IN THE ITAT MUMBAI BENCH ‘B’
Meditap Specialities (P.) Ltd.
Additional Commissioner of Income-tax
IT APPEAL NO. 6835 (MUM.) OF 2010
[ASSESSMENT YEAR 2007-08]
JUNE 8, 2012
R.S. Syal, Accountant Member
This appeal by the assessee arises out of the order passed by the Commissioner of Income-tax (Appeals) on 06.07.2010, in relation to the assessment year 2007-2008.
2. The only issue raised in this appeal is against confirmation of disallowance of Rs. 52,15,454 u/s.14A of the Act. Briefly stated the facts of the case are that the assessee claimed exemption in respect of dividend income received during the previous year relevant to the assessment year under consideration, without offering any disallowance u/s 14A of the Act. On being called upon to state the reasons for not offering any such disallowance, the assessee submitted that it had not incurred any costs for earning such income. The AO observed that dividend income was earned during the year on investment done in mutual funds made during the current year only. He computed disallowance u/s 14A as per rule 8D amounting to Rs. 52.15 lakh by allocating ‘Interest cost’ to exempt income at Rs. 41.90 lakh and ‘Other expenses’ at half percent of average investment amounting to Rs. 10.24 lakh. For the purposes of computing such disallowance as per rule 8D, the Assessing Officer drew a table on page 5 by considering investment yielding exempt income at Rs. 15.69 crore for the current year to which investment in SEZ amounting to Rs. 14.90 crore was added to make total investment as at the end of the year at Rs. 30.59 crore, as against last year’s investment at Rs. 10.39 crore yielding exempt income. It was on that basis the figure of average investment was derived. The assessee’s contention that investment in SEZ should not be considered, was not accepted as in the opinion of the A.O. it also fell under Chapter III of the Income-tax Act and therefore, investment in SEZ was liable to be considered for application of Rule 8D. The learned CIT(A) upheld the disallowance made by the A.O.
3. We have heard the rival submissions and perused the relevant material on record. It is noticed that the total disallowance made u/s 14A amounting to Rs. 52.15 lakh comprises of two components viz., allocation of interest at Rs. 41.90 lakh and other expenses at Rs. 10.24 lakh computed at half percent of the average investment. At the very outset, the learned Counsel for the assessee invited our attention towards the order passed by the Tribunal in assessee’s own case for assessment year 2006-2007 against the appeal filed by the Revenue. Vide this order dated 31.08.2010 in ITA No.5811/Mum/2009, the Tribunal has held that no funds were borrowed by the assessee which were utilized for making investment fetching exempt dividend income. In view of this precedent it is obvious that up to assessment year 2006-2007, the assessee did not make any investment in shares etc. yielding exempt income, out of interest bearing funds. However it is important to note from the assessment order that the dividend income earned by the assessee in the current year was earned from investments made in the current year alone in the units of mutual funds. In that view of the matter the decision taken by the Tribunal in the preceding year, based on the facts as prevailing in that year alone, cannot be straightway applied. It is required to be examined as to whether any interest bearing funds were utilized for making investments in the current year for purchasing the units of mutual funds which fetched exempt income in this year. For this purpose, we have to consider the balance sheet filed by the assessee along with necessary schedules. It can be observed from the balance sheet as on 31st March, 2007 that the total of unsecured loans from the banks and others along with redeemable non-convertible debentures have come down from Rs. 45.84 crore in the preceding year to Rs. 37.86 crore in the current year. Further, the fund flow statement available in the paper book clearly depicts that no interest bearing funds were utilized by the assessee in making investments in the units in the current year, from which such exempt dividend income was earned. The learned Departmental Representative was fair enough to concede that, in fact, no fresh borrowings were made by the assessee in the relevant previous year. In that view of the matter it becomes clear that the assessee did not utilize any interest bearing funds for making investment in units from which exempt dividend income was earned by the assessee. Resultantly no disallowance at Rs. 41.90 lakh as made by the assessee applying Rule 8D could have been made.
4. It is relevant to note that Rule 8D has been inserted by the Income-tax (5th Amendment) Rules, 1988 with effect from 24.03.2008. The Hon’ble jurisdictional High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT  328 ITR 81 has held that Rule 8D can be applied only on or from assessment year 2008-2009. Since we are dealing with assessment year 2007-2008, in such a situation there can be no question of computing disallowance u/s 14A by invoking Rule 8D. Accordingly we direct the A.O. to determine expenditure disallowable u/s 14A on some reasonable basis as per the prescription of the judgment of the Hon’ble jurisdictional High Court, ignoring rule 8D.
5. Before parting with this issue we will like to clarify that the Assessing Officer has taken note of total investments made by the assessee by considering not only the investment giving exempt income but also investment in SEZ. This exercise has been done by him while applying rule 8D. It is apparent that rule 8D cannot be applied in the relevant previous year under consideration and we have directed the AO to work out disallowance on some reasonable basis, as has been directed by the tribunal for the assessment year 2006-2007 for which such matter has been restored by the Tribunal to the file of A.O. in the assessee’s appeal vide order dated 10.11.2010 in ITA No.5489/Mum/2009.
6. Since both the authorities have given their finding in this regard against the assessee, we feel it our duty to clarify the position. The AO has noted that the income of the assessee as developer of SEZ from its operations is also exempt as it falls in Chapter III of the Income-tax Act. We will simply like to clarify that this view point canvassed by the Assessing Officer, as approved in the first appeal, is without any bedrock. The obvious reason is that section 14A provides that : “….. 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 this Act”. Here it is important to note that the expenditure disallowable u/s 14A is in respect of the items of exempt income and not which qualify for deduction under any provision. Income of developer of a SEZ from its operation is deductible u/s 80IAB as well as section 10AA. Under both these provisions, the Legislature has used the word “deduction” and not ‘exemption’. Even though section 10AA falls in Chapter III with the caption : “Incomes which do not form part of total income”, still it is a “deduction” provision as is apparent from the language itself. Difference between ‘deduction provision’ and ‘exemption provision’ hardly needs to be accentuated. Whereas, the exempt income does not enter into the process of computation of total income, the income qualifying for deduction, on the other hand, under any of the relevant sections is, firstly, taxable in itself and finds its place in the course of computation of total income, but is granted deduction to the extent of and as per the conditions specified in the relevant section. Disallowance u/s 14A is contemplated in respect of exempt income and not which is eligible for deduction under any relevant provision. It is impermissible to mix both the deduction and exemption provisions and then take them in one stride for computing disallowance u/s 14A. We, therefore, hold that the authorities below were not justified in placing the exemption provision and deduction provision on one platform for the purpose of making disallowance under this section. Since sections 10AA and 80IAB are ‘deduction provisions’ and not ‘exemption provisions’, the investment or expenses incurred to earn income from SEZ do not merit reckoning in computing disallowance u/s 14A.
7. With these remarks we set aside the impugned order on this count and remit the matter to the file of A.O. for making disallowance u/s 14A on some reasonable basis.
8. In the result, the appeal is partly allowed for statistical purposes.