IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: `F', NEW DELHI
BEFORE SHRI J.S. REDDY, ACCOUNTANT MEMBER
AND
SHRI C.M. GARG, JUDICIAL MEMBER
I.T.A .No. 2069/Del/2012
(ASSESSMENT YEAR- 2006-07)
DCIT, vs R.P. Electronics,
Circle 30(1), Room No. 106, B-7/2, Okhla Inds. Estate,
New Delhi. Phase-II, New Delhi.
AAAFR4909H
&
Cross Objection Nos. 354/Del/2012
(ASSESSMENT YEAR- 2006-07)
R.P. Electronics, vs DCIT,
B-7/2, Okhla Inds. Estate, Circle 30(1), Room No. 106,
Phase-II, New Delhi. New Delhi.
AAAFR4909H
Appellant by Sh. Vikram Sahay, Sr. DR
Respondent by Sh. P.N. Mehta, FCA
Date of Hearing: 01/07/2015
Date of Pronouncement: 07/07/2015
ORDER
PER C.M. GARG, J.M.
The appeals of the Revenue as well as cross objection of the
assessee have been directed against the order of the Commissioner of
ITA No. 2069/D/2012 & CO No. 354/D/2012 2
Income Tax (Appeals)-XXV, New Delhi dated 21/02/2012 in appeal no.
175/2008-09 for A.Y. 2006-07.
2. The sole ground raised by the Revenue in ITA No. 2069/Del/2012
reads as under:
" On the facts and in the circumstances of the case, ld. CIT(A)-XXV,
New Delhi has erred in deleting the addition of Rs. 14,35,233/- out of
total addition of Rs. 15,35,233/- made by AO u/s 14A read with Rule 8D
of I.T. Rules."
3. Cross objections raised by the assessee in CO No. 354/Del/2012
read as under:
1. "That the CIT(Appeal) XXV New Delhi erred on facts and in
law in confirming the disallowance of interest expenditure
amounting to Rs. 1,00,000/- u/s 14A Income-tax Act, 1961
(the Act), alleged to have been incurred for earning tax free
dividend income.
2. That the CIT(A) erred on facts and in law in not holding that
disallowance u/s 14A of the Act, could not have been worked
out as per the method provided in Rule 8D of the Income-tax
Rules, 1962 (`the Rules') since the same was prospective in
operation and was not applicable to the year under
consideration."
4. Briefly stated the facts giving rise to these cases are that the AO
selected the case for scrutiny and noticed that the assessee had claimed
exemption u/s 10(34) of the Income Tax Act, 1961 (for short the Act) of Rs.
20,83,618/- on dividend income. The AO vide questionnaire dated
17/10/2008 asked the assessee to show cause why not proportionate
ITA No. 2069/D/2012 & CO No. 354/D/2012 3
expenses be disallowed u/s 14A of the Act for earning dividend income
being exempted income. After considering replies of the assessee dated
11/12/2008 and 17/12/2008 the AO invoked Rule 8D and calculated
disallowance u/s 14A of the Act to Rs. 15,35,233/- and added the same to
the taxable income of the assessee. The aggrieved assessee preferred an
appeal before the CIT(A) which was partly allowed confirming and
restricting the allowance to the extent of Rs. 1 lakh and remaining balance
of Rs. 14,35,233/- was directed to be deleted.
5. Now the aggrieved revenue before this Tribunal in the second appeal
with the sole ground as reproduced hereinabove and the assessee has
also filed its cross objections supporting the part relief and challenging the
confirmed disallowance of Rs. 1 lakh. We have heard argument of both the
sides and carefully perused the relevant material placed on record, inter-
alia, the assessment order, impugned order and written submissions and
case laws relied by both the sides.
