Dynamic Products Ltd.,, Ahmedabad vs Assessee

M/s. Dynemic Products Ltd, DCIT (OSD), B-301, Satyamev Complex-1, Range-1, Opp. New Gujarat High Ahmedabad Court, SG Highway Road, Sola, Ahmedabad PAN : AAACD 4069 D

अपीलाथ / अपीलाथ / (Appellant) ू यथ यथ / थ / (Respondent)

Assessee(s) by : Shri Rajesh Shah, AR Revenue by : Shri M.K. Singh, Sr. DR.

सु नवाई क! तार#ख / Date of Hearing : 19/05/2015 घोषणा क! तार#ख / Date of Pronouncement: 22/05/2015

आदे श/O R D E R

PER G.D. AGRAWAL, VICE PRESIDENT:

This is an appeal filed by the assessee and is directed against the order of the Commissioner of Income-tax (Appeals)-6, Ahmedabad dated 03.10.2011, pertaining to the Assessment Year 2008-09.

2. The only ground raised in this appeal by the assessee is against the disallowance u/s 14A read with Rule 8D at Rs.10,26,733/-.

3. The facts of the case are that the assessee derives income from manufacturing and trading of dyes, intermediates and chemicals. In the return of income, the assessee himself disallowed the sum of Rs.18,43,737/- u/s 14A. The Assessing Officer worked out the disallowance as per Rule ITA No.2769/Ahd/2011 M/s. Dynemic Products Ltd vs. DCIT AY: 2008-09 2

8D amounting to Rs.28,70,470/-; therefore, he made the further disallowance of Rs.10,26,733/- over and above the disallowance of Rs.18,43,737/- already made by the assessee. The same is upheld by the CIT(A); hence, this appeal by the assessee.

4. At the time of hearing before us, it is submitted by the ld. Counsel that as per Section 14A(2), the Assessing Officer is supposed to work out the disallowance under Rule 8D if he is not satisfied with the correctness of the claim of the assessee in respect of disallowance offered by the assessee in the return of income. Similarly, under Rule 8D(1) also it is provided where the Assessing Officer is not satisfied with the correctness of the claim of the expenditure made by the assessee in relation to the income which does not form part of total income, then he has to work out the disallowance as per sub-rule (2) of Rule 8D. He, therefore, submitted that the Assessing Officer is required to record the finding that he is not satisfied with the correctness of the claim of expenditure made by the assessee. It is contended by the ld. Counsel that, in the assessment order, there is no satisfaction by the Assessing Officer to the effect that the amount of expenditure disclosed by the assessee in relation to earning of income, which does not form part of the total income, is incorrect. Therefore, the Assessing Officer was not justified in working out the disallowance under Rule 8D. In the alternative, the ld. Counsel for the assessee has pointed out that no borrowed money has been utilized for the purpose of investment in shares or mutual fund etc. He stated that the entire borrowed money was utilized for the purpose of assessee's business of manufacturing of dyes and chemicals. He also pointed out that in Assessment Year 2007-08, the ITAT accepted the assessee's claim that the borrowed money has not been utilized for investment in shares/mutual funds. He stated that in the year under consideration there is no fresh investment in shares/mutual funds; on the ITA No.2769/Ahd/2011 M/s. Dynemic Products Ltd vs. DCIT AY: 2008-09 3

other hand, there is realization of the shares/units of mutual funds. He, therefore, submitted that the disallowance of interest is not justified.

5. The ld. Departmental Representative, on the other hand, relied upon the orders of the authorities below and he stated that in the assessment order, the Assessing Officer has duly recorded his satisfaction and pointed out how the working made by the assessee is not correct. He stated that the assessee has only considered the direct expenditure but has not considered the part of clerical/administrative expenses which would have been incurred for earning of the exempt income. Therefore, the Assessing Officer was fully justified in computing the disallowance under Rule 8D. He also submitted that there is a mixed fund which is utilized for business as well as investment in shares/mutual funds. Therefore, the proportionate working of interest as per Rule 8D(2) was fully justified.

6. We have carefully considered the arguments of both the sides and perused the material placed before us. Sub-section (2) of Section 14A reads as under:-

14(A)....

(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.

