RUCHI ACRONI INDUSTRIES LTD,MUMBAI vs. DCIT CEN CIR 40, MUMBAI

The only issue in dispute in this appeal is disallowance of ` 6,75,421 under section 14A of the I.T. Act, 1961 r/w rule 8D of the I.T. Rule, 1962.

Brief facts are, the assessee a company filed its return of income on 30th September 2009, declaring total income of ` 57,74,690. During the assessment proceedings, the Assessing Officer noticing that the assessee had earned exempt income by way of dividend called upon the assessee to explain why provisions of section 14A r/w rule 8D should not be applied to disallow expenditure incurred for earning the exempt income. In response to the query raised by the Assessing Officer, though, the assessee submitted it had earned exempt income by way of dividend amounting to ` 18,52,182 from the investment in shares and mutual funds. However, since the entire investment was made out from own surplus funds and not out of borrowed funds no interest expenditure should be disallowed. The Assessing Officer after considering the submissions of the assessee, however, was not convinced with the same. He, therefore, proceeded to compute disallowance of expenditure under rule 8D and worked out the total disallowance at ` 6,75,421 as under:–

Being aggrieved on such disallowance, assessee preferred appeal before the learned Commissioner (Appeals). The learned Commissioner (Appeals) also confirmed the disallowance.

Learned Authorised Representative referring to the financial statements of the assessee submitted, during the previous year, relevant to the assessment year under consideration, assessee has own interest free surplus fund in the form of share capital and reserves to the tune of ` 14,15,64,109, as against such fund available investment made by the assessee amounted to ` 10,00,70,755. Therefore, the interest free funds available with the assessee are more than enough to take care of the investment. That being the case, no disallowance of interest expenditure can be made. On such proposition he relied upon the decision of the Hon'ble Jurisdictional High Court in the following cases.

As far as disallowance of administrative expenditure is concerned, the learned Authorised Representative submitted, assessee having not incurred any expenditure towards earning of exempt income, no disallowance can be made even on the average value of investment. He submitted, provisions of section 14A, cannot be 4 Ruchi Acroni Industries Ltd.

Learned Departmental Representative on the other hand, contesting the claim of the assessee submitted before the first appellate authority in the written submissions filed the assessee has only contested disallowance of interest expenditure. He submitted, under rule 8D, having come into force from the assessment year 2008–09, the Assessing Officer is bound to compute disallowance under section 14A in terms with rule 8D. He submitted, therefore, there is no justification in accepting assessee’s claim.

We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon. As far as the disallowance of interest expenditure under rule 8D(2)(ii), it is the contention of the assessee it has sufficient surplus interest free fund available to make the investment. However, the aforesaid contention of the assessee has been brushed aside by the Assessing Officer and the learned Commissioner (Appeals), without proper verification. In case, the assessee has mixed funds both borrowed and own interest free funds, as per the ratio laid down in the 5 Ruchi Acroni Industries Ltd.

In the result, assessee’s appeal is allowed for statistical purposes.