6. Undisputedly Rule 8D of the I.T. Rules, 1962 (for short `the Rules') is
not applicable in the present case of the assessee as the cases related to
A.Y. 2006-07 and the same is applicable from A.Y. 2008-09 onwards. The
authorities below have not disputed that the assessee declared tax free
dividend income of Rs. 20,83,618/- which was claimed as exempt u/s
10(34) of the Act in the return of income. From operative part of the
ITA No. 2069/D/2012 & CO No. 354/D/2012 4
impugned order we note that the CIT(A) granted relief for the assessee with
following observations and conclusions:
3. "The assessee has taken as many as 2 grounds of appeal but
the main grievance of the assessee is against the disallowance
of interest of Rs. 15,35,233/- u/s 14A with respect to dividend
income which is adjudicated accordingly.
3.1The facts emanating from the order of the AO and the
submissions of the assessee is that the assessee is a partnership
firm and is a distributor of dry cell batteries. The assessee has
received the dividend income of Rs. 20,83,618/- and claimed
the same as exempt u/s 10(34). The total investment of the
assessee in the stock/mutual fund is Rs. 1,40,04,084/-. The
assessee has declared the interest income of Rs. 21,03,300/-
and has claimed the net interest payment of Rs. 80,33,914/-
and the assessee has also claimed the interest payment of Rs.
88,94,929/- to partners capital. The AO has applied the
provisions of section 14A r.w. Rule 8D for making
disallowance of the interest payment of Rs. 15,33,233/- with
respect to the exempted dividend income of Rs. 20,83,618/-.
3.2The assessee is in appeal against the order of the AO and it is
submitted that the AO is not justified to make the disallowance
without any valid reasons. The main argument of the assessee
is that the provisions of Rule 8D has been notified with effect
from 24/03/2008 and the same is as applicable only with effect
from AY 2008-09 and the assessee also relied on the case of
Hon'ble Bombay High Court in the case of Godrej and Boyce
Mfg. Co. Ltd. Vs. DCIT (2010) 328, ITR 0081 (Bom.) dated
12/08/2010, which supports the case of the assessee. The
assessee also argued that the AO has computed the
ITA No. 2069/D/2012 & CO No. 354/D/2012 5
disallowance without considering the facts that the assessee
has the partners capital of Rs. 15,37,14,803/- which has been
utilized for the purpose of business and as such the AO is not
justified to make any disallowance of the interest payments
which has been paid for the purpose of business. It is also
submitted that the AO has not given any finding for invoking
the provisions of Rule 8D which in any case is not applicable
in the current year. It is also submitted that the assessee has
not proved any nexus between the earning of tax free dividend
and in investment of borrowed fund on which the interest
payment is being disallowed by the AO by invoking the
provisions of Rule 8D. The assessee also argued that since the
provisions of Rule 8D is applicable with effect from AY 2008-
09 only and the same is not applicable in the case of the
assessee as the case of the assessee relates to AY 2006-07, it
was argued that at the best a nominal lump sum disallowance
of the interest may be made.
3.3I have considered the addition of the AO and the submissions
of the assessee and I find merit in the submissions of the
assessee regarding the provisions of Rule 8D to the extent that
the provisions of Rule 8D is effective only w.e.f. AY 2008-09 as
the same was notified on 24/03/2008 and the same view has
also been taken by the Hon'ble Bombay High Court in the case
of Godrej and Boyce Mfg. Co. Ltd. Vs. DCIT (supra).
3.4Even if it is presumed that the provisions of Rule 8D is not
applicable in the relevant AY of the assessee, the AO is very
much entitled to make proportionate disallowance of interest
payment attributable to the earning of the exempted dividend
income of Rs. 20,83,618/- and the case of Godrej and Boyce
ITA No. 2069/D/2012 & CO No. 354/D/2012 6
Mfg. Co. Ltd. Vs. DCIT (supra) relied on by the assessee also
very much supports the case of disallowance made by the AO
which held as under:
"that the provisions of Rule 8D of the rules which have been
notified w.e.f. 24/03/2008 would apply with effect from AY
2008-09. Even prior to A.Y. 2008-09 when Rule 8D was not
applicable the AO had to enforce the provisions of sub-
section (1) of section 14A. For that purpose, the AO is duty
bound to determine the expenditure which has been incurred
in relation to income which does not form part of the total
income under the Act".
