LAADKI TRADING & INVESTMENTS LTD,MUMBAI vs. ADDL CIT RG 6(3), MUMBAI

आदेश / O R D E R PER RAJESH KUMAR, A. M: This appeal by the assessee is directed against the order dated 07.06.2012 of Commissioner of Income Tax (Appeals)-12, Mumbai (hereinafter called as the CIT(A) ) for assessment year 2007-08. The assessee has raised following grounds of appeal:

2 ITA No.5493/Mum/2012 M/s. Laadki Trading & Investments Ltd. Vs. Addl.CIT

disallowance of Rs.45,24,390/- under Section 14A read with Rule 8D. 2. Both the lower authorities erred in holding that Rule 8D was to be applied retrospectively. The appellant submits that Rule 8D is substantive law, and cannot be applied retrospectively. 3. Both the lower authorities erred in invoking that Rule 8D, without recording any objective satisfaction as to how the appellant’s submission was erroneous. 4. Both the lower authorities erred in applying sub-sections (2) and (3) of section 14A, while computing Book Profit u/s 115JB. Having regard to the facts and circumstances of the cas4e and the provisions of law, the appellant submits that the Assessing Officer be directed to exclude disallowance made u./s 14A while computing Book profit u/s 115JB. 5. Without prejudice to the foregoing grounds, and in any event, the Appellant submits that the allocation of expenditure under Section 14A read with Rule 8D to the tune of Rs.21,65,696/- is highly excessive and arbitrary, and is required to be reduced substantially.” Additional grounds of appeal (AY 2007-08) 1. “The learned Commissioner of Income Tax (Appeals ) ought to have directed the Assessing Officer to grant full credit for TDS claimed amounting to Rs.22,80,044/-, as against Rs.16,13,545/- allowed by the Assessing Officer. 2. The appellant submits that the Assessing Officer be directed to allow full credit for tax deducted at source amounting To Rs.22,80,044/- having regard to the fact that all certificates of tax deducted at source are before him.”

3 ITA No.5493/Mum/2012 M/s. Laadki Trading & Investments Ltd. Vs. Addl.CIT

The issue raised in ground no. 1, 2, 3&5 relates to confirming the 2.

disallowance of Rs.45,24,390/- u/s 14A read with Rule 8 D of the Act. The brief

facts of the case are that the assessee company was engaged in the business of

trading and investments in shares and securities beside doing money lending

business. The assessee filed its return of income on 31.10.2007 at an income of

Rs.7,38,35,574/-. The case of the assessee was selected for scrutiny and notices u/s

143(2) & 142(1) were duly issued and served upon assessee. The AO framed the

assessment u/s 143(3) vide order dated 29.12.2009 at Rs.7,84,75,009/- under the

normal provisions of the Act and Rs.16,29,60,549/- u/s 115 JB of the Act by

adding Rs.46,39,435/- u/s 14A read with Rule 8D of the Act comprising of

Rs.24,44,070/- under rule 8D(ii) on account of interest and Rs.21,95,365/- under

rule 8D(iii) on the basis of average investments on the ground that assessee

received dividend income of Rs.4,76,68,340/- and disallowance u/s 14A rule 8D of

Rs.10,31,305/-was made by the assessee being expenses pertaining to the exempt

income and worked out the aforesaid disallowance of Rs.46,39,435/- vide para 3 of

the assessment order.

CIT(A) who confirmed the addition to the tune of Rs.45,24,390/- on the ground

4 ITA No.5493/Mum/2012 M/s. Laadki Trading & Investments Ltd. Vs. Addl.CIT

that the assessee himself submitted the calculation of the said disallowance before

the AO and thereby allowed the relief of Rs.1,15,345/- as noted in para 3.3 of the

appeal order by the ld. CIT(A) which is reproduced as under.

