M/S. SWAGAT TREXIM PVT. LTD.,KOLKATA vs. I.T.O., WARD - 3(1), KOLKATA (FORMERLY D.C.I.T., CC - 3(2), KOLKATA), KOLKATA

Brief facts of the case are that the assessee is a Private Limited Company, which filed its return of income under section (A.Y. 2011-2012) M/s. Swagat Trexim Pvt. Limited 139 of the Act declaring total loss of Rs.2,59,78,597/-. The assessment was completed under section 143(3) of the Act declaring total loss of Rs.2,59,76,598/-. Subsequently ld. Assessing Officer has observed that the assessee had earned exempt dividend income of Rs.4,50,239/- on its investment and the same was offered for tax. Thereafter ld. Assessing Officer added back the dividend income which was offered to tax by invoking the provisions of section 14A read with Rule 8D of the Act and proceeded to make disallowance of the entire investment. A notice under section 148 was issued. In response to the notice, the assessee requested to treat the original return filed on 29.09.2011 as the return filed under section 148. The assessment was completed under section 143(3) read with section 147 of the Act determining the total income of Rs.6,04,190/- under the normal provisions and Rs.6,60,776/- under section 115JB of the Act. Aggrieved by the assessment order, the assessee preferred an appeal before the ld. CIT(Appeals).

After considering the submissions made by the assessee, the ld. Addl./JCIT(Appeals) dismissed the appeal filed by the assessee.

On being aggrieved, the assessee preferred an appeal before the Tribunal raised the following issues:- “(1) That the ld. CIT(A) was wrong in confirming addition of Rs.5,92,707/- u/s 14A read with Rule 8D(iii) without finding any nexus of expenses for earning exempt income in an arbitrary manner. The company has earned only exempted dividend income of Rs.4,50,239/- for which no expenses were incurred. Thus, confirmation of said addition is unjustified and needs to be deleted.

The grievance of the assessee is that the ld. Assessing Officer as well as ld. Addl./JCIT(Appeals) were wrong in making disallowance of Rs.5,92,707/- under section 14A read with Rule 8D(iii). The assessee company has earned only exempt dividend income of Rs.4,50,239/- for which no expenses were incurred. The addition is unjustified and needs to be deleted.

The other grievance of the assessee is that the ld. Assessing Officer as well as ld. Addl./JCIT(Appeals) were wrong in making disallowance under section 14A read with Rule 8D while computing Book Profit of the assessee under section 115JB of the Act.

I have heard both the sides and perused the material available on record. With regard to the first issue is concerned, it was the submission of the assessee that during the year, the assessee has earned dividend income of Rs.4,50,239/- and total investment related to exempt income amounted to Rs.1,43,93,141/- and Rs.80,24,207/-. He further submitted that ld. Assessing Officer was of the view that the average value of total (A.Y. 2011-2012) M/s. Swagat Trexim Pvt. Limited investment was Rs.11,85,41,418/- and disallowance was made as Rs.11,85,41,418/- u/s 14A Rule 8D(2)(iii) at 0.5% is applicable and accordingly disallowed.

Ld. Counsel for the assessee relied on several judgments saying that only investment which has given rise to exempted income should be taken into consideration. He further submitted after the calculation of amount as disallowed under Rule 8D(2)(iii) i.e. only Rs.56,043/-. He therefore pleaded that the disallowance made by the ld. Assessing Officer of Rs.5,92,707/- under section 14A read with Rule 8D be restricted to Rs.56,043/- and balance disallowance may be deleted.

On the other hand, ld. D.R. submitted that the ld. Assessing Officer as well as ld. CIT(Appeals) disallowed an amount of Rs.5,92,707/- by relying on the Board Circular. He pleaded to confirm the order passed by the ld. CIT(Appeals).

Now the issue before me is whether on the facts and circumstances of the case, only the investments are to be considered for calculating the average value of investment which yielded exempt income during the year or not. On this aspect, ld. Counsel relied on a decision of Hon’ble Delhi High Court in the case of Cargo Motors Pvt. Ltd. -vs.- DCIT (2022) 145 taxman.com 641 (Del.), wherein it was held that disallowance under section 14A read with Rule 8D is to be in relation to income which does not form part of total income and this can be done only by taking into consideration of investment, which has given rise to this income (A.Y. 2011-2012) M/s. Swagat Trexim Pvt. Limited ,which does not form part of total income. Therefore, it is clear that for calculation of disallowance under section 14A read with Rule 8D, only those investments are to be considered which yielded exempt income during the year under consideration. Therefore, by applying the decision of Hon’ble Delhi High Court and in view of the facts and circumstances of the case of discussed above, the disallowance made by the ld. Assessing Officer for Rs.5,92,707/- under section 14A read with Rule 8D is set aside and restored to the file of ld. Assessing Officer to compute 0.5% on the investment which yielded exempt income during the year under consideration and also restrict the same to that effect. Accordingly, this issue raised by the assessee is allowed.

So far as the second issue is concerned, it was the submission of the assessee that the issue of disallowance under section 14A while computing the book profit under section 115JB of the Act, has been settled in view of the decision of the Hon’ble Apex Court in the case of Appollo Tyres Limited -vs.- CIT reported in [2002] 122 taxman 562 (SC). He further submitted that according to the ld. Assessing Officer, the assessee has not added this expenditure while computing the book profit under section 115JB of the Act and accordingly the ld. Assessing Officer added the same to the book profit of the assessee under section 115JB of the Act. He further submitted that the ld. Assessing Officer as well as ld. CIT(Appeals) both were wrong in considering the disallowance while computing the book profit under section 115JB of the Act.

I have perused the material placed before me. It is an admitted fact that the Hon’ble Apex Court has categorically held that book profit is to be considered under section 115JB as per the Companies (Schedule 3) Act and hence any disallowance is not permitted to be added in the calculation of book profit under section 115JB of the Act. Therefore, in view of the above decision of the Hon’ble Apex Court, I am inclined to set aside the order passed by the ld. Addl./JCIT(Appeals) and direct the ld. Assessing Officer to delete the addition made to the book profit. The ground raised by the assessee is allowed.

In the result, the appeal filed by the assessee is allowed. Order pronounced in the open Court on 11/12/2024.