Kulgam Holdings Pvt. Ltd.,, Ahmedabad vs Assessee

अपीलाथ!/ (Appellant) "#यथ!/ (Respondent)

Assessee(s) by : Shri S.N. Soparkar Revenue by : Shri Dinesh Singh, Sr.DR

सन ु वाई क तार ख/ Date of Hearing : 15/06/2015 घोषणा क तार ख / Date of Pronouncement: 19/06/2015 आदे श/O RDER

PER N.S. SAINI, ACCOUNTANT MEMBER: This is an appeal

filed by the assessee against the order of the CIT(A)-VIII, Ahmedabad dated 22.9.2011.

2. The sole ground of appeal taken by the assessee is that the CIT(A) erred in confirming the disallowance of Rs.1,06,372/- under section 14A of the I.T.Act.

3. Brief facts of the case are that the AO observed that during the year the assessee has received dividend income of ITA No.2990/Ahd/2011 2

Rs.3,10,10,076/-, which is exempt under section 10 of the Act. The AO observed that the assessee is in receipt of considerable amount of exempt income, and no separate accounts have been maintained with regard to the earning of exempt income. The AO observed that the management and maintenance of such investments always entail certain administrative expenditure, such as, telephone expenditure etc. Therefore, he disallowed the proportionate amount of expenditure incurred out of the total expenditure incurred by the assessee during the year, by taking the proportion of dividend income to total exempt income and worked out the same at Rs.5,01,024/-.

4. On appeal, the CIT(A) observed that it was hard to accept the submissions of authorized representative of the assessee that there are no expenses incurred for earning exempt income. According to the CIT(A) Rule 8D itself says that where the AO having regard to the accounts of the assessee of a previous year, is not satisfied with the correctness of the claim of expenditure made by the assessee, or the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2) of Rule 8D. In view of the above, the calculation done by the AO at Rs.1,06,372/-, which provides for an amount equal to one-half percent of the average of the value of investment, the income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year, is more logical and apt, ITA No.2990/Ahd/2011 3

considering the facts and circumstances of the case. The CIT(A), therefore, restricted the disallowance to Rs.1,06,372/-.

5. Being aggrieved by this order of the CIT(A), the assessee is in appeal before us.

6. The AR of the assessee argued that the assessee-company earned dividend income of Rs.3,10,10,076/-, which is exempt under section 10 of the Act. For earning dividend income, the assessee-company had not incurred any expenditure. Hence, no disallowance under section 14A should be made or much less, the disallowance as per rule 8D of the IT Rules. He submitted that the dividend is received from Nirma Ltd. of Rs.3,10,10,076/- which is directly credited in the bank account of the assessee through ECS. This shows that there is no expenditure incurred for earning dividend income. He relied on the decision of the Hon'ble Gujarat High Court in the case of CIT Vs. Torrent Power Ltd., (2014) 363 ITR 474 (Guj) and submitted that the Hon'ble jurisdictional High Court has held that where there is nothing on record to indicate that there has been in fact any actual expenditure incurred by the assessee for earning tax free income, and that being question of fact, no disallowance of expenditure artificially or on the basis of assumption can be made.

7. On the other hand, the DR opposed the submissions of the AR of the assessee by pointing out from the balance sheet of the assessee in Schedule 4 that the opening balance of the assessee's quoted investment were of Rs.200.01 lakhs which increased to Rs.225.47 lakhs during the year. Further, the unquoted investment of the assessee at opening balance of Rs.760.03 lakhs ITA No.2990/Ahd/2011 4

which were reduced to Rs.560.03 lakhs which were reduced to Rs.3,000/- during the year. Thus, there was a fluctuation in the investment of the assessee, for which, management, time and cost are incurred, and therefore to say that no expenditure for earning tax free income was incurred by the assessee for earning exempt dividend income of Rs.3,10,10,076/-, cannot be accepted. It was further argued that out of the total income shown in the profit & loss account for the year at Rs.6.32 crores, dividend income was Rs.3.10 crores, which was approximately 50% of the total income of the assessee, and therefore, substantial amount of income of the assessee, which was exempt from tax. Hence, the argument of the assessee that no expenditure was incurred for earning of such dividend income cannot be accepted. He, therefore, prayed that the order of the CIT(A) should be upheld.

8. We have heard rival submissions and perused the orders of the lower authorities and the material available on record. In the instant case, the CIT(A) restricted the disallowance made under section 14A of the Act to Rs.1,06,372/- being 0.5% of the average investment in shares on account of which the administrative charges incurred in relation to investment activities, which gave rise to exempt dividend of Rs.3,10,10,076/-. The assessee aggrieved by this sustenance of disallowance of Rs.1,06,372/- is in appeal before us.

9. The contention of the assessee is that no expenditure was incurred in relation to exempt income and no material has been brought on record to show that any actual expenditure was incurred in relation to earning of exempt income, and therefore, the disallowance of Rs.1,06,372/- made on conjecture and ITA No.2990/Ahd/2011 5

surmises is untenable. The assessee placed reliance on the decision of Hon'ble Gujarat High Court in the case of Torrent Power Ltd. (supra), wherein the assessee earned tax free interest of Rs.14 crores and the Hon'ble High Court has held as under:

With regard to disallowance of 1% of administrative expenses averred to have incurred on account of the earning of interest, there is nothing on record to indicate that there has been in feet any actual expenditure incurred by the assessee for earning tax free income of Rs. 14 crores. It is also to be noted that out of the total amount of exempt income of Rs. 14 crores, the assessee could point out that 6.12 crores (rounded off) was earned by 'S' project which was under construction for which no expenditure had been claimed and for the remaining income of Rs.7.88 crores which consists of dividend and tax free interest, no part of expenditure appears to have been made towards the investment activity as emerging from the material. According to the respondent, the total investment from the huge surplus is comparatively small and investment made was effortless, without any burden of administrative expenses.

[Para 8]

In view of feet that no expenditure was incurred for earning exempted income and that being the question of fact, disallowance of 1% of interest expenditure artificially or on the basis of assumption rightly has not been sustained by the Tribunal.

10. We find that in the instant case, the Revenue has not brought any positive material on record to show that the assessee actually incurred any expenses in relation to earning of exempt income. In our considered view, before making disallowance under section 14A, it was imperative on the part of the Revenue to bring some material on record to show that the assessee actually incurred any expenditure in relation to exempt income. In the absence of the same, in view of the above cited decision of the ITA No.2990/Ahd/2011 6

Hon'ble Gujarat High Court, the disallowance of Rs.1,06,372/- confirmed by the CIT(A) is not sustainable. We, therefore, delete the disallowance of Rs.1,06,372/- made under section 14A and allow the ground of appeal of the assessee.

11. In the result, the appeal of the assessee is allowed.

Order pronounced in the Court on Friday the 19th June, 2015 at Ahmedabad.

Sd/- Sd/- (S.S. GODARA) ( N.S. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER

Ahmedabad; Dated 19 /06/2015

आदे श क& " त(ल)प अ*े)षत/Copy of the Order forwarded to :

1. अपीलाथ / The Appellant

2. यथ / The Respondent.

3. संबं धत आयकर आयु!त / Concerned CIT

4. आयकर आय! ु त(अपील) / The CIT(A)-III

5. $वभागीय 'त'न ध, आयकर अपील य अ धकरण / DR, ITAT,

6. गाड* फाईल / Guard file.

आदे शानस/ ु ार BY ORDER,

उप/सहायक पंजीकार ( Dy./Asstt.Registrar) आयकर अपील य अ धकरण, अहमदाबाद / ITAT, Ahmedabad