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Income Tax Appellate Tribunal, MUMBAI BENCH “D”, MUMBAI
Before: SHRI SANJAY GARG & SHRI ASHWANI TANEJA
Per Sanjay Garg, Judicial Member:
The present appeal has been preferred by the Revenue against the order dated 29.09.2014 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2011-12.
No one has come present on behalf of the assessee. Considering the small and sole issue involved in this case relating to the disallowance made under section 14A in relation to the expenditure incurred for earning of tax exempt income, we proceed to decide the appeal of the assessee after hearing the Ld. Departmental Representative.
Revenue is aggrieved by the action of the Ld. CIT(A) in deleting the disallowance of Rs.56,20,235/- made by the Assessing Officer (hereinafter
The brief facts of the case are that the AO found that the assessee during the year had earned dividend income of Rs.11,794/- and claimed the same as exempt from tax. The assessee, however, suomoto made disallowance under section 14A of Rs.1,51,256/- in the computation of income. On being asked to explain in this respect, the assessee company explained as under: "1. Disallowance u/s 14A: The Company has Share Capital and Reserves of Rs.593,90,387/- as against investments of Rs.366,38,661/-. The Company did not borrow any funds for making investments. These investments are made out of its own Share Capital and Reserves. Further, the Company has interest income of Rs.148,44,260/- and interest expense of Rs.115,74,849/-, i.e. net interest income 32,69,411/- during the relevant financial year. Thus, no disallowance is required to be made out of interest expense u/s 14A read with Rule 8D of the Income Tax Act. Secondly, the Company has added, while calculating total income, Rs.1,51,256/-, being 0.5% of the average investments u/s 14A read with Rule 8D of the Income Tax Act. In view of above, no further disallowance is required to be made u/s 14A read with Rule 8D of the Income Tax Act.”
The AO, however, did not accept the above submissions of the assessee and made the impugned disallowance. Being aggrieved by the above order of the AO, the assessee preferred appeal before the Ld. CIT(A).
The Ld. CIT(A), after considering the submissions of the assessee, deleted the disallowance so made by the AO observing as under: “5. The above grounds are taken together as they address a common issue. I find that the assessee has shown dividend income of Rs.11,794/- and claimed the same as exempt from tax. The assessee has suo motu made disallowance of Rs.1,51,256/- u/s. 14A of the Act. I also find that as per para 4.3 (page 2) of the assessment order the assessee had filed a written submission before the AO dated 22/12/2010 stating that "the company has share capital reserves of Rs.593,90,387/- as against investment of Rs.366,38,661/-. The company did not borrow any funds for making investments. These investments are made out of its own share capital and reserves.” The above fact is not disputed by the AO. The above fact is also borne out from the audited accounts of the appellant. Also I find the appellant’s interest expenditure during the year was Rs.115,74,849/-whereas interest income was of Rs.148,44,260/-. Hence there was net interest income of 3 M/s. Remi Finance & Investment Pvt. Ltd. Rs.32,69,411/- during the relevant financial year. The interest expenses during the year were against the loans taken for lending and interest income of Rs.148,44,260/- were received.
In the case of CIT v. HDFC Ltd.(ITA No. 330 of 2012) Order dated 23/07/2014, the Hon'ble Bombay High Court held that in view of the factual position as per the judgement in the case of CIT v. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom), it would have to be presumed that the investment made by the assessee would be out of the interest free funds available with the assessee. The issue before the Hon'ble High Court was disallowance u/s. 14A. The fact before the Hon'ble High Court was that the assessee's capital, profit, reserves, surplus and current account deposits were higher than the investment in tax free securities.
In view o f the above po sitio n of law the disallowance of Rs.56,20,235/- made by the AO as per rule 8D is deleted.
I n t h e c a s e o f M a x o p p I n v e s t m e n t L t d . v . C I T ( 2 0 1 1 ) 1 5 taxmann.com 390 (Delhi) the Hon'ble High Court held that if one examines sub rule (2) of Rule 8D, it is found that the method for determining the expenditure in relation to exempt income has three components and the third component is an artificial figure - 0.5% of the average value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheets of the assessee, on the first day and last day of the previous year. In view of the above the disallowance @ 0.5% made by the AO which comes to Rs.3,25,256/- is confirmed. Thus the disallowance is restricted to Rs.1,74,000/- (Rs.3,25,256 – Rs.1,51,256) in place of Rs.57,94,235/- made by the AO.
In the result the appeal is hereby allowed.”
6. Being aggrieved by the above findings of the lower authorities, the Revenue has come in appeal before us.
We find that the Ld. CIT(A) has given a categorical finding that the share capital reserves of the assessee were at Rs.5,93,90,387/- during the year against the investments of Rs.3,66,38,661/- only and the Ld. CIT(A) has also given categorical finding that the company did not borrow any funds for making investments and that the investments were made out of its own share capital and reserves. That even the AO has also not disputed the above facts. Even, otherwise the assessee’s interest income was much more than the interest expenditure incurred by the assessee for its business purposes. The 4 M/s. Remi Finance & Investment Pvt. Ltd. assessee has already disallowed 0.5% of the average value of investment on account of administrative expenses as per the provisions of rule 8D of the Income Tax Rules.
We find that the assessee suo-moto offered much more disallowance of expenditure than the total tax exempt income earned by the assessee during the year. We, therefore, do not find any reason to interfere with the well reasoned order of the Ld. CIT(A) and the same is therefore upheld.
In the result, the appeal of the Revenue is hereby dismissed.
Order pronounced in the open court on 21.10.2016.