JCIT (OSD), CHENNAI vs. BHERUDAN DUGAR FINANCE LTD., CHENNAI

This appeal of the Revenue is directed against the order of the Commissioner of Income Tax (Appeals) – 1, Chennai, dated 09.03.2016 and pertains to assessment year 2011-12.

No one appeared for the assessee despite service of notice.

The only issue arises for consideration is with regard to disallowance made by the Assessing Officer under Section 14A of the Income-tax Act, 1961 (in short "the Act") read with Rule 8D of Income-tax Rules, 1962.

Shri V. Nanda Kumar, the Ld. Departmental Representative, submitted that the Assessing Officer computed the disallowance under Section 14A of the Act. The Assessing Officer has taken the direct expenditure as NIL. After taking into consideration the loan borrowed by the assessee and the interest paid, the Assessing Officer found that the expenditure, which was not directly attributable to any particular income, was at `21,21,643/-.

Referring to Rule 8D of Income-tax Rules, 1962, the Ld. D.R. submitted that for the purpose of computing disallowance under Section 14A of the Act, the method as prescribed in three stages, the average of the three has to be taken into consideration. The first limb of Rule 8D is with regard to expenditure incurred by the assessee which does not relatable to any particular income. The third limb of Rule 8D is with regard to 0.5% of average of investment made by the assessee yielded exempt income. Therefore, the Assessing Officer has to compute the disallowance under all the three limbs of Rule 8D and he has to take average of the same.

We have heard the Ld. Departmental Representative and perused the material available on record. For the purpose of making disallowance under Section 14A of the Act, Rule 8D was framed prescribing the method for computing the disallowance. For the purpose of convenience, we are reproducing Rule 8D of Income-tax Rules, 1962 which reads as follows:-

Rule 8D(2) provides three limbs. The first limb relates to direct expenditure and the second limb which does not relate to any particular income and the third limb relates to 0.5% of the average value of investment, income from which does not form part of total income of the assessee. In the case before us, the CIT(Appeals) deleted the disallowance on the ground that there was no exempt income earned by the assessee. Therefore, at the best, we may say that the disallowance to be computed under third limb of Rule 8D may be NIL. The direct expenditure incurred by the assessee is also NIL. In view of the factual situation that the assessee borrowed funds for the purpose of business and paid interest and the assessee was maintaining mixed account, it is very difficult to find out the expenditure which is attributable to any particular income. In other words, one cannot say that the entire expenditure incurred by the assessee is only for the purpose of earning income which is not exempt from income-tax. Therefore, this Tribunal is of the considered opinion that the Assessing Officer is bound to apply the provisions of Rule 8D of Income-tax Rules, 1962 for the purpose of computing disallowance. Since the CIT(Appeals) has not considered the provisions of Rule 8D and simply allowed the claim of the assessee on the ground that no income was earned by the assessee, this Tribunal is of the considered opinion that the matter needs to be reconsidered by the Assessing Officer. Accordingly, the orders of the lower authorities are set aside and the entire disallowance made by the Assessing Officer under Section 14A of the Act is remitted back to the file of the Assessing Officer. The Assessing Officer shall reconsider the issue afresh in the light of the provisions of Section 14A of the Act read with Rule 8D of Income- tax Rules, 1962 and thereafter decide the issue in accordance with law, after giving a reasonable opportunity to the assessee.

In the result, the appeal filed by the Revenue is allowed for statistical purposes.