B4S SOLUTION P.LTD,GHAZIABAD vs. ACIT, CIRCLE-4(2), NEW DELHI

The assessee has raised the following grounds:-

Briefly stated, the assessee company is engaged in the business of security services, labour contract work and operation/maintenance work of telecommunication towers. For AY 2017-18, it filed its return on 01.11.2017 declaring income of Rs. 9,97,72,810/-. The case was selected for scrutiny through CASS. In response to statutory notice(s) reply/details have been filed through system which the Ld. Assessing Officer (“AO”) examined. The Ld. AO found that the assessee earned dividend of Rs. 74,08,555/- which it claimed exempt under section 10(34) of the Income Tax Act, 1961 (the “Act”). However, the assessee did not make any disallowance suo moto under section 14A of the Act on the investments made in equity shares. The Ld. AO disallowed Rs. 30,65,239/- being 1% of average monthly investments during the period April, 2016 to March, 2017 under section 14A r.w. Rule 8D of Income Tax Rules, 1962 (“the Rules”) and added it to the income of the assessee. Accordingly, he completed the assessment under section 143(3) of the Act on total income of Rs. 10,28,38,000/- on 22.12.2019.

The assessee filed appeal before the Ld. CIT(A). During appellate proceedings, the assessee made a lengthy written submission which has been reproduced by the Ld. CIT(A) in para 3 at pages 2-8 of the appellate order. The Ld. CIT(A) recorded the following observations and findings on the submissions of the assessee in para 4.1:-

Dissatisfied, the assessee is in appeal before the Tribunal and all the four grounds relate thereto.

The Ld. AR submitted that the Ld. CIT(A) is not correct in sustaining the impugned disallowance under section 14A r.w. Rule 8D of the Rules as he did not appreciate that the assessee neither incurred any expenditure to earn exempt income nor there is any possibility to incur such expenditure. The assessee has received dividend from its subsidiary on investment made in earlier year i.e. AY 2016-17. Dividend comes automatically for which there is no involvement of staff / management as it is credited by e-transfer. Moreover, the assessee made the said investment out of its own non-interest bearing funds and not out of any borrowed capital. The Ld. AR further submitted that in its case in subsequent years provisions of section 14A have not been invoked. In the absence of incurring any direct/indirect expenditure against the exempt income, disallowance under section 14A is against the law being wholly arbitrary, he argued.

The Ld. DR relied on the order of Ld. AO/CIT(A).

We have considered the submission of the parties and perused the records. It is not in dispute that the assessee did not make any disallowance suo-moto under section 14A as it earned the exempt dividend income from its investment made in the immediately preceding year in its subsidiary company out of its own non-interest bearing funds without incurring any direct/indirect expenditure. These contentions were raised before the Ld. AO as also Ld. CIT(A). None of them contradicted these contentions by bringing on record any material. There has to be a proximate cause for disallowance which is its relationship with tax exempt income. In the absence thereof, the provision of section 14A of the Act is inapplicable as held by the Hon’ble Supreme Court in CIT vs. Walfort Share & Stock Broker (P) Ltd. (2010) 192 Taxman 211(SC).

Having recorded the finding that the assessee has not incurred any interest expenditure; no direct or indirect expenditure has been claimed by the assessee towards earning of exempt dividend income, in our opinion, the Ld. CIT(A) was not justified in sustaining the impugned disallowance being 1% of average investment by applying Rule 8D(2)(iii). We, therefore, direct the Ld. AO to delete the impugned disallowance.

In the result, appeal of the assessee is allowed.