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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: SHRI AMIT SHUKLA & SHRI RAMIT KOCHAR
आदेश / O R D E R PER RAMIT KOCHAR, ACCOUNTANT MEMBER:
This appeal, filed by the assessee company, being 21-10-2013 passed by the learned Commissioner of Income Tax (Appeals)- 12, Mumbai (Hereinafter called “the CIT(A)”), for the assessment year 2010-11.
The assessee company has raised the following ground:-
“On the facts and circumstances of the case and in law, the authorities below have erred in making an addition of Rs. 4,01,599/- u/s 14A rwr 8D of the I.T. Act/Rules and the reasons assigned by them were wholly wrong, irrelevant and not in accordance with the facts and ITA 6609/M/13 2 circumstances of the case and provisions of Income tax Act, 1961 and rules made there under:-
The Brief facts of the case are that the assessee company is engaged in the business of manufacture of chemicals. During the course of assessment proceedings u/s 143(3) read with Section 143(2) of the Income Tax Act, 1961(Hereinafter called “the Act”), the learned assessing officer (Hereinafter called “the A.O.”) observed that the assessee company had earned Dividend Income of Rs. 3,65,045/- which is exempt from tax . The AO made disallowance u/s 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 of interest expenditure of Rs. 3,77,194/- under Rule 8D(2)(ii) and Rs. 24,405/- under Rule 8D(2)(iii) of Income Tax Rules, 1962, aggregating to total disallowance of Rs. 4,01,599/- vide assessment orders dated 25.12.2012 u/s 143(3) read with Section 143(2) of the Act.
4.Aggrieved by the assessment order dated 25.12.2012 passed by the AO, the assessee company carried the matter before the CIT(A) in first appeal and made the following submissions :-
“The second ground of appeal relates to the addition of a sum of Rs.4,0l,599/- u/s.14A r.w.r 8D of the I T Act. In this connection we would like to submit that the company has its owned funds to the tune of Rs.721.02 Lacs. Out of the said interest free funds a sum of Rs.48.8O Lacs is said to be invested into shares and securities. There is no cost incurred by the appellant on these funds and which are available with the appellant company without any cost and thus the company was entitled to invest these funds anywhere. It has been held in various judicial decisions, that when there is no cost incurred for earning exempt income, then there should not be any notional disallowance. Further in the case of the appellant himself, it had been held by the CIT(A) that there was no need of any disallowance of such expenses. Further it is logically also incorrect when there no cost, why should there be any disallowance of any kind for any exempted income. At the most the disallowance ought to have been ½ % of the average value of the cost of investment which works out to only Rs. 24,405/- under rule 8D of the IT Rules. The disallowance thus made by the A.O. was very much excessive and therefore need to be deleted and the relief be granted to the appellant.”
ITA 6609/M/13 3
The CIT(A) after careful consideration of the facts held that the assessee company did not apportion any expenditure in relation to its exempt income bearing investments in spite of the fact that during the year the assessee company had earned exempt dividend income of Rs. 3,65,045/- and made substantial investments. The CIT(A) held that the assessee company is relying on the decision of the CIT(A) in assessee’s company case for the assessment year 2005-06 while the relevant assessment year is 2010-11 and therefore the issue in dispute has to be decided in the light of sub-section (2) of section 14 of the Act read with Rule 8D of Income Tax Rules, 1962 and also the decision of Hon’ble jurisdictional High Court in the case of Godrej and Boyce Mfg. Co. Ltd. v. CIT (2010) 328 ITR 81 (Bom) and the disallowance has been rightly made by the A.O. The assessee company contended that the assessee company had interest free fund in the form of share capital including reserves and surplus amounting to Rs. 7.21 crores, therefore, no disallowance is warranted on account of interest expenses. However, the CIT(A) held that the share capital including the reserves and surplus amounts to Rs. 7.21 crores but as per the balance sheet, application of fund represents ‘fixed ássets’ of Rs. 7.94 crores (after providing for depreciation as per the Companies Act), inventories of Rs. 4.68 crores, sundry debtors of Rs. 4.34 crores, loans and advances of Rs. 4.27 crores. Since fund in the form of share capital etc. was not sufficient, a borrowing of Rs. 8.78 crores have been made by the assessee company. Thus the entire fund is fungible in nature, hence, the A.O. has rightly made the addition of Rs.3,77,194/- as per clause (ii) of Rule 8D(2) of the Income Tax Rules, 1962 in the light of the decision of Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. (supra). Similarly, the disallowance under Rule 8D(2)(iii) of Income Tax Rules,1962 of Rs.24,405/- was upheld in the light of decision of Godrej and Boyce Manufacturing Co. Ltd.(supra) and the provisions of Section 14A of the Act read with Rule 8D(2)(iii) of Income Tax Rules, 1962.
