DCIT, NEW DELHI vs. M/S. SVP INDUSTRIES LTD., MUZAFFARNAGAR

The ground of appeal raised by the Revenue is as follows:

On the facts and in the circumstances of the case, the CIT(A) has erred in holding that Rule 8D applied only in a case where the assessee has paid interest on investment. 4. The order of the CIT(A) is erroneous and is not tenable on facts and in law.” 3. The assessee company is engaged in business of manufacture and sale of Spirit, IMFL, and Country Liquor. As per the return of income the assessee had made investments during the year and earned the income which does not form part of total income. The investment at the beginning of the year were Rs.3,95,26,224/- and at the close of the year the amount of the investments was Rs.5,34,94,339/-. The assessee was asked to explain vide order sheet entry dated 24/5/2010 as to why the disallowance on investments be not made as envisaged in Section 14A of the Income Tax Act, 1961. In reply to this query, the assessee replied as under:

The AO held that as making investments is not the business of the assessee, the proportionate expenditure on the amounts spent on these investments has to be disallowed under the provisions of Section 14A of the Act read with Rule 8D of the Income Tax Rules. The AO further held that it is a well settled law that only those expenses can be allowed to the assessee which are incurred and relatable to the earning of taxable income. Further, to avoid litigation with regard to calculation of disallowance under this section, explanation by way of Rule 8D of the Income Tax Rules has been provided wherein a clear formula has been given to calculate the expenses which are relatable to the tax free income i.e., the investments of the assessee. In view of these reasons, the disallowance under Section 14A of the Income Tax Act calculated by AO as under:-

The CIT(A) held that the investment at the beginning of the year was Rs.5,03,41,498/- and at the end of the year it was Rs.5,34,94,339/-. Thus, there was increase in the investment to the tune of Rs.31,52,841/-. This increase in investment was stated to be made out of the funds available with the assessee and therefore, no component of interest on this amount was involved which could warrant applicability of Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules. The CIT(A) categorically observed that the assessee contended that no expenses have been incurred in earning the exempt income of Rs.96,622/-.

The DR relied upon the Assessment Order and stated that making investment is not a business of the assessee and proportionate expenditure amount spent on these investments has rightly been disallowed by the AO.

The AR relied on the CIT(A)’s order and stated that no expenditure was incurred on these investment during the year.

We have perused the records and proceedings as well as the submissions made by both the parties. In this particular case the investment at the beginning of the year was Rs. 5,03,41,498/- and at the end of the year, it was Rs.5,34,94,339/-. There was increase in the investment to the extent of Rs.31,52,841/-. This increase in investment was stated to be made out of the funds available with the assessee, and, therefore, no component of interest on this amount was involved as per assessee. The assessee has contended that no expenses have incurred in earning the exempt income of Rs.96,622/-. The same was recorded in CIT(A)’s order as well. The AO while disallowing this has not brought on record anything to establish that the assessee had incurred any expenses while earning this exempt income. Therefore, the action of the AO in disallowing the same of Rs.16,00,583/- against the dividend income of Rs.96,622/- u/s 14A read with Rule 8D is not just and proper as there is no expenditure incurred by the assessee for increase in the investment. Though the Assessing Officer has given the finding that as making investment is not the business of the assessee accordingly the proportionate expenditure on the amounts spent on these investments needs to be disallowed he has not stated any specific satisfaction while applying Section 14A read with Rule 8D in this particular case. The provision of Section 14A of the Act incorporates that the assessing officer shall determine the amount of expenditure incurred in relation to such income which does not form part of total income under this Act in accordance with law such method as may be prescribed and if the Assessing Officer after taking into consideration of the accounts of the assessee is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. The expenditure incurred was not clearly stated in the Assessment Order by the Assessing Officers as well as neither the assessee has given any substantial evidence in respect of his claim that he has not incurred any expenditure for investment. Though CIT(A) held that provisions of Rule 8D for determining such expenses applies only in case where the assessee pays interest on the investment. But in this case there are certain expenses which any assessee can incur during the processw of investment and such expenses/expenditure has to be taken into account. The Assessing Officer has not given clear picture about the expenditure which has been incurred by the assessee and, therefore, the same has to be looked into by the AO.

While rejecting the claim of the assessee with regard to the expenditure or no expenditure in relation to exempt income, the AO must specify cogent reasons for the same and has to show why he is not satisfied with the correctness of the assessee’s claim as held in case of Maxopp Investment Ltd. V. Commissioner of Income-tax, New Delhi [2011] 15 taxmann.Com 390 (Delhi HC). The Hon’ble Supreme Court in case of CIT vs. Walfort Share and Stock Brokers (P) Ltd. 326 ITR 1 (SC) wherein it was held that “For attracting Section 14A, there has to be proximate cause for disallowance, which is its relationship with the tax exempt income.” In case of CIT-II vs. Hero Cycles Ltd. (ITA No. 331/2009 (O&M): decided on 04.11.2009) the Punjab and Haryana High Court held that “Disallowance under Section 14A requires finding of incurring expenditure where it is found that for earning exempt income no expenditure has been incurred, disallowance under Section 14A cannot stand.”

Besides that the CIT(A) has given a finding that there was no expenditure incurred by the assessee for increase in investment and when the expenses in respect of exempt income have not been incurred by the assessee, the question of disallowance u/s. 14A does not arise. In assessee’s case, increase in investment was from the funds available with the assessee and no interest has been paid, but there are certain expenditures which are incurred during the process of investment. While applying provisions under Section 14A of the Act and Rule 8D of the Income Tax Rules, these factors should be looked into. But in this case, the CIT(A) held that the Assessing Officer has not placed any material on record nor has he made any clear cut finding to prove that any expenditure had been incurred by the assessee and thus disallowance u/s. 14A read with Rule 8D is not warranted instead should have been remanded back the matter to the Assessing Officer to verify the expenditure incurred while earning the dividend income. Thus finding of the CIT(A) that the disallowance of Rs. 16,00,583 against dividend income of Rs. 96,622/- was not proper. In view of the above the matter is remanded back to the Assessing Officer for examining the expenditure incurred against the investment as against the dividend income earned by the assessee.

In result, appeal of the Revenue is disposed off accordingly.