PRAYAS ENGINEERING LIMITED(FORMERLY KNOWN AS VVN MFG. INV. LTD.),ANAND vs. THE ACIT.,ANAND RANGE, ANAND

ITA Nos. 1145 & 1146/Ahd/2014 are two appeals by two different assessees preferred against two separate orders of the Ld. CIT(A)-II, Baroda dated 12.12.2013 pertaining to A.Y. 2006-07. 2. Since common issues are involved in these appeals, therefore, they were heard together and are disposed of by this common order for the sake of convenience and brevity.

The common grievance in both these appeals relates to the disallowance u/s. 14A read with Rule 8D.

During the course of the scrutiny assessment proceedings, the A.O. noticed that the assessee has earned dividend income and has claimed the same exempt from tax. The assessee was asked to explain why disallowance u/s. 14A read with Rule 8D should not be made. The assessee objected to this proposition made by the A.O. stating that it has not incurred any expenditure for earning the exempt income.

The A.O. was not convinced with the contention of the assessee and found that the assessee has borrowed funds on which it has claimed interest expenditure. The A.O. formed a belief that part of the borrowed funds must have been used for making the investment from which the assessee has earned exempt income. The A.O. proceeded by computing the disallowance of proportionate interest and made the impugned additions.

The assessee assailed the assessment before the ld. CIT(A) but without any success.

Before us, the ld. counsel for the assessee vehemently stated that the action of the A.O. is not in accordance with law as Rule 8d has been held to be applicable with effect from A.Y. 2008-09. The ld. counsel further stated that the A.O. erred in not appreciating the facts in true perspective. It is the say of the ld. counsel that the interest free reserve and surplus of the assessee are far more in excess of the investments. Therefore, disallowance of proportionate interest is uncalled for.

Per contra, the ld. D.R. strongly supported the findings of the revenue authorities.

We have given a thoughtful consideration to the orders of the authorities below. We have also considered the financial statements of the assessee. We find that the interest free reserve and surplus of the appellants are in excess of the investments. Therefore, we do not find any merit in making the disallowance on account of proportionate expenses. For this proposition, we draw support from the decision of the Hon’ble High Court of Bombay in the case of Reliance Utilities and Power Ltd. 313 ITR 340 followed by HDFC Bank in 366 ITR 505. 10. However, at the same time, we are of the opinion that some reasonable disallowance ought to be made in respect of earning of the exempt income.

In the result, both these appeals are partly allowed.