TRIMURTI HEIGHTS AND PROPERTIES P.LTD,MUMBAI vs. ITO 2(3)(3), MUMBAI

against the disallowance u/s. 14. A of the Act. As facts of both the years are almost identical and common grounds of appeal are raised, thus both the appeals were clubbed, heard together and are decided by common order.

Brief facts related to the disposal of the present appeals are that the assessee- company is engaged in the business of investing in properties. For AY 2011-12, the assessee filed its return of income on 24th September 2011. In the return of income, assessee claimed exempt income of Rs. 3,40,617/-. The assessee has not apportioned any expenditure toward earning such exempt income. The return of income was selected for scrutiny and while framing assessment, the AO asked the assessee as to why appropriate disallowance should not be made u/s. 14A of the Income Tax Act as per Rule 8D. The assessee filed revised computation of income and offered Rs.7,03,118/- for disallowance u/s. 14A of the Act. The working of disallowance of the assessee was not accepted by the AO. The AO computed the disallowance u/s. 14A as per Rule 8D at Rs. 10,45,373/- and added back to the assessee’s total income, in its order dated 26th March 2014. Similarly, for AY 2012 -13, the assessee-company claimed dividend income of Rs. 98,450/-. The AO while framing assessment asked the assessee to furnish its explanation as to why appropriate disallowance should not be made u/s. 14A of the Income Tax Act as per rule 8D of I.T Rules, 1962. The assessee furnished its reply vide reply dated 5th September 2014, wherein the assessee submitted that no disallowance u/s. 14A had been made for the reasons that assessee has shown its income under the head “House Property” and “Other Sources”. The contention of the assessee was not accepted by AO and the AO made the disallowance u/s. 14A read with Rule 8D of Rs 34,50,193/- vide order dated 27th Feb 2015. Aggrieved by the orders of assessment, the assessee filed appeal before the CIT(A). Both the appeals of the assessee were decided by CIT(A) vide common order impugned in the present appeals.

We have heard ld AR of the assessee and DR for Revenue and perused the material available on record. Ld AR of the assessee argued that the order of AO and CIT(A) for making disallowance are not only unfair but unreasonable. The AO disallowed the exorbitant amount which is many folds, than the exempt income earned by the assessee. For AY 2011-12 Ld. AR of assessee argued that during the year under consideration, the assessee invested in mutual fund and earned exempt income of Rs. 3,40,617/-, the income was by way of dividend on the unit of mutual fund. The 3 & 542/Mum/16 M/s. Trimurti Heights and Properties Pvt. Ltd. assessee borrowed funds from M/s Saraswat Bank for the purpose of investing in business, repayment of unsecured loan and for working capital. The assessee had invested the excess funds from time to time in mutual fund to save cost when the funds were temporarily not utilized. The assessee suo-moto disallowed interest expenditure of Rs. 7,03,118/- which was incurred to earn exempt income. The AR of the assessee further argued that details of computation of disallowance were provided to the AO. The Rule 8D can only be invoked, if the AO is not satisfy with the correctness of the claim of the expenditure incurred for earning exempt income, or the claim made by assessee that no expenditure has been incurred for earning exempt income. The AO has not recorded its satisfaction that the calculation/details for disallowance are not correct. On the other hand, ld. DR for Revenue supported the order of authorities below. DR for Revenue further argued that the calculation of disallowance submitted by AO was found to be not as per Rule 8D and the AO duly recorded his observation in paragraph 4.3 of the order. We have considered the rival contentions of the parties and further perused the material available on record. The assessee claimed to have earned dividend income of Rs. 3,40,617/- during the relevant financial year. During the assessment proceeding, the assessee furnished the calculation of voluntary disallowance u/s.14A of Rs. 7,03,118/-. The assessee further contended that they have invested the excess loan from fund from time to time for a mutual fund to save the cost when the funds were temporarily available. We have seen that the assessee reserve and surplus fund of Rs.10.93 crore and the assessee had investment of Rs. 2.61 crore during the year under consideration. The assessee categorically stated that only cost incurred by the assessee to earn exempt dividend income was in the form of interest payment of the said loan for which the voluntary disallowance of interest expenditure of Rs. 7,03,118/- was made. The AO while framing the assessment order simply observed that working of disallowance submitted by assessee is not as per Rule 8D not satisfied in respect of working is recorded. Ld. CIT(A) while considering the ground of disallowance concluded that assessee made the huge investment of Rs. 2,61,25,979/-. The assessee incurred finance cost of Rs. 2,49,37,929/- in the year. The AO finally concluded that the apportionment is required to be made in terms of 4 & 542/Mum/16 M/s. Trimurti Heights and Properties Pvt. Ltd. section 14A r.w.r 8D which is mandatory from AY 2008-09. The Ld. CIT(A) has also not examined the pre-conditions for applicability of Rule 8D. The AO as well as the ld CIT(A) failed to record the correctness of the claim of the assessee in respect of expenditure incurred in relation to the exempt income. The AO calculated the disallowance without discarding the statement of account and the working of disallowance submitted by assessee. The disallowance made by AO is not in accordance with the pre-condition provided under sub-section (2) of section 14A of the Act. In our considered opinion, when the assessee is engaged in composite and indivisible business and earned both taxable and exempt income (non-taxable income), expenditure incurred towards the exempt income should be identify by apportionment. The AO while framing assessments should issue specific questionary to identify the apparent connection to specific expenditure when the assessee earn taxable and non-taxable income from all business activities constitute indivisible bossiness. The expenditure factually incurred on non-taxable receipt is to be disallowed. The expenditure assumes, presumes or deemed to be incurred on non- taxable income cannot be allowed. There should be a proximate cause for disallowance, which has relationship with the exempt income. The return of investment or huge investment cannot be a proximate cause. The assessee specifically pleaded during the assessment that they have earned non-taxable income by way of dividend on the mutual funds. The assessee has invested the excess loans funds. The assessee has suo-moto disallowed the interest expenditure of Rs.7,03,118/-. The AO merely hold that the working of the disallowance is not as per Rule 8D, and the same was upheld by Ld. CIT(A). With the above observation, we hold that the disallowance u/s 14A should be restricted to Rs. Rs.7,03,118/- plus Rs.65000/- on account of administrative expenses as per Rule 8D2(iii). In the result the appeal of the assessee for AY 2011-12 is allowed.

