On perusal of assessment records it is observed that the assessee had made certain investments, and it had received dividend income of Rs. 60,088/- during the year under consideration which was claimed as exempt u/s 10(34) of the Act. The assessee in its computation of income had suo moto disallowed an amount of Rs. 10,23,000/- as per Rule 8D, calculations of the same has been submitted by the assessee before ld. AO. The AO worked out the disallowance at Rs. 166.18 lacs u/s 14A of the Act. The AO had made the disallowances u/s 14A as under:
It is argued that out of 751.21 lacs, interest expenditure to an extent of 681.25 lacs is directly attributable to loans, which was taken for the purposes of business of the company, namely Textile Division and I.T. Division. This amount cannot be proportionately attributed in terms of Rule 8D. The AO has further included value of shares amounting to Rs. 42 crores which are allotted by DCM Engineering , pursuant to transfer of business to that company under the scheme of arrangement approved by the Delhi High Court. Therefore, the amount of Rs. 42 crores cannot be included in the value of assets as well as investments, as no funds had been invested by the appellant for the allotment of above shares.
In respect of disallowance of administrative expenses the appellant submits that it had received dividend income during the year to an extent of Rs. 60,088/- only, and that there has been no transaction of purchase and sale of shares during the relevant year under consideration. Therefore, no disallowance on account of administrative expenses is warranted. In any case, it noticed that the appellant has offered a disallowance of Rs. 2 lacs over and above the interest expenses.
On the other hand, the ld. DR present supported the stand of the CIT (A) on the issue. The Ld. D.R. placed reliance on the decision of coordinate bench in the case of T&T Motors Ltd., in ITA no. 6490/Del/2010 for assessment year 2009-10.
We have verified the above submissions and perused the Statement of accounts submitted by the assessee in paper book. As per the computation the assessee has offered disallowance on account of interest amounting to Rs. 8.23 lacs and has further offered disallowance on account of administrative expenses to an extent of Rs. 2 lacs. Thus, the total disallowance u/s 14A as offered by the assessee amount to Rs. 10.23 lacs.
It is further observed that as per the scheme of restructuring and arrangement approved by the Hon’ble Delhi High Court, the assets and liabilities(including loans) were transferred to a new company and shares were allotted against the same(clause 3, 11 of the Schedule to the Accounts). In respect of administrative expenses, we find that the assessee has not made any purchase or sale of investment in the relevant year under consideration. Still to cover up, the assessee has suo moto disallowed an amount of Rs.2,00,000/- (working of 14 A disallowance at page 34 of paper book).
We find force in the submissions made by the ld. AR. We also find that the AO has neither recorded his satisfaction nor given reasons as to how the claim of expenditure in relation to tax free income has not been correctly made by the assessee as envisaged under section 14A(2). The ld AO has mechanically invoked Rule 8D. Sub-section (2) of section 1 4A of the Act provides the manner in which the AO is to determine the amount of expenditure incurred in relation to income, which does not form part of the total income.
We find that the AO has not established any nexus between the investments made and the expenditure incurred under the head interest expenditure and administrative expenses, before disregarding the disallowance suo moto made by the assessee u/s 14A of the Act vis a vis the dividend income earned amounting to Rs.68,088/-.
The decision relied upon by the Revenue in the case of T&T Motors Ltd., in ITA no. 6490/Del/2010 for assessment year 2009-10 are distinguishable on facts. In the case of T&T, the assessee had argued that there cannot be any expenditure that could be disallowed against the exempt income received by the assessee therein. The Hon’ble coordinate bench has recorded in para 5 therein that the assessee had incurred certain expenses which was attributable to the earning of exempt income. However in the facts of the present case before us, the assessee has suo mote disallowed expenses under section 14A of the Act. The Ld.D.R, contended that in the event there are any deficiency left by the A.O in recording proper satisfaction, the same can be made good by the Ld.CIT(A). In the facts of the present case the Ld. CIT(A) has not compensated for the deficiency by the A.O in recording proper satisfaction. The ld. CIT(A) has restricted the disallowance to an extent of Rs. 9.79 lacs. The ld. CIT(A) fails to appreciate the reasonableness of expenditure that has been disallowed viz-a-viz the exempt income. In the light of the judgment of Macopp Investments Ltd. CIT (2012) 374 ITR 272. We, restrict the disallowance to 10.23 lacs as calculated by the assessee.
The Hon’ble Delhi High Court in the case of Joint Investment Ltd., Vs. CIT, vide its order dated 25.02.20 15, has held that disallowance u/s. 14A cannot exceed the amount of exempt income. Ths Delhi High Court in the case of Holcim India Pvt.Ltd., reported in (2014) 272 CTR 282(Del), has held that there can be no disallowance u/s. 14A in the absence of any exempt income. The rationales behind these judgments are that, the amount of disallowance should not exceed the exempt income.
In view of the aforesaid discussion and on the basis of material and evidence on record, to meet the ends of justice, we find no perversity in the calculation of 14 A, disallowance by the assessee.