IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH `C': NEW DELHI
BEFORE SHRI GEORGE GEORGE K., JUDICIAL MEMBER
AND
SHRI T.S. KAPOOR, ACCOUNTANT MEMBER
ITA No. 4582/Del/2013
Assessment Year 2009-10
Integrated Databases India. Ltd. Vs. DCIT, Circle-11(1)
K-9- Block, Connaught Cireus, New Delhi.
New Delhi - 110001
(PAN AAACI 2809 J)
(Appellant) (Respondent)
Appellant by : Shri Salil Agarwal, Advocate And
Shri Shailesh Gupta, CA
Respondent by: Sh. Robin Rawal, Sr. D.R.
ORDER
PER SHRI GEORGE GEORGE K, JM:
1. This appeal, at the instance of the assessee, is directed against the order of the
CIT(A) dated 10.06.2013. The relevant assessment year is 2009-10.
2. The effective grounds argued in the course of the hearing reads as follows:-
"2(a) That the Ld. CIT(A) has gone wrong in disallowing expenses for earning
Dividend Income;
2(b) That the Ld. CIT(A) has gone in disallowing expenses for earning Dividend
Income by considering those Investment on which no dividend has been
received by the assessee company during the year."
ITA No.4582/Del /2013 2
3. Briefly stated the facts of the case are as follows.
The assessee is a limited company. It is engaged in the business of book
publishing and export of software. The return of income was filed on 29.09.2009
declaring total income of Rs.1,50,37,780/-. The assessment was taken up for
scrutiny by issuing of notice u/s 143(2) of the Act and the scrutiny assessment was
completed u/s 143(3) of the Act (assessment order dated 13.12.2011). In the scrutiny
assessment completed, the Assessing Officer had made a disallowance u/s 14A of
the Act amounting to Rs.2,34,629/-. The relevant observation of the Assessing
Officer in making the addition of Rs.2,34,629/- reads as follow:-
(at Page 6) " Disallowance under Rule 8D of IT Rules being 0.5% of the average
investment i.e. Rs.8,20,44,780/- comes out to Rs.4,10,224/-. The assessee has
itself disallowed an amount of Rs.1,75,592/-, however, the difference of
Rs.2,34,629/- (410224-175595) is therefore, disallowed and added back to the
total income of the assessee......."
4. The assessee being aggrieved filed an appeal before the First Appellate
Authority. Before CIT(A), it was submitted that the AO is not justified in
including investment, which have not yield income, for the purpose of
disallowance under Rule 8D(2)(iii). The CIT(A) rejected the contentions raised
by the assessee and affirmed the order of the assessment. However, CIT(A)
directed the AO to exclude a sum of Rs.2.6 crores being the mutual fund, on
which, the assessee had paid capital gains tax under the head long term/short term
capital gains for the AYs 2008-09 and 2009-10. For re-computation of
disallowance u/s 14A, the appeal of the assessee was restored to the AO (for the
exclusion of 2.6 crores from the "average investment").
ITA No.4582/Del /2013 3
5. The assessee being aggrieved is in appeal before us. Ld. counsel for the
assessee submitted that the investment on which no dividend/income is received
for the current assessment year are to be excluded for the purpose of disallowance
u/s 14A r.w.r. 8D(2)(iii) of the Act. It was submitted by the Ld. counsel for the
assessee that the following judicial of precedents of the Hon'ble High Court and
the Tribunal have held that the investment on which no income was received are
to be excluded, while computing disallowance under Rule 8D(2)(iii) of the IT
Rules.
i) CIT Vs. Holcim India P. Ltd. in ITA No.486/2014 and 299/2014.
ii) ACIT Vs. M/s Computer Age Management Services (P) Ltd. in ITA
No. 1236 and 1240/Mds/2014.
iii) Mitshubishi Corporation Pvt. Ltd. Vs. DCIT in ITA No. 803/Del/2014.
iv) LG Chemical India (P) Ltd. in ITA No.331/Del/2013.
v) M/s Alliance Infrastructure Projects Pvt. Ltd. Vs. DCIT in ITA No.220
and 1043/Bang/2013.
6. Ld. D.R. present was duly heard.
7. We have heard the rival submissions and perused the material on record.
Ld. AR has not disputed the applicability of Rule 8D(2)(iii) of the IT Rules, 1962.