7. From the above, it is evident that the Assessing Officer is permitted to determine the amount of expenditure incurred in relation to exempt income as per the method prescribed by the Government which is now 8D, provided the Assessing Officer recorded his satisfaction that the working of ITA No.2769/Ahd/2011 M/s. Dynemic Products Ltd vs. DCIT AY: 2008-09 4

expenditure made by the assessee for the purpose of Section 14A is not correct. Now the question is whether the Assessing Officer has recorded the requisite satisfaction. The relevant finding in the assessment order reads as under:-

"It is seen that the assessee has earned dividend income to the tune of Rs.29,27,374/- from Mutual Fund and Dividend from companies of Rs.1,94,320/- which is claim as exempt from tax u/s 10(34) of I.T. Act. The assessee has made investment of Rs.2,64,35,446/- as on 31.03.2008. The assessee has taken loans of Rs.8,78,94,293/- on which interest of Rs.37,73,680/- has been claimed by the assessee. In addition to that some administrative/other expenses must be incurred for earn tax free income. Therefore, some disallowance u/s 14A of the I.T. Act is warranted. In this regard the assessee vide notice u/s 142(1) dated 12.10.2010 was show caused to explain as to why disallowance u/s 14A should not be made as per rule 8D.

In reply to this show cause notice, the assessee has submitted in written reply dated 21.10.2010 at point No.9 that we have already added back in the income Rs.42,47,393/- which includes expenses of Rs.18,43,737/- incurred for earning tax free income.

The assessee had disallowed some expenses directly relatable to earning of exempt income. However, disallowance is to be made as per Rule 8D of Income Tax Rules as under:-

i. Amount of Expenditure directly relating 18,43,737

ii. Interest paid x average value of investment Average value of total assets 37,73,680 x 6,52,17,945 = 7,00,643 35,12,65,445 Investment as on 31.03.2007 Rs.10,40,00,445 Investment as on 31.03.2008 Rs. 2,64,35,446 Average value of investment Rs. 6,52,17,945

Value of Assets Value of Assets as on 31.03.2007 Rs.33,02,71,476 Value of Assets as on 31.03.2008 Rs.37,22,59,415 Average value of assets Rs.35,12,65,445 ITA No.2769/Ahd/2011 M/s. Dynemic Products Ltd vs. DCIT AY: 2008-09 5

iii. 0.5% of average value of investment 3,26,090 Total Rs. 28,70,470

However, the assessee has allowed an amount of Rs.18,43,737/-. Hence, the disallowance u/s 14A of the I.T. Act is limited to Rs.10,26,733/- (Rs.28,70,470/- - Rs.18,43,737/-) (Disallowance of Rs.10,26,733/-)"

8. From the above, it is evident that in the first paragraph, the Assessing Officer has recorded the finding that some disallowance u/s 14A of the Income-tax Act is warranted. In paragraph 2, the Assessing Officer has recorded that the assessee has offered the expenses of Rs.18,43,737/- as expenditure incurred for earning of exempt income and added back the same to the total income. In the third paragraph, the Assessing Officer rejected the assessee's claim on the ground that the disallowance is to be made as per Rule 8D of the Income-tax Rules. In our opinion, the disallowance is to be made as per Rule 8D only after the Assessing Officer records his satisfaction that the amount of expenditure claimed to have been incurred by the assessee for the purpose of earning of exempt income is incorrect. The claim of the assessee cannot be said to be incorrect merely on the ground that the working of the expenditure has not been made by the assessee as per Rule 8D. If the interpretation of the Assessing Officer is accepted, then the working of disallowance under Rule 8D would come compulsory making the provisions of Section 14A(2) as well as Rule 8D(1) redundant. The Assessing Officer has not given any other reason for not accepting the assessee's working of the expenditure claimed to have been incurred for earning of exempt income. Therefore, we are of the opinion that no satisfaction was recorded by the Assessing Officer for rejecting the assessee's claim with regard to expenditure incurred for earning of exempt income. Without recording such satisfaction, the Assessing Officer cannot proceed to compute the disallowance as per Rule 8D(2). In view of above, ITA No.2769/Ahd/2011 M/s. Dynemic Products Ltd vs. DCIT AY: 2008-09 6

we delete the addition made by the Assessing Officer u/s 14A read with 8D(2) of the Income-tax Rules.

9. In the result, the assessee's appeal is allowed.

Order pronounced in the Court on 22nd May, 2015 at Ahmedabad.

Sd/- Sd/-

(S. S. GODARA) (G.D. AGRAWAL) JUDICIAL MEMBER VICE-PRESIDENT Ahmedabad; Dated 22/05/2015 Biju T., PS

षत Copy आदे श क! ूितिल)प अमे)षत/ of the Order forwarded to : 1. अपीलाथ / The Appellant 2. ू यथ / The Respondent. 3. संबंिधत आयकर आयु, / Concerned CIT 4. आयकर आयु,(अपील) / The CIT(A)

5. )वभागीय ूितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Ahmedabad

6. गाड फाईल / Guard file.

/ BY ORDER, आदे शानु सार

TRUE COPY Dy./Asstt.Registrar) उप/सहायक पंजीकार ( उप/ अिधकरण, अहमदाबाद / आयकर अपीलीय अिधकरण, ITAT, Ahmedabad