“3.3. I find that the appellant has himself accepted the fact that Rs.45,24,390/- would be the calculated amount of disallowance under Section 14A of the Income-tax Act. As per the working submitted by the appellant, it is seen that computation has been done keeping the above facts in mind. The AO is, therefore, required to adopt the disallowance at Rs.45,24,390/- as worked out by the appellant. The addition is sustained to the extent of the above mentioned amount. This ground of appeal is therefore, partly allowed.”

account of interest under rule 8D(ii) of the Act by ignoring the facts of the case of

the assessee that assessee had its own sufficient funds amounting to Rs.65.30

crores whereas the investments at the end of the year were Rs.49.64 crores. The ld.

Counsel for the assessee argued that since the assessee had its own adequate funds

and therefore no disallowance of interest under rule 8D(ii) is called for as rule 8D

was not applicable to current assessment year. The ld. Counsel relied on the

decisions of Bombay High Court in the case of CIT Vs. HDFC Bank Ltd. 366 ITR

505 (Bom.), CIT Vs. SBI DHFL Ltd. 376 ITR 296 (Bom.),Pr. CIT Vs. India

5 ITA No.5493/Mum/2012 M/s. Laadki Trading & Investments Ltd. Vs. Addl.CIT

Gelatine and Chemicals Ltd. 376 ITR 553 (Guj.) in support of his arguments. The

ld Counsel further submitted that the loan funds had substantially decreased

during the year from Rs.5,80,06,448/- to Rs.59,63,482/-. As regards the

disallowance under rule8D (iii) the ld. Counsel submitted that the total expenses

charged to the Profit and Loss A/c were Rs.84,63,105/- and out of the said

expenditure, the assessee had, suo motto, disallowed while filing the return of

income a sum of Rs.10,31,305/- thereby restricting claim of expenses of

Rs.74,34,800/-. It was also pointed out that appellant was fully engaged in the

business of share trading, speculation, and financing, and that dividend was a

passive earning where the amounts were credited directly to the bank account,

without any effort. The ld. Counsel finally prayed that the disallowance of

Rs.21,99,365/- under rule 80D(iii) of the Act is excessive having regard to the

total claim of expenses of Rs.74,31,800/- and net profit of Rs.18.52 crores and

requested for reasonable disallowance under rule 8D(iii). It was also submitted by

the ld. Counsel of the assessee that assessee had never submitted the calculation of

disallowance as mentioned by the CIT(A) in his order rather filed a working sheet

“without prejudice” to the contention as raised u/s 14A read with Rule 8D which

was wrongly treated by the CIT(A) as assessee had worked out the disallowance

u/s 14A rule 8D(iii) of the act thereby treating “without prejudice” submission as

6 ITA No.5493/Mum/2012 M/s. Laadki Trading & Investments Ltd. Vs. Addl.CIT

entire submission by ignoring the main contention raised by the assessee and

therefore, the findings of CIT(A) were erroneous. The ld. CIT(A) also recorded

the facts in the appeal order as regards the assessee’s contention that no interest is

allocable under rule 8D(ii). The ld. AR of the assessee finally submitted that

provisions of section 14A read with Rule 8D were not applicable for the AY 2007-

08 the year under consideration. To support his contention the ld. Counsel placed a

reliance in the case of Godrej & Boyce Mfg. Co. Ltd. Vs. CIT (328 ITR 81) and

prayed that the issue to remitted back to the file of the AO by setting aside the

order of the authorities below to work out a reasonable disallowance, after

considering all contentions of the assessee. The ld. DR relied on the authorities

below.

We find from the order of the authorities below that disallowance of

Rs.23,58,695/- was confirmed by the CIT(A) under rule 8D (ii) and Rs.21,65,696/-

under Rule 8D (iii) being half percent on average investment from the audited

account of the assessee. It is clear that the total shareholder’s funds as on

31.03.2007 were Rs.65.30 crores whereas the total investments as on that date was

Rs.49.65 crores.

