PARRY ENTERPRISES INDIA LTD.,CHENNAI vs. JCIT, CHENNAI

PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER:

This is an appeal filed by the assessee against the Order dated 30.06.2016 & 24.06.2016 of Commissioner of Income Tax (Appeals)-3, Chennai, in for the AY 2009-10 & ITA No.80/2014-15/CIT(A)-3 for the AY 2011-12 respectively. Both appeals are involved common issue of disallowance u/s14A r.w.r. 8D of Income Tax Rules. Since the common issues are involved in both the appeals the & 2698/Mds/2016 :- 2 -: appeals are clubbed and heard together and disposed off in a common order as under:

2.0 All the grounds of appeal are related to the disallowance made by the AO u/s.14A r.w.r.8D of Income Tax Act. During the assessment proceedings, the AO found that the assessee has made investments to the tune of Rs.1030.34 lakhs but did not offer any exempt income and no expenditure was disallowed by the assessee as per section 14A r.w.r. 8D of Income tax act. Therefore, the AO applied Rule 8D of Income Tax Rules and made the disallowance of Rs.8,84,422/- u/s 14A of Income Tax Act.

For the AY 2011-12, the assessee company earned dividend income of Rs.18,17,598/- and claimed it as exempted income. No expenditure has been debited to the Profit & Loss A/c relating to earning of dividend income. Therefore, the AO applied Rule 8D of Income tax Rules and disallowed the amount of Rs.10,53,304/- under Rule 8D(2)(ii) and Rule 8D2(iii).

3.0 Aggrieved by the order of the AO, the assessee went on appeal before the CIT(A) and the Ld.CIT(A) confirmed the addition made by the AO. Hence, the assessee filed the appeal before this Tribunal. & 2698/Mds/2016 :- 3 -:

4.0 Appearing for the assessee, the Ld.AR argued that the assessee has not made any investments out of the borrowed funds and hence no disallowance is required to be made under Rule 8D(2)(ii) of Income Tax Rules. He invited our attention to Page No.20 of Paper Book containing the account copy of Standard Chartered Bank and explained that sale proceeds of the shares were deposited in the Bank account and the same were invested in shares. The ld AR further stated that there was complete identification of borrowed funds and interest free funds. The assessee made the investments from the interest free funds available to the assessee. The assessee vehemently opposed the disallowance u/s.8D(2)(ii). Per contra, the Ld.DR argued that whether the assessee has borrowed the funds or not, it had incurred the expenses for the purpose of making investments such as administrative expenses, services of the staff etc. Therefore, the Ld.DR contended that even the funds are identifiable, the disallowance u/s. 14A r.w.rule 8D(2)(iii) is applicable.

Similarly, the Ld.DR argued that the assessee debited a sum of Rs.8,58,000/- towards the interest and no disallowance has been made by the assessee. Therefore, the Ld.DR of the view that interest expenditure has to be disallowed as per Rule 8D(2)(ii) of IT Act also and submitted that no interference is called for in the CIT(A)’s order.

5.0 We heard the rival submissions and perused the material placed before us. & 2698/Mds/2016 :- 4 -:

The assessee made the investments towards shares and mutual funds from the interest free funds available to the assessee. The assessee has maintained separate account and the investments are not made out of common pool of interest bearing funds. There was a complete identity of accounts for which the investments were made out of interest free funds.

This fact has not been controverted by the Ld.DR during the appeal hearing. Therefore, we hold that the provisions of Rule 8D(2)(ii) does not apply in the assessee’s case. Accordingly, the addition made by the AO on account of interest as per Rule 8D(2)(ii) is deleted and the order of the lower authorities are set-aside on this issue.

5.1 The next issue is related to the disallowance of expenditure related to the dividend income. It is not disputed fact that the assessee has made the investments in earning exempted income but no expenditure has been disallowed by the assessee. The assessee has to incur various expenses for making the investments in shares, but no expenditure has been disallowed by the assessee. This fact has not been controverted by the Ld.AR during the appeal hearing. Therefore, we hold that though the disallowance u/s.14A r/w Rule 8D(2)(ii) is not applicable, disallowance under Rule 8D(2)(iii) is still applicable in the assessee’s case. Therefore, we uphold the order of the Ld.CIT(A) to the extent of disallowance related Rule 8D (2)(iii) of income tax rules. Accordingly, the appeals of the assessee is partly allowed. & 2698/Mds/2016 :- 5 -:

6.0 In the result, the appeal of the assessee for both the Assessment years are partly allowed.