Case Law Details
Ramalinga Mills Ltd. Vs ACIT (ITAT Chennai)
The issue under consideration is whether disallowance of expenditure in relation to exempt income u/s.14A read with Rule 8D of I.T. Rules, 1962 is justified in law?
ITAT states that, the facts borne out from records clearly indicate that the assessee has earned dividend for the impugned assessment year. It is a well settled principles of law that disallowance computed u/s.14A read with Rule 8D shall not swallow entire income earned for the year. In other words, disallowance of expenditure u/s.14A read with Rule 8D shall not exceed exempt income earned for the year. This principle is supported by the decision of Hon’ble Delhi High Court in the case of Cheminvest Ltd. vs.CIT (2015) 378 ITR 33, where it was clearly held that disallowance of expenditure u/s 14A shall not exceed exempt income earned for the year . A similar view has been taken by the Chennai Bench of the Tribunal in the case of M/s. Voltech Engineers Pvt. Ltd Vs. DCIT (2017) 163 ITD 469. In this case, although the dividend income earned for the year, the Assessing Officer has computed disallowance which is in excess of exempt income earned for the year. Therefore, considering the facts and circumstances of the case and also by following the decision of the Hon’ble Delhi High Court in the case of Cheminvest Ltd. (supra), ITAT direct the Assessing Officer to restrict the disallowance computed u/s.14A read with Rule 8D of I.T.Rules, 1962 to the extent of exempt income earned for the year. In the result, the appeal filed by the assessee is allowed.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal filed by the assessee is directed against the order of the learned Commissioner of Income Tax (Appeals)-1,Madurai dated 31.01.2019 and pertains to the assessment year 2014-15.
2. The assessee has raised the following grounds of appeal:-“1. Section 14A of the IT Act read with rule 8D of the IT rules.
1.1. Disallowances of Rs. 1,17,42,802/-under rule 8D{2){ii) of the IT rules and Rs. 12,23,566/- under rules 8D(1J(iii) of the IT rules totaling to Rs 129,66,368/- under section 14A of the IT Act are under dispute.
1.2.The Assessing Officer made elaborate discussions which are against the facts of the appellant’s case.
1.3.The Assessing Officer took various grounds which are not relevant to the facts of the appellant’s case arid are also not in accordance with the Act and rules.
1,4.The Commissioner of Income tax (Appeals) confirmed the disallowances made by the Assessing Officer by referring to various case laws which are not applicable to the facts of the appellant’s case.
1,5.The investments Rs.29,02,50,507/- represent as application of funds out of appellant’s own funds out of appellants share capital and reserves and surplus Rs. 115,74,02,105/-.
1.6. The entire dividends Rs. 24,611/- were credited at par in appellant’s accounts with banks.
1.7 The formalities to be observed and the man power required in making and maintaining investments as in the case of investment companies and as discussed by the Assessing Officer are not present in full force in the appellant company as it is practically an one man company and the investments are static for several years and are incidental to appellant’s business.
2. Clause (f) of explanation 1 to sec 115JB of tile IT Act:
2.1 In computing the Book profit under section 115JB of the Act, the Assessing Officer added Rs.129,66,368/- being the disallowance under section 14A of the IT Act which is also now under dispute (supra) in the present appeal.
2.2 The addition is not in accordance with clause(f) of explanation 1 to Section 115JB of the Act reading as the amount or amounts of expenditure relatable to any income to which section 10 other than the provisions contained in clause(38) thereof section 11 or section 11 apply; read with the concluding portion of the explanation after clause(k) reading as “if any amount referred to in clause (a) to (i) is debited to the statement of profit and loss”
2.3 The expenditure debited in the profit and loss account could alone be added in computing the Book Profit and not others.
2.4 The Commissioner of Income tax (Appeals) confirmed the addition by referring to case law which Is not applicable to the facts of the appellants case.”
