DOSHI HOUSING,CHENNAI vs. ITO, CHENNAI

O R D E R

PER D.S. SUNDER SINGH, ACCOUNTANT MEMBER:

1.0 This is an appeal filed by the assessee against the Order dated 31.08.2016 of Commissioner of Income Tax (Appeals)-4, Chennai, in ITA No.52/2015-16/A.Y.2012-13/ CIT(A)-4 for the AY 2012-13. :-2-:

2.0 All the grounds of the appeal are related to the disallowance made by the Assessing Officer under Section 14A of the Income Tax Act, 1961 (in short ‘the Act’). During the assessment proceedings, the Assessing Officer found that the assessee has received exempted income in the form of dividend and profit on sale of units of mutual funds and disallowed Rs.25,947/- u/s.14A of Income Tax Act. The assessee made total investment of ₹865.65 lakhs as on 31.03.2012 and contended that the assessee is having interest free funds to the extent of ₹2,541.73 lakhs from which investments are made, hence no disallowance u/s.14A of the Act is called for. The Assessing Officer not being satisfied with the explanation of the assessee disallowed a sum of ₹3,13,036/- u/s.14A r/w Rule 8D of the Income Tax Act. The assessee went to appeal before the CIT (Appeals) and the CIT (Appeals) confirmed the disallowance made by the Assessing Officer.

3.0 The assessee assailed for disallowance u/s14A without recording satisfaction by the A.O. As per Section 14A of the Act, the disallowance required to be made if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of total income. For ready reference, we extract Section 14A as under:

Expenditure incurred in relation to income not includible in total income24. 25 14A. 26[(1)] For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred27 by :-3-: the assessee in relation to27 income which does not form part of the total income27 under this Act.] 26[(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed28, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.

4.0 In the appellant’s case, the assessing officer in Para No.7clearly stated that “the circular is squarely applicable and the expenditure could not be ascertained correctly”. This clearly shows that the AO has applied his mind and not satisfied with regard to the correctness of the expenditure. Therefore we do not find any merit in the argument of the Ld.A.R. on this issue and the same is rejected.

5.0 The Ld.AR of the assessee reiterated the submissions made before the AO and the Ld.CIT(A). On the other hand, the Ld.DR relied on the lower authorities Order.

6.0 We heard the rival submissions and perused the material placed on record. We have gone through the case laws relied upon by the assessee. The assessee has received dividend income of ₹51,89,458/-. Though the assessee is having interest free funds, the assessee has borrowed the funds and invested from the common pool of funds and the assessee has paid the interest on borrowed funds. When the assessee has made investment from the common pool of funds without demarcating interest :-4-: bearing funds and interest free funds, though the assessee is having substantial sum of interest free fund, this Tribunal has consistently taken a decision that disallowance under Rule 8D (2) applies. The assessee relied on Bombay High Court judgment in the case of CIT v HDFC Bank Ltd relating to the assessment year 2001-02 to 2005-06. The Hon’ble Bombay High Court has rendered the judgment in relation to disallowance u/s14A but not considered the Rule 8D in the judgment stated supra, since the Rule 8D was introduced w.e.f. assessment year 2008-09. which was also rendered before introduction of Rule 8D of the Act. The case laws relied upon by the assessee are clearly distinguishable and the facts are not applicable in the assessee’s case. The Rule 8D of the Act was introduced with a clear intention to disallow the interest and expenditure relating to investment made pertaining to exempted income.

With the introduction of Rule 8D of the Act, it is mandatory to disallow the interest relatable to the investments made for earning the exempted income unless the assessee proves by transaction by transaction.

Therefore, we are of the considered opinion that disallowance under Rule 8D (2) applies in this case and we confirm the addition made by the Assessing Officer.

I.T.A. No.3175/Mds/2016 :-5-:

7.0 In the result, the appeal of the assessee is dismissed.

Order pronounced in the open court on 13th January, 2017 at Chennai. ("ड.एस. सु"दर "संह) (एन.आर.एस. गणेशन) (N.R.S. GANESAN) (D.S.SUNDER SINGH) लेखा सद"य/ACCOUNTANT MEMBER "या"यक सद"य/JUDICIAL MEMBER