ITA 6609/M/13 4 6.Aggrieved by the orders of the CIT(A), the assessee company is in further appeal before the Tribunal.
5. The ld. Counsel for the asessee company submitted that the assessee company has made investment in shares and securities amounting to Rs. 48.80 lakhs for more than five years back and the Revenue has made addition on account of disallowance expenditure relating to exempt income which has been deleted by the CIT(A) for assessment year 2005-06 vide order dated 25.3.2008 and in assessment year 2006-07, the disallowance has been restricted to 0.5% of the average value of investment which has been upheld by the CIT(A) vide orders dated 18/12/2009 and the Revenue is not in appeal for the assessment years 2005-06 & 2006-07 before the Tribunal or any other judicial forums. The ld. Counsel submitted that there is only an investment of Rs. 48.80 lakhs as against the share capital of Rs. 7.21 crores and exempt dividend amount of Rs. 3,65,045/- earned by the assessee company. These investments are appearing in the balance sheet of the assessee company for the last more than five years and no investment has been made during the year under consideration and since the interest disallowed for the earlier year is deleted by the CIT(A), on the same analogy, no disallowance can be made in this assessment year. Moreover, no borrowed funds whatsoever were used for the purpose of making investment of Rs. 48.80 lakhs.With respect to the disallowance of Rs.24,405/- made under Section 14A of the Act read with Rule 8D(2)(iii) of Income Tax Rules,1962, the ld. Counsel of the assessee company submitted that the assessee company is agreeable for disallowance of the expenditure as computed by the authorities below.
The ld. D.R., on the other hand, relied on the decision of Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. ITA 6609/M/13 5 (supra) and submitted that for earlier assessment years i.e. 2005-06 and 2006-07, Rule 8D was not there and since this Rule is applicable w.e.f. assessment year 2008-09 as held by the Hon’ble Bombay Court in the case of Godrej and Boyce Manufacturing Co. Ltd.(supra), the A.O. has rightly made the addition as funds invested are mixed funds.
We have considered the rival contention and perused the material available on record. It is stated before us that this investment of Rs.48.80 lacs was made more than five years back and no borrowed funds have been used for the purpose of making investment of Rs. 48.80 lakhs but the facts as such are not appearing from the orders of the authorities below. The Ld. Counsel of the assessee company has submitted that the CIT(A) has already deleted the addition for the assessment year 2005-06 and 2006-07 with respect to the interest expenditure disallowed. The ld. Counsel has submitted that the investment is only Rs. 48.80 lakhs which is appearing for last more than five years and no fresh investment is made during the previous year relevant to assessment year. We have observed that the CIT(A) in its orders dated 25.03.2008 for assessment year 2005-06 has considered investment of Rs.6,44,263/- for the purposes of disallowance while in the impugned assessment year, the investment is Rs.48,80,960/- considered for computing disallowance u/s 14A of the Act read with Rule 8D(2)(ii) of Income Tax Rules, 1962 so it not known when the investments were made and whether the interest bearing funds were utilized for making investment, these facts need investigation and verification by the authorities below and in our considered view, the interest of justice will be best served aside if the matter is restored to the file of the AO for computation of disallowance u/s 14A of the Act read with Rule 8D(2)(i) or (ii) of Income Tax Rules, 1962 relating to interest expenditure in accordance with the law keeping in view the judgment of Hon’ble Bombay High Court in the case of Godrej and Boyce Manufacturing Co. Ltd(supra) . We order accordingly.
ITA 6609/M/13 6 With respect to the addition of Rs. 24,405/- u/s 14A of the Act read with Rule 8D(2)(iii) of Income Tax Rules, 1962 , we find that as per the decision of Hon’ble Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. (supra), Rule 8D of Income Tax Rules, 1962 is applicable only prospectively i.e. from assessment year 2008-09 and the relevant assessment year is assessment year 2010-11 whereby Rule 8D(2)(iii) is applicable. The Ld. Counsel of the assessee company has also consented to the disallowance of expenditure of Rs.24,405/- under Rule 8D(2)(iii) of Income Tax Rules, 1962 read with Section 14A of the Act, hence based on our above discussions and reasoning , we uphold the orders of the CIT(A) sustaining the disallowance of expenditure of Rs.24,405/- made by the AO under Rule 8D(2)(iii) of Income Tax Rules, 1962 read with Section 14A of the Act , as we have found no infirmity in the orders of the authorities below w.r.t. the additions@0.5% of average investment as prescribed under Rule 8D(2)(iii) of Income Tax Rules, 1962 read with Section 14A of the Act. We order accordingly.
In the result, the appeal filed by the assessee company is partly allowed for statistical purposes
Order pronounced in the open court on 16th December, 2015. आदेश क� घोषणा खुले �यायालय म� �दनांकः 16-12-2015 को क� गई ।