ITO, WD-2(3), KOLKATA, KOLKATA vs. M/S JALAN CEMENT WORKS LTD., KOLKATA

This appeal is preferred by Revenue against the order of CIT(Appeals)-I, Kolkata dated 18.12.2013 and the same is being disposed of along with Cross Objection (CO) filed by the assessee being CO No. 66/Kol/2014.

The assessee in the present case is a company which is engaged in the business of dealing in shares and financing. The return of income for the year under consideration was filed by it on 25.09.2009 declaring total income at NIL under the normal provisions of the Act and book profit at ₹3,45,410/- u/s. 115JB of the Act. In the said return, the dividend income of ₹18,06,644/- earned on share was claimed to be exempt by the assessee. However, no disallowance on account of expenditure incurred in relation to the said exempt income was made by the assessee as required by the provision of Sec. 14A of the Act. The AO, therefore worked out such expenses incurred by the assessee in relation to the earning of exempt income at ₹62,16,051/- by applying Rule 8D of the Income Tax Rule, 1962. However, keeping in view that the total expenditure incurred by the assessee including the interest was only to the extent of ₹46,96,495/-, the AO made a disallowance of ₹46,90,495/- u/s. 14A of the Act in the assessment completed u/s. 143(3) of the Act vide an order on 27.12.2011.

Against the order passed by u/s. 143(3), an appeal was preferred by assessee before CIT(Appeals) disputing the disallowance made by the AO u/s. 14A of the Act. During the course of appellate proceedings before CIT(Appeals) a detailed submission was made by the assessee in support of its case on the issue of disallowance u/s 14A of the Act which was forwarded by the CIT(Appeals) to the AO for his comments. In the remand report submitted to the CIT(Appeals), the AO offered his comments on the submission made by the assessee and when the said remand report was confronted by CIT(Appeals) the assessee, counter comments were also offered by assessee. Keeping in view the submission made by the assessee as well as the material available on record including remand report submitted by the AO and the counter comments offered by the assessee, CIT(Appeals) proceeded to decide the issue relating to the disallowance u/s. 14A of the Act vide para-3.3 and 3.3.1 of his impugned order which read as under:- & CO 66/Kol/2014 A.Y. 2009-10 ITO Wd-2(3) Kol. Vs. M/s Jalan Cement Works Ltd. Page 3 “3.3 The submissions of the Appellant and its rejoinder to the remand report of the AO have been considered. It is seen that the issue is regarding the computation of disallowance u/s. 14A read with Rule-8D. It is seen that the Appellant has placed reliance on the decision of Kolkata Tribunal in respect of non-computation of disallowance under Rule-14A in respect of Shares held as stock in trade. It has however been held in DCIT, Cir-6, Kolkata –vs- Gulshan Investment Co. Ltd after considering the decision of the Special Bench in Daga Capital by the jurisdictional ITAT that – ‘9. So far as the case before us is concerned as will be clearly discernible from the observations of the learned CIT(A) extracted earlier in this order, learned CIT(A) has upheld disallowance under section 14A in respect of even indirect expenditure, but he has merely held that the provisions of rule 8D do not come into play in this case as the shares are not held as ‘investments’. As learned counsel rightly contends the provisions of rule 8D can never be applied in a case where exempt income yield assets are not held as investments, and that the related asset, i.e. shares, having been held as stock in trade all along, there is no occasion to invoke rule 8D. There is no infirmity in this approach, canvassed by the assessee. Quite to the contrary of what learned Departmental Representative perceives to be advantageous to the Assessing Officer, in case the application of rule 8D was to be upheld, there would have been no disallowance at all since not only that no investments were held by the assessee, admittedly there are no direct expenses are incurred on earning of the dividends and as such in all the three segments of disallowance under rule 8D(2) i.e. 8D(2)(i), (ii) and (iii), there will be zero disallowance. As against this zero disallowance under rule 8D, the CIT(A) has upheld disallowance to the extent of Rs.1,57,227 in respect of indirect expenses attributed to the earning of dividends, and it has even the case of revenue that this disallowance for indirect expenses is unfair or unreasonable.

In view of the above discussions, while uphold the conclusions arrived at by the learned CIT(A), we also make it clear that, in our humble understanding, the provisions of Section 14A are indeed attracted whether or not the shares are held as stock in trade or as investments, even though the provisions of rule 8D(2)(ii) and (iii) cannot be invoked in such a case, and even though the provisions of rule 8D(2)(i) are much narrower in scope than the scope of Section 14A simplictor.’

We have heard arguments of both the sides and also perused the relevant material on record. It is observed that the disallowance made by the Assessing Officer u/s. 14A of the Act has been reduced substantially by the CIT(Appeals) on two grounds. Firstly, he held that the disallowance in respect of expenditure covered under Rule 8D(2)(ii) and (iii) of the IT Rules cannot be made u/s 14A of the Act in respect of share held by the assessee as stock-in-trade by relying on the decision of co- ordinate Bench of this Tribunal in the case of DCIT vs. Gulshan Investment Co. Ltd. (supra). As submitted by the Ld. counsel for the assessee, a similar view as taken by the Tribunal in the case of Gulshan Investment CO. Ltd. (supra) on this issue has been taken by the Hon'ble jurisdictional High Court in the case of CIT vs. M/s G.K.K. Capital Markets (P) Ltd. (ITAT No. 52 of 2015 dated 10.02.2017). This issue thus now stands covered by the said decision of Hon'ble jurisdictional High Court in favour of assessee and respectfully following the same, we uphold the impugned order of CIT(Appeals) directing the AO not to make the disallowance on account of expenditure covered under Rule 8D(2)(ii) & (iii) in respect of shares forming part of stock-in-trade.

As regards relief given by CIT(Appeals) in respect of disallowance made u/s. 14A of the Act by the AO in respect of interest vide para 3.3 & 3.3.1, it is observed that a specific finding has been given by CIT(Appeals) in his impugned order that the assessee-company had its own fund to the extent of ₹26.79 crores in the form of share capital and reserves and the same being more than the investment made in shares of ₹23.51 crores, the said investment was made by the assessee out of its own fund. There was thus no utilization of borrowed fund by the assessee-company for making investment in shares as found by the CIT(Appeals) and since this position, clearly evident from the copy of relevant balance-sheet placed on record is not disputed by the Ld. DR, we find no infirmity in the impugned order of CIT(Appeals) deleting the disallowance made by the AO on account of interest u/s. 14A of the Act. We therefore uphold the impugned order of CIT(A) restricting the disallowance of & CO 66/Kol/2014 A.Y. 2009-10 ITO Wd-2(3) Kol. Vs. M/s Jalan Cement Works Ltd. Page 6 ₹46,90,498/- made by the AO to ₹8,08,415/-[as re-computed by the AO while giving effect the order of CIT(Appeals)] and dismiss the appeal of Revenue.

At the time of hearing, Ld. counsel for the assessee has not pressed the solitary issue raised in the CO of assessee relating to the sustenance by the CIT(Appeals) of the disallowance made by the AO u/s. 14A partly. The CO filed by the assessee is accordingly dismissed as not pressed.