3. Brief facts of the case are that the assessee company is engaged in the business of manufacturing of textiles, hand loom and power loom filed its return of income for the assessment year 2014-15 on 28.10.2014 declaring total income of ` 28,36,52,150/-. The case was selected for scrutiny and assessment has been completed u/s.143(3) read with section 92CA(3) of the Act, after making addition of ` 1,29,66,368/- towards expenditure in relation to exempt income u/s.14A read with Rule 8D of I.T.Rules, 1962. The Assessing Officer has made similar additions towards book profit u/s.115JB of the Act . The assessee carried on the matter in appeal before the first appellate authority . The learned CIT(A) for the detailed reasons recorded in his appellate order dated 31.01.2019 upheld the additions made by the Assessing Officer towards disallowance of expenditure incurred in relation to exempt income under section 14A read with Rule 8D of I.T.Rules, 1962, by holding that even in a case where assessee claims that no expenditure has been so incurred, the statute has provided for presumptive expenditure which has to be disallowed. The learned CIT(A) also upheld the additions made by the Assessing Officer towards disallowance u/s.14A read with Rule 8D of I.T. Rules, 1962 to book profit computed u/s.115JB of the Act, by following the decision of ITAT., Mumbai in the case of DCIT Vs. Viraj Profiles Ltd (2016) 156 ITD 76. Aggrieved by the learned CIT(A) order, the assessee is appeal before us.
4. None appeared for the assesse. We have heard the learned DR, perused the materials available on record and gone through the orders of the authorities below. The solitary issue that came up for consideration in the given facts and circumstances of the case is disallowance of expenditure in relation to exempt income u/s.14A read with Rule 8D of I.T. Rules, 1962. The facts borne out from records clearly indicate that the assessee has earned dividend of ` 24,611/- for the impugned assessment year . It is a well settled principles of law that disallowance computed u/s.14A read with Rule 8D shall not swallow entire income earned for the year. In other words, disallowance of expenditure u/s.14A read with Rule 8D shall not exceed exempt income earned for the year. This principle is supported by the decision of Hon’ble Delhi High Court in the case of Cheminvest Ltd. vs.CIT (2015) 378 ITR 33, where it was clearly held that disallowance of expenditure u/s 14A shall not exceed exempt income earned for the year . A similar view has been taken by the Chennai Bench of the Tribunal in the case of M/s. Voltech Engineers Pvt. Ltd Vs. DCIT (2017) 163 ITD 469. In this case, although the dividend income earned for the year is at ` 24,611/-, the Assessing Officer has computed disallowance of Rs.1,29,66,368/- which is in excess of exempt income earned for the year. Therefore, considering the facts and circumstances of the case and also by following the decision of the Hon’ble Delhi High Court in the case of Cheminvest Ltd. (supra), we direct the Assessing Officer to restrict the disallowance computed u/s.14A read with Rule 8D of I.T.Rules, 1962 to the extent of exempt income earned for the year.
5. Insofar as recomputation of book profit u/s.115JB of the Act towards disallowance of expenditure in relation to exempt income u/s.14A read with Rule 8D of I.T. Rules, 1962, we find ITAT., Delhi Special Bench in the case of ACIT vs. Vireet Investments (P) Ltd. [2017] 165 ITD 27 (Delhi – Trib.) (SB) has considered an identical issue and after considering relevant facts held that computation under clause (f) of Explanation 1 to section 115JB(ii) of the Act is to be made without resorting to computation as contemplated u/s.14A read with Rule 8D of I.T. Rules, 1962. Therefore, we are of the considered view that Assessing Officer cannot make additions towards computation of disallowance u/s.14A read with Rule 8D of I.T. Rules, 1962, to the book profit computed u/s.115JB of the Act. Hence, we direct the Assessing Officer to delete the additions made towards 14A disallowance to book profit computed u/s.115JB of the Act.
6. In the result, the appeal filed by the assessee is allowed.
