DCIT, CC-XVI, KOLKATA, KOLKATA vs. SHRI RAM MULTICOM PVT. LTD., KOLKATA

This appeal of the assessee arises out of the order of Learned CIT(A)-II, Kolkata, in Appeal No.73/CC-XVI/CIT(A)C-II/1.3-14, dated 19.05.2014 passed against the assessment framed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’).

The only issue to be decided in this appeal of the revenue is as to whether the ld. CIT(A) was justified in restricting the disallowance made u/s.14A of the Act r.w.rule 8D of the Rules in the facts and circumstances of the case.

The brief facts of the case are that the assessee is a private limited company engaged in the business of construction and sale of flats, rental income and sale of assets. The assessee company derives income mainly from sale of real estates, income from logistic business, interest received from partnership firm, share of profit from partnership firm, rentals and other income including dividend. The assessee during the year under consideration earned dividend income to the extent of Rs.16,74,830/- and share of profit from partnership firm of Rs.13,39,939/- and claimed the same as fully exempt u/s.10(34) and 10(2A) of the Act. The assessee claimed that no expenditure was incurred in relation to earning of exempt income other than demat charges of Rs.2994/-. No disallowance u/s.14A of the Act was voluntarily made by the assessee in return of income. However, the assessee offered a sum of Rs.9,104/- to tax during the course of assessment proceedings u/s.14A of the Act. Ld. AO ignored the workings of the assessee and proceeded to make disallowance u/s.14A r.w.rule 8D at Rs. 35,75,823/- and added the same in the assessment. The assessee explained before the ld. CIT(A) that the basis of disallowance offered by it for the sum of Rs.9104/- is as follows :- i) Direct expenses in the form of demat charges Rs.2994/- ii) Disallowance under rule 8D(2)(iii) (investment of 0.5% of Rs.12,22,089/-) Rs.6110/- Rs.9104/- Total

Before the ld. CIT(A) the assessee stated that it had considered the investment made in quoted shares from which it had earned the dividend income while computing the disallowance under rule 8D(2)(iii). It was stated that the investment made in unquoted shares have not been taken into consideration in the calculation made under rule 8D because the assessee is in the real estate business wherein it is common to float Special Purpose Vehicle (SPV) for the purpose of acquiring estates outside. Such Special Purpose Vehicle (SPV) are the subsidiary companies of the assessee and investments in subsidiary were made for the purpose of business and not to earn dividend income. Further it was submitted that these subsidiary companies have not declared any dividend. Accordingly, it was prayed that the said investments should be ignored while computing the disallowance under rule 8D.

With regard to the investment in partnership firm, it was submitted that the assessee had derived both interest on capital (which is taxable) and share of profit from partnership firm (which is exempt). It was also or in partnership firm. It was also submitted that the loan amount got reduced from Rs.10 crores as on 31.03.2010 to Rs.7.57 crores as on 31.03.2011, whereas the investments increased from Rs.7.82 crores to Rs.29.18 crores in the same period, thus, it would be evident that the investments were made out of own funds and not out of borrowed funds. Accordingly, it claimed that no disallowance of interest should be made in terms of rule 8D(2)(iii) of the Rules. It was prayed before the ld. CIT(A) that the investments which had yielded exempt income alone should be considered for the purpose of working out the disallowance u/s.14A r.w.rule 8D.

It was also submitted that with regard to investments made in unquoted shares, these investments were made in subsidiary companies (SPVs) and they had not declared any dividend and moreover these investments when sold would result in liability of capital gains and, hence, the same cannot be treated as investments yielding any exempt income. The assessee also placed reliance on the decision of this Tribunal in the case of REI Agro Ltd., order dated 19.06.2013, wherein it was held that only the investments which yielded exempt income should be considered for the purpose of computing disallowance u/s.14A r.w.rule 8D of the Rules. Ld. CIT(A) observed that the decision of REI Agro Ltd. (supra) is squarely applicable to the facts of the assessee’s case. He observed that assessee had not correctly worked out the disallowance u/s.14A in accordance with the rule 8D as admittedly it has not considered the investment made in partnership firm from where exempt income in the form of share of profit was earned by the assessee. Accordingly, ld. CIT(A) recalculated the disallowance u/s.14A r.w.rule 8D and arrived at the figure of Rs.1,72,737/- as against Rs.35,75,823/- disallowed by the AO.

Aggrieved, the revenue is in appeal before us on the following grounds :-

When the case was called no one appeared on behalf of the revenue and even the adjournment petition was not filed by the revenue, hence, we decide to dispose of the appeal on hearing the ld. AR and on merits of the case.

Ld. AR reiterated the submissions made before the ld. CIT(A). In addition, he placed reliance on the decisions of coordinate bench of the Tribunal in the case of DCIT Vs. K.B.Capital Markets (P) Ltd., [2016] 71 taxmann.com 354 (Kolkata Tribunal) and DCIT Vs. Teenlok Advisory Services (P) Ltd, [2016] 159 ITD 991 (Kolkata Tribunal), dated 8.6.2016, in support of his various contentions.

We have heard ld. AR. We find that the issue regarding consideration of investments yielding exempt income alone ought to be considered for the purpose of computing the disallowance under rule 8D is well settled by the decision of the Tribunal as relied on by the ld. AR. The findings given thereon are not reiterated herein for the sake of brevity. However, we find that there is no specific finding recorded by the lower authorities as to whether the investments were made by the assessee out of its own funds or out of utilization of borrowed funds. In this regard, we place reliance on the decision of Hon’ble Jurisdictional High Court in the case of Dhanuka and Sons, (2011) 339 ITR 319 (Cal), wherein it was held that onus is on the assessee to prove that the investments were made out of the earlier years. We find that this factual finding is admittedly missing from the records, hence, we deem it fit and appropriate in the interest of justice and fair-play, to set aside to the file of ld. AO for giving factual finding with regard to source of making investments in quoted shares and investment in partnership firm. Ld. AO is directed to consider the disallowance under rule 8D(2)(ii) based on the outcome of such factual finding. In other words, the ld. AO is directed as below :- a) make disallowance under rule 8D(2)(iii) by considering the investments in quoted shares and the investments in partnership firm alone; and b) make verification of source of making investments i.e. whether the same has been made out of own funds or out of borrowed funds in respect of investment in quoted shares and investments in partnership firm alone. Based on the outcome of such verification, the ld. AO is to decide the disallowance under rule 8D(2)(ii).

In the result, appeal of the revenue is allowed for statistical purposes.