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DCIT, Circle 30(1), Room No. 106, New Delhi. Vs. R.P. Electronics, B-7/2, Okhla Inds. Estate, Phase-II, New Delhi.
July, 08th 2015
            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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