For AY 2012-13, the Ld. AR of the assessee argued that assessee earned dividend income of Rs. 98,450/-. The assessee has not made any voluntary disallowance as they have not claimed deduction for the expenses incurred by assessee, thus, the disallowance u/s 14A were not possible. The AO disallowed a sum of Rs.43,50,194/- u/s 14A of the Act, while framing assessment and the same was sustained in first 5 & 542/Mum/16 M/s. Trimurti Heights and Properties Pvt. Ltd. appeal. The Ld. DR for Revenue argued that during the year under consideration, the assessee earned the dividend income of Rs 98,450/- which was claimed as exempt income. The assessee has not apportioned any expenditure for earning such exempt income. Despite making show cause by the AO that as to why disallowance u/s 14A be not made against the assessee. The assessee has not furnished any satisfactory explanation. The AO has no option except to calculate the disallowance as per Rule 8D of Income-tax Rule 1962. We have considered the rival contention of the parties and gone through the material available on record. The assessee earned the dividend income of Rs. 98,450/- which was claimed as exempt income. The assessee has not apportioned any expenditure attributable to earn such exempt income. The CIT(A) while considering the ground observed that the investment of assessee has increased from Rs. 2,61,25,979/- to Rs. 4,21,25,979/- during the FY. The finance cost has also gone from 2,49,37,929/- to 3,44,17,216/-. The CIT(A) dismissed the appeal of the assessee holding that the submission made by AR are similar as for earlier years. We have considered the rival contention of the parties and gone through the material available before us. The assessee has surplus interest free fund of Rs. 10.10 crore and made investment of Rs.5.56 crore during the year. On specific queries, the AR of the assessee submitted that the assessee has incurred corresponding interest expenditure of Rs. 1,95,668/-. We have further seen that the fact of this appeal are at little variance to the earlier year. In the earlier year, the assessee voluntarily made the disallowance of Rs.7,03,118/-, however, in the year under consideration, no voluntary disallowance was made. It has come on record that assessee earned dividend income on units of mutual fund. The assessee invested the borrowed fund for the investment in the mutual fund in earlier years, thus, the assessee must incurred interest on the borrowed fund. On our specific queries, the assessee submitted the corresponding interest expenditure incurred for earning the exempt income and the such interest is worked out at Rs. 1,96,668/-. Accordingly, the AO is directed to restrict the disallowance u/s of the Act at Rs. 1,95,668/- plus administrative expanses of Rs.1,70,000/- under rule D2(iii).