M/S MPL ENTERPRISES LIMITED,MANIPAL vs. ADDL.C.I.T., UDUPI

This is an appeal by the assessee against the order dated 17.3.2014 of the CIT(Appeals), Mysore relating to assessment year 2011-12.

The assessee is a company, engaged in the business of dealing in properties, foreign currency and insurance agency related services. The Assessing Officer noticed that the assessee had shown in the balance sheet as on 31.3.2011 investment in shares of Rs.92,34,050. The assessee also earned dividend income of Rs.1,15,584 which was claimed as exempt in the computation of income.

Under the provisions of section 14A of the Act, any expenditure incurred in earning income (dividend income) which does not form part of total income u/s. 10A of the Act, should be disallowed. According to assessee, only a sum of Rs.2,890 in the form of administrative expenses had to be disallowed u/s. 14A of the Act.

The AO was of the view that disallowance of expenses of earning exempt income had to be worked out in accordance with Rule 8D of the I.T. Rules. The assessee, in reply to the query of AO in this regard submitted as follows:-

The AO did not verify the aforesaid claim of the assessee, but observed that disallowance u/s. 14A of the Act r.w. Rule 8D of the Rules had to be made and he worked out the disallowance as follows:-

Before the CIT(A), the assessee reiterated the contentions as were put forth before the AO. The CIT(A), however, upheld the order of AO. Hence the assessee's appeal before the Tribunal.

The ld. counsel for the assessee filed before us a copy of the Annual Report for 2010-11 and pointed out that the own funds of the assessee as on 31st of March, 2010 & 2011 were much more than the investments in shares. It was pointed out by him that share capital reserves and surplus were Rs.2,84,03,000 and Rs.69,45,722 respectively as on 31.3.2010 and Rs.2,84,03,000 and Rs.74,75,780 respectively as on 31.3.2011. The value of investments in shares as on 31.3.2010 was Rs.1,00,42,530 and as on 31.3.2011 it was Rs.92,34,050. The ld. counsel for the assessee accordingly submitted that own funds were much more than the investment in shares and therefore no disallowance ought to have been made u/s. 14A of the Act r.w. Rule 8D of the Rules. The other submissions made before the AO were also reiterated before us.

The ld. DR relied on the order of the AO.

We have given a very careful consideration to the rival submissions. In our view, the disallowance u/s. 14A of the Act r.w. Rule 8D of the I.T. Rules insofar as it relates to application of Rule 8D(2)(ii) of the Rules cannot be sustained. As is clear from the financial statements, the assessee had own funds which were sufficient to make investment in shares. In the circumstances, the conclusion of AO that borrowed funds were used for making investments in shares cannot be sustained.

As far as disallowance under Rule 8D(2)(iii) of the Rules is concerned, the same deserves to be remanded back to the AO for fresh consideration. The assessee had claimed before the AO that general expenses incurred for earning tax free dividend was only Rs.2,890. This explanation has not been found to be false by the AO. Whenever an assessee makes a claim regarding expenditure incurred for earning exempt income, it is incumbent upon the AO to consider such a claim and reject the same objectively and only thereafter AO can resort to invoking Rule 8D(2)(iii) of the Rules. In the set aside proceedings, the AO will examine the claim of assessee and thereafter decide the issue in accordance with law.