BHUPESH JAYATILAL JAIN,MUMBAI vs. ITO 9(3)(3), MUMBAI

Brief facts of the case are that the assessee filed return of income on 6.6.2011 declaring taxable income at Rs.8,83,530/-. The return was processed under section 143(1) of the Act and thereafter the scrutiny proceedings under section 143(2) and 142(1) were initiated against the assessee.. During the course of assessment proceedings, the AO found that the assessee has earned the dividend income of Rs.19,581/- which was claimed exempt under section 10 of the Act. The AO further observed that the assessee claimed interest expenses of Rs.26,90,063/- on borrowed funds. Therefore the AO was of the view that the provisions of section 14A read with rule 8D were applicable to the case of the assessee as the assessee has not made any disallowance under the said provisions. Finally the AO framed the assessment under section 143(3) of the Act on 14.2.2014 at an income of Rs.27,37,960/- by making an addition of Rs.8,42,946/- u/s 14A read with rule 8D of the IT Rules besides making other disallowances. Aggrieved by the order of the AO, the assessee preferred an appeal before the FAA, who dismissed the appeal of the assessee by observing and holding as under : “5.2 I have carefully considered the order of the AO. and the submissions of the appellant. It is noted that the AO had made addition u/s 14A of Rs. 8,42,946/- by applying rule 80. It was observed by the AO. that the assessee's average investments stands at <' 93,00,030/-. The effect of this position of the above investments would imply that the assessee had receivable exempt income. Therefore, although, there was no actual receipt of exempt income yet provisions of section 14A would come to the fore. Thus, the capacity to earn in exempt income based on maintenance of level of investment would also come under the ambit of section 14A In this regard it is noted that in the recent judgment in the case of Shankar Chemicals Works vs. DCIT [47 SO 121], the Hon'ble Ahmedabad Tribunal has held that, if any expenditure has been incurred for earning exempt income, same has to be disallowed even if there is no actual earning of any exempt income. If interest bearing borrowed funds are utilised for purpose of investment in shares and there is no receipt of dividend income or if there is only meagre dividend income, even then whole amount of interest expenditure incurred for this purpose will be subject to disallowance under section 14A because the same has been incurred for earning exempt income. Hence, the actual earning of exempt income is not relevant. In the earlier period, when dividend income was not exempt, interest expenditure incurred on borrowed funds used for investment in shares was held to be fully allowable expenses, even if, there was no actual receipt of dividend or insufficient/meagre amount of dividend income. The logic was that the entire expenditure has been incurred for earning taxable dividend income and hence, it is allowable, even if there is nil or small amount of dividend income. This aspect has been approved by various courts and hence, the same judgement supports this view also that even in case of 'nil' or small amount of dividend income, the entire interest expenditure incurred for making investment in shares is to be considered as expenditure incurred for earning exempt income and the same has to be disallowed under section 14A. It is noted that the Assessing Officer made disallowance u/s 14A of Rs.8,42,946/- The working of the disallowance of u/s 14A made by the Assessing Officer is in accordance with Rule 8D and in light of CBDT Circular NO.5/2014 dated 11 th February 2014 which categorically states that disallowance u/s 14A was possible even in cases where no income has been earned by the assessee that had been claimed exempt is found to be rightly made and the assessee's plea for application of other method is summarily rejected. In view of the above discussion and considering all the above facts, the addition of Rs. 8,42,946/- u/s.14A made by the Assessing Officer is found to be inorder and is upheld. Accordingly the grounds of appeal

4. We have heard the rival submissions and perused the material placed before us including the orders of authorities below and the case law relied upon by the assessee. Before us the ld.AR argued that in the present case the disallowance u/s 14A read with rule 8D in no case would exceed the amount of exempt income which in the present case was Rs.19,581/- in view of the decision in the case of M/s Daga Global Chemicals Pvt Ltd V/s ACIT in order dated 1.1.2015 and the decision of Kolkata Bench of the Tribunal in the case of DCIT V/s M.S.Trade Apartment Ltd in ITA No.1277/Kol/2011(AY-2008-09) dated 30.3.2012. We find that an identical issue has been decided by the Co- ordinate Benches of the Tribunal in favour of the assessee by holding that the amount of disallowance u/s 14A r.w.r 8D cannot be exceed the amount of exempt income. The operative part of the judgement of Kolkata Bench is reproduced below :

As learned CIT(A) has rightly observed, once there is no net interest expenditure, as is the case before us – upon setting off interest credited to profit and loss account, no part of interest debited can be disallowed as attributable to earning tax free dividend. The CIT(A) was thus quite justified in deleting the interest disallowance. We have also noted that entire expenses incurred by the assessee have been offered for disallowance, and once that happen, nothing remains for further disallowance u/s. 14A. The disallowance under section 14A can come into play only out of expenses claimed for deduction and expenses have been claimed for deduction, there cannot be any disallowance either. The conclusions arrived at by the CIT(A) are, therefore, correct and admit no interference by us. We, approve and confirm the order of the CIT(A)”.

In the present case before us, the exempt income is Rs.19,581/- and therefore, respectfully following the decision of the Kolkata Bench of the Tribunal , we hold that the disallowance in this case at the most would be equal to Rs.19581/-. Accordingly, we are inclined to set aside the order of the ld.CIT(A) and direct the AO to make the addition of Rs.19581/-.

In the result, the appeal of the assessee is partly allowed. Order pronounced in the open court on 31st Mar, 2017. Sd sd (महाविर स िंग /Mahavir Singh) (राजेश कुमार /Rajesh Kumar) न्याययक दस्य / Judicial Member ऱेखा दस्य / Accountant Member भुंफई Mumbai; ददनधंक Dated : 31.3.2017 SRL,Sr.PS