M/S MANIPAL PRAKASHAN LIMITED,MANIPAL vs. ACIT, UDUPI

This appeal by the assessee is against the order dated 17.03.2014 of the CIT(Appeals), Mysore relating to assessment year 2011-12.

The assessee is a company engaged in the business of printing and manufacture of packing material. The assessee earned dividend income which was exempt u/s. 10(34) of the Act. The Assessing Officer was of the view that expenses incurred in earning the dividend income which was exempt from tax had to be disallowed u/s. 14A of the Act r.w. Rule 8D of the I.T. Rules. The assessee submitted before the AO that no expenses whatsoever were incurred to earn the dividend income and therefore no disallowance could be made u/s. 14A of the Act. The AO, however, was of the view that it was not possible to earn dividend income without utilizing the resources and incurring the cost. The AO accordingly made a disallowance of Rs.17,64,211 u/s. 14A which was computed as follows:-

On appeal by the assessee, the CIT(Appeals) confirmed the order of the Assessing Officer. Before the CIT(Appeals), the assessee submitted that there could be no interest expenses attributable to earning of dividend income because interest paid on borrowings were for very specific purpose of the business of the assessee and had to be allowed as a deduction u/s. 36(1)(iii) of the Act. The CIT(A), however, was of the view that in assessee’s own case for A.Y. 2009-10 in his order dated 30.5.2012, he had confirmed similar addition made by the AO and for the reasons given in the said order, the disallowance made by the AO in this assessment year was also being confirmed.

Aggrieved by the order of the CIT(Appeals), the assessee has preferred the present appeal before the Tribunal.

At the time of hearing of the appeal, it was brought to our notice that the order of CIT(Appeals) for A.Y. 2009-10, based on which the order of AO in the present A.Y. 2011-12 was confirmed, was subject matter of appeal before the Tribunal in ITA No.1208/Bang/2012. This Tribunal by order dated 30.8.2013 set aside the disallowance u/s. 14A of the Act and remitted the issue to the Assessing Officer for fresh consideration. The Tribunal held that the requirement of Rule 8D was that the AO should first come to the conclusion that claim made by the assessee that there was no expenditure incurred to earn the dividend income was not correct. The Tribunal further held that the AO did not point out as to how borrowed funds on which interest was paid were utilised for making investments, which yielded the tax free income. The Tribunal thereafter referred to the decision of the Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd., 328 ITR 81 and the decision of the Bangalore Bench of the Tribunal in ACIT v. Jindal Aluminum Ltd, A.Y. 2008-09, order dated 30.4.2013. The Tribunal finally came to the conclusion that AO has not examined whether interest bearing funds were utilized for the purpose of earning of exempt income and also as to whether indirect expenses were not wholly and exclusively for the purpose of earning of taxable income.

It is not in dispute that the facts and circumstances under which disallowance was made by the AO and confirmed by the CIT(Appeals) in the instant case are identical as it prevailed in A.Y. 2009-10. Respectfully following the decision of the Tribunal cited supra, we set aside the order of CIT(Appeals) and remand the issue to the AO for fresh consideration on the issue of disallowance u/s. 14A, keeping in mind the observations of the Tribunal in ITA No.1208/Bang/2012.

For statistical purposes, the appeal by the assessee is treated as allowed.