The dispute is with regard to quantum of computation of disallowance by
invoking Rule 8D(2)(iii) of the IT Rules. It is a case of the assessee that those
investments of shares and mutual funds on which no dividend is actually received
(though the same are eligible for dividends) ought to be excluded from "average
investment" for the purpose of computing disallowance under Rule 8D(2)(iii) of
ITA No.4582/Del /2013 4
the IT Rules. The Hon'ble Delhi High Court in the case of CIT Vs. Holcim India
P. Ltd. reported in ITA No.486/2014 and 299/2014 have held that if there is no
exempt income earned during the year, they cannot be disallowed by invoking the
provision of Section 14A of the Act. The relevant finding of the Hon'ble
Jurisdictional High Court in the case of Holcim India P. Ltd. (Supra) reads as
follows:
Para 14 " On the issue whether the respondent-assessee could have earned dividend
income and even if no dividend income was earned, yet section 14A can be
invoked and disallowance of expenditure can be made, there are three
decisions of the different High Courts directly on the issue and against the
appellant Revenue. No contrary decision of a High Court has been shown to
us. The Punjab and Haryana High Court in Commissioner of Income Tax,
Faridabad Vs. M/s Lakhani Marketing Incl., ITA No. 970/2008, decided on
02.04.2014, made reference to two earlier decisions of the same Court in CIT
Vs. Hero Cycles Limited, [2010] 323 ITR 518 and CIT Vs. Winsome Textile
Industries Limited, [2009] 319 ITR 204 to hold that section 14A cannot be
invoked when no exempt income was earned. The second decision is of the
Gujarat High Court in Commissioner of Income-Tax I Vs. Corrtech Energy
(P.) Ltd. [2014] 223 Taxmann 130 (Guj.). The third decision is of the
Allahabad High Court in Income Tax Appeal No. 88 of 2014, Commissioner
of Income Tax (ii) Kanpur, Vs. M/s Shivam Motors (P) Ltd. decided on
05.05.2014. In the said decision it has been held:
"As regards the second question, Section 14A of the Act provides that
for the purposes of computing the total income under the Chapter, no
deduction shall be allowed in respect of expenditure incurred by the
assessee in relation to income which does not form part of the total
income under the Act. Hence, what section 14A provides is that if
there is any income which does not form part of the income under the
Act, the expenditure which is incurred for earning the income is not
an allowable deduction. For the year in question, the finding of fact is
that the assessee had not earned any tax free income. Hence, in the
absence of any tax free income, the corresponding expenditure could
not be worked out for disallowance. The view of the CIT(A), which
has been affirmed by the Tribunal, hence does not give rise to any
substantial question of law. Hence, the deletion of the disallowance of
Rs.2,03,752/- made by the Assessing Officer was in order".
Para 15. Income exempt under Section 10 in a particular assessment year, may not
have been exempt earlier and can become taxable in future years. Further,
whether income earned in a subsequent year would or would not be taxable,
ITA No.4582/Del /2013 5
may depend upon the nature of transaction entered into in the subsequent
assessment year.........."
8. Similarly the Chennai Bench of the ITAT in the case of ACIT Vs. M/s
Computer Age Management Services (P) Ltd. reported in ITA No.1236 and
1240/Mds/2014 has held as follows:-
"Para 10. We have heard rival contentions of both the parties and perused orders of lower
authorities and the decision relied on. On a careful consideration of the facts
and circumstances of the case, we are not in agreement with the assessee that
no expenditure was incurred in managing the portfolio of the assessee. The
assessee company is into the business of registrars and share transfer agent. It
is not in dispute that management of the assessee company periodically
monitors through its Board of Directors about the investments. In such
circumstances, it cannot be said that assessee has not at all incurred any
expenses in managing its portfolios.
Para 11. The Kolkata Bench of this Tribunal in REI Agro Ltd. Vs. DCIT (supra) held
that disallowance under section 14A read with Rule 8D can be made only by
taking into consideration the investments which has given rise to such income
which does not form part of the total income. While holding so, the Tribunal
observed as under:-
"8. In respect of provisions of Rule 8D(2)(iii) which is the subject
matter of the assessee's appeal in the assessee's hand, a perusal of the
said provision shows that what is disallowable under Rule 8D(2)(iii)
is the amount equal to Y2 percentage of the average value of the
investment the income from which does not or shall not form part of
the total income. Thus, under sub-clause (iii) what is disallowed is Y2
percentage of the numerator B in Rule Bo(2)(ii). Again this is to be
calculated in the same line as mentioned earlier in respect of
Numerator B in Rule 8D(2)(ii) of the Act.
8.1 Thus, not all investments become the subject matter of
consideration when computing disallowance under section 14A read
with rule 8D. The disallowance under section 14A read with rule 8D
is to be in relation to the income which does not form part of the total
income and this can be done only by taking into consideration the
investment which has given rise to this income which does not form
part of the total income. Under the circumstances, the computation
of the disallowance under section 14A read with rule 8D(2)(iii) which
is issue in the assessee's appeal is restored to the file of the Assessing
Officer for recomputation in line with the direction given above. No
disallowance under section 14A read with rule BD(2)(ii) and (ii) can
be made in this case."
Para 12. Following the said decision, we direct the Assessing Officer to recompute the
ITA No.4582/Del /2013 6
disallowance under Rule 8D(2)(iii) by taking the amount equal to 1/2
percentage of the average value of the investment which has given rise to the
income which does not form part of total income."
9. In view of the above, jurisdictional precedents on the subject, we direct the
AO to exclude from the "average investment" those investments on which no
dividend/income was received by the assessee in the current assessment year. For
the above said purpose, the issue is restored to the AO. The AO shall afford
reasonable opportunity of being heard to the assessee before re-computing
deduction under Rule 8D(2)(iii) of the IT Rules. It is ordered accordingly.
10. In the result, appeal of the assessee is allowed for statistical purposes.
The decision was pronounced in the open Court on 6th February, 2015.
Sd/- Sd/-
(T.S. KAPOOR) (GEORGE GEORGE K.)
Accountant Member Judicial Member
Dated: 6th February, 2015.
Aks/-
Copy forwarded to
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
Asst. Registrar, ITAT, New Delhi
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