DCIT, CC-XXVII, KOLKATA, KOLKATA vs. M/S SANGITA SECURITIES PVT.LTD., KOLKATA

This appeal by the Revenue is directed against the order of Commissioner of Income Tax (Appeals)-II, Kolkata dated 28.01.2014. Assessment was framed by DCIT, Central Circle-XXVII, Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 30.07.2013 for assessment year 2011-12. Shri Sallong Yaden, Ld. Departmental Representative represented on behalf of Revenue and Shri Ravi Tulsiyan, Ld. Authorized Representative appeared on behalf of assessee.

The facts in brief are that the assessee, a Private Limited Company is engaged in business of share trading and investments. The assessee, for the year under consideration filed its return of income dated 30.09.2011 showing DCIT CC-XXVII, Kol. Vs. M/s Sangita Securities Pvt. Ltd. Page 2 total income of ₹28,71,936/- which was processed u/s. 143(1) of the Act. Subsequently the case was selected under scrutiny and notice u/s 143(2) / 142(1) of the Act issued upon assessee. The assessment was framed u/s 143(3) of the Act by Assessing Officer at a total income of ₹1,76,58,706/- after making certain additions / disallowances.

First issue raised by Revenue in ground No. 1 and 2 is that Ld. CIT(A) erred in directing the Assessing Officer to work out the disallowance under Rule 8D of the Income Tax Rule, 1962 r.w.s.14A of the Act by taking into consideration only those investments which had yielded dividend income. 3.1 The assessee, in the year under consideration has declared dividend income for ₹27,59,496/- which was claimed exempted u/s. 10(34) of the Act. The assessee has disallowed a sum of ₹1,20,075/- in its computation of total income u/s. 14A rws Rule 8D of the IT Rules. The AO, during the course of assessment proceedings observed that the disallowance has not been made on the basis of Rule 8D of IT Rules. Accordingly, the AO sought clarification from the assessee. The assessee in compliance thereto submitted that the working of disallowance under Rule 8D of the IT Rules which shows total disallowance under Rule 8D(iii) of IT Rules for Rs.4,04,088/- only. It was also observed by AO that the disallowance has been worked out by assessee after taking into consideration only those investments which yielded the dividend income. However, AO disregarded the working of assessee by observing that all the average value of investments should be considered for making the disallowance. Accordingly, AO has disallowed the expense under the Rule 8D r.w.s 14A of the Act as detailed under:- Sl.No. Particulars of transactions Rule Amount (Rs) 1. direct expenses 8D(i) 21,987/- 2. interest expenses 8D(ii) 138,56,373/- 3. Administrative expenses 8D(iii) 9,37,485/- Aggrieved, assessee preferred an appeal before Ld. CIT(A). The assessee before Ld. CIT(A) submitted that AO has grossly erred in working out the interest of disallowance under Rule 8D(ii) of the Act. It is because the total DCIT CC-XXVII, Kol. Vs. M/s Sangita Securities Pvt. Ltd. Page 3 interest expense claimed by assessee of ₹72,44,454/- whereas AO has disallowed the interest expense for ₹138,56,373/-. The assessee further submitted that the AO erred in working out the average value of assets of ₹9,80,28,111/- whereas the same cannot be less than the average value of investment i.e. ₹18,74,97,093/-. The assessee also submitted that only dividend yielding investments will be taken into consideration for making the disallowance under Rule 8D of IT Rules. Accordingly, assessee worked the disallowance u/s 14A of the Act for ₹21,05,539/- and offered to tax. However, Ld. CIT(A) after considering the submission of assessee has granted relief in part by observing as under:- “5. I have considered the submission of the appellant and peruse the assessment order. I have also gone through the profit and loss account as well as the balance sheet for the relevant assessment year as well as the preceding assessment year. On perusal of calculation made by the AO in the assessment order with reference to the average value of assets, there appears to be an apparent mistake because he has calculated the value of the average assets at Rs.9,80,28,111/- whereas the average value of the investments was calculated at Rs.18,74,97,093/. The amount of investments is the part of the total assets in the balance sheet and hence the average value of the assets cannot be less than the average value of the investments As a result the AO has computed the disallowance under Rule 8D(2)(ii) on account of interest at Rs.1,38,56,373/- whereas himself has mentioned that total expenditure on account of interest payment was Rs.72,44,454/-. Thus, the disallowance under Rule 8D(2)(ii) cannot be more than the total expenditure on account of interest. On perusal of balance sheet as on 31.03.2010 and 31.03.2011, it is observed that while computing the average value of the assets, the AO has considered the figures of net current assets (after deducting current liabilities and provision) at Rs.4,62,29,040/- and Rs.14,98,27,183/- as per balance sheet as on 31.03.2011 and 31.03.2010 respectively and also ignored the value of investments which are separately recorded in the balance sheet. Thus, to arrive on the value of average assets, the AO has not taken correct figures as per the balance sheet. On facts, I agree with the view of the AO that in the case of appellant company the disallowance u/s 14A has to be made as per Rule 8D. However, there is calculation mistake in the value of average investment as mentioned above. Further, for the purpose of computation u/s. 14A as per Rule 8D, the AO has considered value of entire investments as per the balance sheet. But, the Hon'ble jurisdictional Tribunal in the case of REI Agro Ltd. (supra) has held that for the purpose of calculation of average value of investments, the value of only such investments has to be taken into consideration which has yielded exempt income in the relevant previous year and the entire value of investments cannot be considered for the same. In the course of appellate proceedings, the appellant submitted the calculation u/s. 14A as per Rule 8D which have been reproduced above. The said calculation has been made in DCIT CC-XXVII, Kol. Vs. M/s Sangita Securities Pvt. Ltd. Page 4 accordance with the ratio laid down by the Tribunal in the case of REI Agro Ltd. and as per the appellant disallowance u/s 14 read with rule 8D comes to Rs.21,05,539/-. In view of above facts, the AO is directed to recalculate the disallowance u/s. 14A read with Rule 8D in accordance with the decision of the ITAT in the case of REI Agro Ltd., and if the calculation made by the appellant at Rs.21,05,539/- is found to be correct, he is directed to restrict the disallowance u/s. 14A to that extent. The ground no. 2(a) is partly allowed and ground no. 2(b) is dismissed.”

Before us Ld. DR for the Revenue submitted that while passing appellate order Ld. CIT(A) has overlooked the provision has laid down by the Hon'ble ITAT in its Special Bench in the case of Cheminvest Investment Ltd. vs. ITO reported in 121 ITD 318 where it was held that all the investments whether yielding dividend or not should be taken into account for making the disallowance. He vehemently relied on the order of AO. On the other hand, Ld. AR for the assessee relied on the order of Ld. CIT(A).

We have gone through the rival submissions made by both the sides and order of lower authorities including the material available on record as well as judgments relied upon before us. The issue in the instant case is about the disallowances made by the AO under rule 8D read with section 14A of the Act. The ld CIT(A) confirmed the disallowance made by the AO but directed to consider only those investments which have yielded exempt income in the year under consideration. While doing so the learned CIT-A relied in the order of jurisdictional Tribunal in the case of REI Agro Ltd in ITA 1331/Kol/2011 order dated 19. 6.2013. Against the said direction Revenue has filed an appeal and submitted that the learned CIT-A has overlooked the ITAT special bench decision in the case of Cheminvest Ltd vs. ITO (2009) reported in 121 ITD 318 where it was held that for the working of disallowance all the investments whether earned exempted income and not have to be considered under the provisions of rule 8D read with section 14A of the Act.