that sum, i.e., 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 is to be disallowed. The window for disallowance is indicated in Section 14A, and is 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 amount as has happened in this case.
For the above reasons, the impugned order of the ITAT is set aside. The question of law is answered in favour of the assessee. Consequently, order of the AO is set aside. The initiation of penalty proceedings also is set aside. The matter is remitted to the AO for fresh consideration in accordance with the above directions. The appeal is partly allowed.”
Aggrieved, revenue is in second appeal before Tribunal.
We have heard the rival contentions and gone through the facts and circumstances of the case. We find that the CIT(A) has restricted the disallowance to the extent of exempted income i.e. Rs. 25,18,274/- and this issue is covered by the decision of the Hon’ble Delhi High Court in the case of Joint Investment (supra). Respectfully following the same, we confirm the order of CIT(A) and this appeal of Revenue is dismissed.
In the result, the appeal of Revenue is dismissed. Order pronounced in the open court on 10-04-2017.