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Income Tax Appellate Tribunal, MUMBAI BENCHES “D”, MUMBAI
Before: SHRI B.R.BASKARAN (AM) & SHRI RAM LAL NEGI (JM)
The appellant/assessee has preferred the present appeal against order dated 03/09/2013 passed by the Ld. CIT (Appeals)-16 Mumbai for the Asst. Year 2010-11.
Brief facts of the case are that the assessee company engaged in the business of manufacturing, selling, trading, import and export of textile dyestuffs. During assessment proceedings the Assessing Officer noticed that the assessee had made investments for earning exempt, assessee was asked as to why disallowance should not be made in accordance with Rule 8D of the Income Tax Rules. The Assessing Officer after taking into consideration the plea of the assessee made disallowance of Rs. 23,42,372/- u/s 14A of the Act read with rule 8D of the Income Tax Rules. On appeal the Ld. CIT(A) confirmed the same.
Filling aggrieved by the impugned order passed by the Ld. CIT(A), the assessee is in appeal before the Tribunal on the following effective grounds:-
a) The Commissioner of Income Tax(Appeals)-16 [ hereinafter referred to as CIT(A)] erred in confirming the disallowance of Rs. 23,42,372/- u/s 14A of the I.T.Act. r.w.r. 8D of the I.T.Rule being the expenses attributable to investment activity giving rise to the exempted income. The Appellant submits that it has made strategic investment in shares of its subsidiary for acquiring controlling interest; further the Appellant has not incurred any expenditure attributable to investment activity giving rise to the exempted income and hence no disallowance u/s 14A of the Act is called for.
b) The CIT(A) erred in confirming the disallowance of proportionate interest of Rs. 16,36,234/- as attributable to earning of exempted income. The Appellant submits that interests bearing borrowed funds are used for the purpose of business and not for making investments in Shares and Securities resulting into earning of exempted income.
2. The CIT(A) erred in confirming the action of AO in adding the expenditure of Rs. 23,42,372/- as attributable to earning of exempted income while calculating book profit u/s 115JB of the I.T.Act. 4. Before us, the Ld. authorised representative (AR) submitted that the assessee’s case is covered by the order of the Tribunal dated 27.4.2016 passed in assessee’s own case M/s Dystar India Pvt. Ltd. vs. JCIT, Mumbai and 3046/Mum/2012 for the assessment year 2008-09 and 2009-10 respectively wherein the Tribunal has decided the identical issue in favour of the assessee. The Ld. AR further submitted that since the assessee did not receive any dividend, section14A of the Act is not applicable. The investment in question was made by the assessee out of the surplus funds available during the relevant year and as per the law laid down by the Hon’ble jurisdictional High Court in CIT vs. HDFC Bank Ltd. 366 ITR 505 (Bom.) and CIT vs. Reliance Utilities 313 ITR 430 no disallowance is to be made in the assessee’s case. As per the decisions rendered by the Mumbai Tribunal in JM Financial Ltd. vs. AICT 2014 TIOL 2002 (Mum) and Garware Wall Rops Ltd. vs. ACIT 65 SOT 86 (Mum) the transaction being a strategic investment in the shares of assessee’s subsidiary company provisions of 14A of the Act are not applicable. On the other hand the Ld. departmental representative relying upon the findings of authorities below submitted that since each case is required to be decided on its own merit, the Ld. CIT(A) has rightly upheld the findings of the AO.
We have heard the rival submissions and perused the material placed before us in the light of the respective submissions of the parties. The Ld. AR has demonstrated during the course of arguments by referring the Paper Book on record that the assessee had already acquired 70% shares of its subsidiary company, Taxanlab Laboratories Pvt. Ltd., for Rs. 10.97 crore and during the relevant financial year the assessee acquired 20% share of the said company for Rs. 6.28 crore. Hence the transaction falls in the category of strategic investment. The assessee had its own funds to the tune of Rs. 45.36 crore and it had earned net profit of Rs.13.01 crore during the relevant year.
Since, the assessee’s own capital and profit reserves were considerably higher than the strategic investment made by the assessee in its subsidiary company, it would have to be presumed in the light of the decision of the Hon’ble Bombay High Court in HDFC Bank (supra) that the investment made by the assessee would be out of the interest free funds available with the it and no disallowance was warranted under section 14A of the Act. Hence, the impugned order passed by the Ld. CIT(A) is not in accordance with the law. Since the investment in question is strategic investment, the same is required to be excluded from the value of investment for the purpose of Rule 8D(2)(iii) as per the decision rendered by the coordinate Bench in the case of Garware wall Rops Ltd.(supra). Since, the value of aggregate investment will be Nil, no disallowance is required to be made under Rule 8D(2)(iii) also
In view of the foregoing discussion in the light of the facts and circumstances of the case and the decisions rendered by the coordinate Bench of ITAT in JM Financial Ltd. vs. AICT and Garware Wall Rops Ltd. vs. ACIT(supra) and the law laid down by the Hon’ble Bombay High Court CIT vs. Reliance Utilities and CIT vs. HDFC Bank Ltd. (supra), the impugned order is apparently erroneous and bad in law. We, therefore, set aside the impugned order and direct the AO to delete the disallowance made under section 14 A of the Act.
In the result appeal filed by the assessee for A.Y. 2010-11 is allowed.