7 ITA No.5493/Mum/2012 M/s. Laadki Trading & Investments Ltd. Vs. Addl.CIT

We are in agreement that the submissions of the ld. Counsel for the assessee that

the investments were made out of owned funds of the assessee and therefore, the

disallowance made u/s 14A read with Rule 8D(ii) of Rs. 23,58,695/- were wrong

and against the law as laid down by the Jurisdictional High Court and various other

Courts. In the case of CIT Vs. HDFC Bank Ltd. (supra) the Hon’ble Bomay High

Court has held that assessee’s capital , profits reserves, surplus and current

account deposits were higher than higher than the investments in the tax free

securities and in view of this factual position it would have to be presumed that

investments made by the assessee would be out of the interest free funds available

with the assessee. In the case of CIT Vs Gujrat Power Corporation Ltd (supra) the

Hon’ble Gujrat High Court has held that the assessee had demonstrated that it had

other sources of investments and no part of the borrowed could be stated to be used

for the purpose of earning tax free income, the invocation of the provisions of

section 14A for taxing such interest was not justified. The facts of the case of the

assessee are squarely covered by the above decisions and we respectfully following

the ratio laid down , delete the addition of Rs.5,49,368/- under rule 8D(2)(ii). it

was held that view taken by the Commissioner Appellant and Tribunal was in

accordance with the law and merely because there was a common pool of funds

and a presumption cannot be drawn that investment yielding tax free return were

8 ITA No.5493/Mum/2012 M/s. Laadki Trading & Investments Ltd. Vs. Addl.CIT

made out of borrowed funds. In the case of Pr. CIT Vs. India Gelatine and

Chemicals Ltd. 376 ITR 553 (Guj.) it was held that tribunal categorically found on

the basis of material on record that assessee has tax free return out of which the

investments was made and the deletion of disallowance u/s 14A read with Rule 8D

was justified. The case of the assessee is squarely covered by the above decisions

and we, therefore, delete the disallowance of Rs. 23,58,695/- on account of interest

made under rule 8D(ii). As regards the disallowance u/s 14A read with Rule

8D(iii) of Rs.21,65,696/-, it is pertinent to state that Rule 8D was made applicable

w.e.f. AY 2008-09. We are of the view that Rule 8D is not applicable to the AY

2007-08 in view of the judgment of the Bombay High Court in the case of Godrej

& Boyce Mfg. Co. Ltd. Vs. CIT (328 ITR 81) (supra). Moreover, the disallowance

of Rs. 21,65,696/- was excessive. We, therefore, set aside the order of the CIT(A)

and restore back the matter to the file of the AO with the direction to work out

disallowance u/s 14A on a reasonable basis after allowing reasonable and

appropriate opportunity to the assesee on this points. Thus the additions of Rs.

23,58,695/- is deleted and on the additions of Rs. 21,65,696/- the matter is restored

back to AO for making reasonable disallowance. The appeal of the assessee is

partly allowed. The AO is directed accordingly.

9 ITA No.5493/Mum/2012 M/s. Laadki Trading & Investments Ltd. Vs. Addl.CIT

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

Order pronounced in the open court on 28thJanuary, 2016

Sd/- Sd/- (Shailendra Kumar Yadav) (Rajesh Kumar) �या�यक सद�य / Judicial Member लेखा सद�य / Accountant Member मुंबई Mumbai; �दनांक Dated : 28.01.2016 Ps. Ashwini Gajakosh आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent 3. आयकर आयु�त(अपील) / The CIT(A) 4. आयकर आयु�त / CIT – concerned 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, मुंबई / DR, ITAT, Mumbai 6. गाड� फाईल / Guard File

10 ITA No.5493/Mum/2012 M/s. Laadki Trading & Investments Ltd. Vs. Addl.CIT

आदेशानुसार/ BY ORDER,

उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील�य अ�धकरण, मुंबई / ITAT, Mumbai