WORLDWIDE MEDIA P.LTD,MUMBAI vs. DCIT 1(3), MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद�य लेखा सद�य राजे�� राजे�� केकेकेके अनुसार अनुसार PER RAJENDRA, AM - लेखा लेखा सद�य सद�य राजे�� राजे�� अनुसार अनुसार Challenging the order dated 29/05/2014 of the CIT (A)-2,Mumbai the Assessee has filed the present appeal.Assessee-company,engaged in the business of printing and publishing of magazines,filed its return of income on 30/09/2009, declaring total income at Rs.(-)1.39 Crores.The Assessing officer(AO) completed the assessment u/s.143 (3) of the Act, on 30/12/2011,determining its income at Rs.27,69,170/-. 2.The solitary ground of appeal is about confirming the disallowance of Rs. 50. 64 lakhs,made u/s.14A of the Act.During the assessment proceedings,the AO found that the assessee had shown dividend income of Rs.25.99 lakhs, that the same was claimed as exempt income, that it did not make any disallowance u/s.14 A of the Act, that the assessee had made investment to the tune of Rs. 12.26 crores, that it had incurred interest expenditure of Rs. 2.76 crores on the funds borrowed during the year.He asked the assessee to explain as to why disallowance u/s.14 A r.w. Rule 8D of the Income Tax Rules,1962 (Rules) should not be calculated.Vide its letter dated 9/12/201 and 12/12/2011 the assessee argued that it had not incurred any direct expenditure for earning

5462/M/14 –Worldwide Media dividend income or for making any investment in the mutual funds, that the investments were made out of the surplus funds. After considering the submission of the assessee, the AO observed that the effect of section 14A was to widen the theory of the apportionment of the expenditure, that the expenditure incurred u/s.14A would include direct and indirect expenditure but the relationship with the exempt income had to be approximate,that there was direct nexus between the expenditure incurred and the income not forming the part of total income.He referred to the case of Cheminvestment Ltd.(124 TTJ 577)and made the disallowance of Rs.50,64,722/-(Rs. 43.42 lakhs under the head interest expenditure+ Rs.7.22 lakhs under the head 0.5% of average investments).

3.Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority(FAA).Before him,it was contended that while making disallowance out of interest, the AO had considered the entire interest expenditure without appreciating the fact that the borrowed funds were mainly utilised for payment of purchase consideration of brands of magazines, that no expenditure had been incurred in arriving at income which was not chargeable to tax. The assessee relied upon certain case laws. After considering the submission of the assessee and the assessment order, the FAA held that in the earlier years the then FAA.s.have decided the identical issue against the assessee.He referred to the case of the Damani Estate and finance Private Ltd., And held that where there was no separate an exclusive establishment mending for the purpose of managing investments that yield exempt income of presumption was required to be made that common office facilities available were also utilised for the purpose of investment activities, that there was an underlying presumption under the Rule 8D of the Rules. Finally, he upheld the disallowance made by the AO.

5462/M/14 –Worldwide Media 4.During the course of hearing before us,the Authorised Representative(AR) contended that the loan was taken for the business purposes, that the borrowed funds were not utilised for making investment resulting in exempt income, that the own fund of the assessee was far more than the investments for the year under consideration, that AO had not made any disallowance under the head interest expenditure while completing the assessment for the AY. 2008-09 though the facts were identical.One query by the bench about the disallowance made on account of 0.5% of the average investment, the AO stated that matter could be decided on merits. He referred to the cases of Oriental Structural Engineers Private Ltd.(ITA 605 of 2012)of the honorable Delhi High Court and Geojit Investment Services Ltd (ITA/261/Coch/2014-AY.2008- 09,dtd.28/08/2014).The Departmental Representative (DR)supported the order of the AO and the FAA.

5.We have heard the rival submissions and perused the material available on record.The undisputed facts of the case are that the assessee had shown dividend income of Rs.25.99 lakhs that it had not made any disallowance u/s.14 A of the Act,that the AO after considering the submission of the assessee made a disallowance of Rs. 50.64 lakhs. We find that the assessee had borrowed the funds for its business (pages 107-09 of the paper book),that it had not invested the borrowed money for making investment that yielded dividend income, that the own funds of the assessee were of Rs. 68.78 crores, that the investment was of Rs. 12.26 crores only.In our opinion,if the funds owned by the assessee or more than the investments made no disallowance could be made for interest expenditure. The presumption,as held by the various honorable High Courts, is that the assessee utilised its own funds for making investments. In the case under consideration the AO had not brought on record any fact proving that the loan taken by the assessee was not used for the business purposes. If the assessee had utilised the borrowed funds for its business and not for the 3

5462/M/14 –Worldwide Media investment,there was no justification for invoking the provisions of section 14A of the Act.Therefore, we hold that the order of the FAA confirming the disallowance of Rs. 43.42 lakhs under the head interest expenses cannot be endorsed.As far as the disallowance made under the head 0.5% of the average investment is concerned,we would like mention that same should be restricted to 2% of the dividend income.Effective ground of appeal, raised by the assessee, is allowed in its favour, in part.