3.5After considering all the facts and circumstances of the case, I
find some merits in the submission of the assessee that the
provisions of Rule 8D is not applicable in the case of the
assessee but at the same time it cannot be denied that the
assessee has earned tax free dividend income on which some
part of the expenses would have been incurred and which is
even otherwise disallowable u/s 14A and accordingly, it will be
in the interest of justice to make a nominal estimated
disallowance of Rs. 1,00,000/- and as such the disallowance of
Rs. 1,00,000/- is confirmed and the balance amount of Rs.
14,35,233/- (Rs. 15,35,233/- (-) Rs. 1,00,000/-) is deleted."
7. In view of above, at the outset, we are in agreement with the
conclusion of the CIT(A) that as per decision of Hon'ble Bombay High
Court in the case of Godrej & Boyce Manufacturing Company Ltd. Vs. DCIT
(supra) the Rule 8D of the Rules is applicable from A.Y. 2008-09 onwards
and the AO was not justified in invoking Rule 8D for making impugned
disallowance. We are also in agreement with the conclusion of CIT(A) that
ITA No. 2069/D/2012 & CO No. 354/D/2012 7
even when Rule 8D of the rules is not applicable in the present case of the
assessee pertaining to A.Y. 2006-07 but at the same time it cannot be
denied that the assessee has a tax free dividend income on which some
part of the expenses would have been incurred and which is otherwise
disallowable u/s 14A of the Act. With these observations the CIT(A)
concluded and restricted the disallowance to the extent of Rs. 1 lakh.
8. While we analyze the chart given in regard to interest paid by the
assessee we note that the interest paid to the partners on their capital is
Rs. 88,94,929/- and interest paid towards security deposits overdraft facility
loan on vehicles late payments and bank charges comes to Rs.
1,01,37,215/- and after deducting interest received by the assessee on
fixed deposit of Rs. 21,03,300/- the net interest debited in the profit and
loss account comes to Rs. 80,33,915/- and these figures have not been
disputed by the ld. DR. In this situation, while the assessee has earned
dividend income on equity shares amounting to Rs. 11,32,575/- and on
mutual funds of Rs. 9,51,042/- then interest paid to bank on overdraft
facility amounting to Rs. 3,38,505/- and bank charges of Rs. 2,46,968/-
may be related expenses of business activities of the assessee which also
includes investments which brings tax free dividend income to the
assessee.
9. Therefore, in totality of the facts and circumstances, we are of the
considered view that the invocation of Rule 8D of the Rules by the AO was
ITA No. 2069/D/2012 & CO No. 354/D/2012 8
an incorrect action which was rightly corrected by the CIT(A) restricting the
disallowance u/s 14A of the Act to the extent of Rs. 1 lakh. We are unable
to see any infirmity or any other valid reason to interfere with the impugned
order and we upheld the same in toto. Accordingly sole grounds of the
Revenue and cross objection of the assessee being devoid of merits are
dismissed.
Order pronounced in the open court on 07/07/2015
Sd/- Sd/-
(J.S. REDDY) (C.M. GARG)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 07/07/2015
*Kavita
Copy to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT, New Delhi.
TRUE COPY
By Order
ASSISTANT REGISTRAR
ITA No. 2069/D/2012 & CO No. 354/D/2012 9
Sl. Description Date
No.
1. Date of dictation by the Author 03/07/2015
2. Draft placed before the Dictating Member 07/07/2015
3. Draft placed before the Second Member 07/07/2015
4. Draft approved by the Second Member 07/07/2015
5. Date of approved order comes to the Sr. PS 07/07/2015
6. Date of pronouncement of order 07/07/2015
7. Date of file sent to the Bench Clerk 07/07/2015
8. Date on which file goes to the Head Clerk
9. Date of dispatch of order
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