REHAB HOUSING P. LTD,MUMBAI vs. ASST CIT CEN CIR 9, MUMBAI

This appeal filed by the assessee on 28.10.2013 is against the order of the CIT (A)-37, Mumbai dated 10.9.2013 for the assessment year 2010-2011.

In this appeal, the solitary issue, which is the subject matter of adjudication before us relates to the disallowance u/s 14A of the Act. Brief facts in this regard are that in the assessment, AO made a disallowance of Rs. 31,885/- under clause (ii) of Rule 8D(2) and also made another disallowance under clause (iii) of Rule 8D(2) of the IT Rules, 1962. On appeal, CIT (A) dismissed the appeal. 3. Before us, at the outset, Ld Counsel for the assessee submitted that this is a case where no interest was ever paid by the assessee as evident from the Profit & Loss Account. Referring to the sum of Rs. 1,62,769/- on account of „interest expenses‟ appear in the books of account, Ld Counsel for the assessee brought our attention to page 46 of the paper book and the contents of para 6, ie the submissions of the assessee dated 26.8.2013 filed before the CIT (A) on 2.9.2013, and mentioned that the said sums relate to the loss of interest on the fixed deposit, which was prematurely terminated and also towards delayed payment and they have nothing to do with the investment in shares / mutual funds in any form. On perusal of the said submissions, we find this is a case where the Revenue Authorities mechanically invoked the provisions of section 14A read with Rule 8D of the Rules, without going into the nitty gritty of the interest account. It is unfortunate that the officers of the Department could not find difference between “the interest expenditure on the loan borrowed” and “the interest loss on account of premature termination of the FDs” with banks. The later is the case here. After hearing the Ld Representatives of both the parties, we are of the opinion that clause (ii) of Rule 8D of the Rules need not be invoked for making any disallowance. To that extent, assessee gets relief. Accordingly, AO is ordered.

Regarding the disallowance made under clause (iii) of the Rule 8D(2), Ld Counsel for the assessee relied on various legal propositions. In this regard, he brought our attention to each and every account of the Profit & Loss Account and submitted that none of these expenses are directly relatable to the earning of the dividend income. Notwithstanding the said arguments, Ld Counsel for the assessee brought our attention to the order of the AO for the earlier AY 2009-2010 and demonstrated that the officers accepted the assessee‟s submission of restricting the disallowance to the amount of Rs. 4,89,834/- u/s 14A of the Act. In this regard, he mentioned that the same amount was arrived at after establishing the proportion to the dividend income qua dividend yielding investment. In this regard, he brought our attention to page 44 of the paper book to demonstrate that no expenditure was incurred towards advisors and agents. Further, he brought our attention to page 30 of the PB, which the computation of disallowance u/s 14A of the Act applying the similar formula of proportion between the exempt income versus dividend yielding investment.

After hearing both the parties and on perusal of the said page 30 of the PB, we find the disallowance of Rs. 4,54,399/- is in tune with the decision of the AO for the AY 2009-2010. No specific reason is brought our before us as to why the similar formula should not be followed for this year also instead of mechanically adopting the formula laid down in Rule 8D(2) of the Rules. Considering the same, we direct the AO to follow the method adopted by him for the earlier AY 2009-2010 and restrict the disallowance to Rs. 4,54,400/- (rounded of). Accordingly, grounds raised