Continental Device India Pvt. Ltd., New Delhi vs DCIT, Circle-6(2), New Delhi: Appeal Against Disallowance u/s 14A for AY 2015-16

Continental Device India Pvt. Ltd., New Delhi vs DCIT, Circle-6(2), New Delhi

Case Number: ITA 5818/DEL/2019

Assessment Year: 2015-16

Background

The appeal was filed by Continental Device India Pvt. Ltd. (the appellant) against the order dated 13.06.2019 in appeal no. 229/18-19/10143/17-18 for the assessment year 2015-16. The order was passed by the Commissioner of Income Tax (Appeals)-31, New Delhi, against the order dated 07.12.2017 passed by the Deputy Commissioner of Income Tax (DCIT), Circle-6(2), New Delhi.

Facts of the Case

The appellant filed its return of income on 30.09.2015, declaring a total income of Rs. 2,94,66,590/-. The case was selected for scrutiny under the Computer Assisted Scrutiny Selection (CASS) and various notices u/s 143(2) and 142(1) were issued. The Assessing Officer (AO) observed that the appellant had claimed a certain amount of income as exempt and had disallowed a sum of Rs. 2,87,797/- u/s 14A, as evident from Clause 21(h) of Form 3CD. The amount of investment was Rs. 89,66,30,000/- as on 31.03.2015 compared to Rs. 85,70,81,000/- as on 31.03.2014. The AO issued a notice dated 21.08.2017 requiring the appellant to explain why expenditure related to income not chargeable to tax should not be disallowed u/s 14A r.w. Rule 8D.

In response, the appellant submitted a reply dated 24.09.2017, stating that disallowance at 0.5% of the average value of investment from which tax-free income was received had already been disallowed, in view of the decisions of the Hon’ble Jurisdictional High Court in the cases of ACIT vs Vireet Investment Pvt Ltd (2017) 82 taxmann.com 415 and ACB India Ltd vs ACIT (2015) 374 ITR 108. However, the AO was not satisfied with the explanation and proceeded to make the disallowance as per Rule 8D.

Commissioner of Income Tax (Appeals) Decision

On appeal, the CIT(A) held that the disallowance u/s 14A could not exceed the total exempt income claimed by the appellant and directed the AO to restrict the disallowance to the extent of Rs. 37,94,067/-. The appellant raised the following grounds of appeal:

• Ground No. 1: The CIT(A) was not justified in restricting the disallowance u/s 14A r.w.r. 8D at Rs. 37,94,067/- as against the disallowance of Rs. 2,78,797/- computed by the appellant under Rule 8D(2)(iii).
• Ground No. 2: On the facts and circumstances of the case, the disallowance u/s 14A r.w.r. 8D may be restricted to Rs. 2,78,797/- only.
• Ground No. 3: Each ground is independent of and without prejudice to the other grounds raised herein.

Tribunal’s Decision

After hearing and perusing the record, the Tribunal noted the following:

On behalf of the appellant, it was submitted that in the remand report submitted by the AO, it was mentioned that no borrowed funds were used by the appellant in making the investments. However, the CIT(A) relied upon certain judgments, which had no relevance, and held that some part of interest-bearing funds must have been used for making the investment. It was submitted that the CIT(A) failed to consider that no part of the interest could be disallowed because the appellant had sufficient own interest-free funds. The total investment of the appellant was Rs. 89.66 crores, while the total interest-free funds available were Rs. 104.60 crores. It was also submitted that in the appellant’s own case for the assessment years 2014-15 and 2016-17, the Co-ordinate Benches held that no disallowance of interest could be made and the same was directed to be deleted.

The Departmental Representative (DR) supported the findings of the CIT(A).

The Tribunal observed that the CIT(A) failed to consider the remand report and proceeded on the premises that since the appellant had disallowed a sum of Rs. 2,78,797/- u/s 14A, the provisions of section 14A were applicable. Furthermore, the CIT(A) noted that there were common bank accounts for exempt income and business income, and therefore, on the principle of the common pool of funds, proportionate disallowance under Rule 8D(2)(ii) was called for but restricted it to the total amount of exempt income of Rs. 37,94,067/-.

The Tribunal held that the CIT(A) failed to consider the settled proposition of law that if the appellant had sufficient own funds, which were higher than the investments made in tax-free yielding instruments, a presumption was required to be drawn that all the investments were made out of the appellant’s own funds, and no part of the interest expenditure could be disallowed u/s 14A. The Tribunal referred to the judgment of the Hon’ble Supreme Court of India in South Indian Bank Ltd. vs CIT (2021) TIOL 236.

Moreover, the CIT(A) failed to consider the remand report of the AO, which established that no exempt income was received by the appellant during the year under consideration. In the appellant’s own case for the assessment years 2014-15 and 2015-16, similar circumstances existed, and the disallowances were deleted, which could not be distinguished on the facts by the Revenue.

Thus, the Tribunal concluded that the CIT(A) had erred in restricting the disallowance to Rs. 37,94,067/- as against the disallowance of Rs. 2,78,797/- computed by the appellant. The grounds of appeal were allowed, and the appeal was also allowed.

The order was pronounced in open court on 19th May 2022.

Order pronounced in open court on this 19th day of May 2022.

Sd/-
(B.R.R. Kumar)
Accountant Member

Sd/-
(Anubhav Sharma)
Judicial Member

Date: 19.05.2022

Copy forwarded to:

• Appellant
• Respondent
• CIT
• CIT(Appeals)
• DR: ITAT

Assistant Registrar
ITAT, New Delhi

Continental Device India Pvt. Ltd., New Delhi vs DCIT, Circle-6(2), New Delhi: Appeal Against Disallowance u/s 14A for AY 2015-16