M/s GODREJ INVESTMENT PVT. LTD. (NOW AMALGAMATED WITH GODREJ & BOYCE MFG. CO. LTD., MUMBAI V. DCIT 14(1)(2), MUMBAI

ITA 3163/MUM/2019

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 7505 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 6 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-11-2021
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: G
• Assessment Year: 2015-2016
• Appeal Filed On: 12-05-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Rule 8D
• Section: 2; 143(3); 142(1); 234B; 14A; 143(2); 264; 72; 153

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (VIRTUAL COURT) “G” BENCH, MUMBAI BEFORE SHRI MAHAVIR SINGH, HON'BLE VICE PRESIDENT AND SHRI S. RIFAUR RAHMAN, HON'BLE ACCOUNTANT MEMBER ITA NO. 3163/MUM/2019 (A.Y: 2015-16) M/s. Godrej Investments Pvt. Ltd., M/s. Kalyaniwall & Mistry LLP Esplande House, 2 nd Floor 29, Hazarimal Somani Marg Fort, Mumbai – 400001 PAN: AAACG1395D v. DCIT – Circle – 14(1)(2) Aayakar Bhavan, M.K. Road Mumbai - 400020 (Appellant) (Respondent) Assessee by : Shri Farrokh Irani Department by : Shri Ambuselvam Date of Hearing : 07.09.2021 Date of Pronouncement : 26.11.2021 O R D E R PER S. RIFAUR RAHMAN (AM) 1. This appeal is filed by the assessee against order of Learned Commissioner of Income Tax (Appeals)–22, Mumbai [hereinafter in short “Ld.CIT(A)”] dated 15.02.2019 for the A.Y. 2015-16. 2. Brief facts of the case are that, assessee filed return of income on 26.11.2015 declaring total income of ₹.4,20,68,450/-. The return of 2 ITA NO. 3163/MUM/2019 (A.Y: 2015-16) M/s. Godrej Investments Pvt. Ltd., income was selected for scrutiny and notices u/s. 143(2) of Income-tax Act, 1961 (in short “Act”) and u/s. 142(1) of the Act were issued and served on the assessee. Assessee is a private limited company engaged in the business of investment holding company, not accepting public deposits and governed by the Non-Banking Financial Companies Regulations, laid down by the Reserve Bank of India with the main objective of investing in shares and lending/borrowing monies. Assessing Officer observed from the Profit and Loss Account that assessee company has earned dividend income to the extent of ₹.55,20,85,740/- and assessee has attributed ₹.4,219/- as expenses which are incurred in relation with the purchase, sale and/or maintaining/holding the investments relatable to exempt income. During the course of the assessment proceedings, assessee was asked to furnish details of the investments and why disallowance of expenditure should not be made u/s. 14A of the Act. In response assessee submitted as below: - “1) The Company has earned tax free dividends during the year amounting to Rs.55.21 crores. 2) As per the records of the Company, the direct actual expenditure by way of interest expenditure attributable to the earning of these Tax Free Dividends is ₹.4219/- 3) As regards the administrative expenditure, 100% of the actual salary paid to the Managing Director has been suo-moto offered by the company for disallowance in its return of income. the disallowance, Therefore, aggregates to ₹.4,80,000/- 3 ITA NO. 3163/MUM/2019 (A.Y: 2015-16) M/s. Godrej Investments Pvt. Ltd., 4) Hence, the total disallowance offered by the company in its return of income u/s. 14A of the Act aggregates to ₹.4,84,219/-.” 3. Further, assessee vide its submission dated 22.08.2017 submitted that during the year assessee has borrowed funds from shareholders and placed these funds as well as own funds in Inter-Corporate Deposits (ICD) with companies. On the funds borrowed, assessee incurred ₹.7.68 crores as interest expenditure and in turn earned interest income of ₹.11.96 crores on the ICDs placed with companies. Further, assessee submitted that it has purchased shares of M/s Godrej Properties Ltd, to the extent of ₹.102.63 crores and this was funded partly by internal accruals and also the investment by the assessee in the taxable interest earning ICD’s which were withdrawn and replaced by the investment in tax free dividend bearing investment. It was also submitted that the total interest expenditure liable for disallowance based on day wise cash flow statement amounts to ₹.4,219/- which is the actual interest paid on the utilization of borrowed funds for investment in shares. Further, it was submitted that assessee made investment in three Godrej group companies viz. Godrej & Boyce Mfg. Co Ltd., Geometric Ltd., and Godrej Properties Ltd as strategic long term investments to maintain the controlling stake in the said companies and not solely for the purpose of earning any dividend 4 ITA NO. 3163/MUM/2019 (A.Y: 2015-16) M/s. Godrej Investments Pvt. Ltd., income. Without prejudice to the above submissions assessee also submitted working of disallowance u/s. 14A of the Act as per Rule 8D of I.T. Rules. 4. By relying on case law the Assessing Officer rejected the contention of the assessee and proceeded to make the disallowance u/s. 14A of the Act as below: - i) Under Rule 8D(2)(1) 4,219/- ii) Under Rule 8D(2)(ii) 6,04,86,540/- iii) Under Rule 8D(2)(iii) 11,94,645/- Total 6,16,85,904/- 5. Aggrieved assessee preferred an appeal before the Ld.CIT(A) and made detailed submissions which are reproduced below: - “During the course of appellate proceedings, the appellant has submitted as under. The Appellant is a Non-Banking Financial Company, classified as an Investment Company not accepting / holding any public deposits. The Appellant filed its return of income on November 26, 2015 declaring total income of Rs.4,20,68,450/-. This fact has been correctly stated by the Assessing Officer in the Assessment Order. However, the Assessing Officer has also erroneously mentioned that the return of income was ‘led by the Appellant on September 29, 2015 declaring total loss of Rs.1,16,73, 163. This is an erroneous Statement which does not pertain to the case of the Appellant. The major issues arising out of the Assessment Order framed under Section 143(3) of the Act are discussed below: 5 ITA NO. 3163/MUM/2019 (A.Y: 2015-16) M/s. Godrej Investments Pvt. Ltd., Ground No. 1 to 5 Disallowance under Section 14A of the Act computed in accordance with Rule 8D read with Sections 14A 2 & 3 of the Act The Appellant Company had suo-moto disallowed interest expenses of Rs.4,2194 and administrative expenditure aggregating to Rs.4,80,000/- against the dividend income of Rs. 55,20,85,740/-, which was treated as exempt u/s.10(34) of the Act, while filing its Return of Income for the year ended March 31, 2075, relevant to the Assessment Year 2015-16. it was explained to the Assessing Officer that the disallowance under Section 14A of the Act of interest expenditure and administrative expenditure was computed based on the actual expenditure incurred during the year. The Assessing Officer has, however disregarded the submissions and has, vide the Assessment Order framed under Section 143(3) of the Act, computed the disallowance under Section 14A of the Act in accordance with sub-clause (ii and (iii) of clause (2) of Rule 8D as follows: Clause Particulars Amount Rs. 2(1) The amount of expenditure directly relating to income which does not form part of total Income 4,219 2(ii) The amount of interest expenditure not directly attributable to any particular income or receipt 6,04,86,540 2(iii) Amount @ 0.5% of average investment value restricted to the aggregate administrative expenditure incurred during the year 11,94,645 Total 6,16,85,404 Interest Expenditure Allocated to Dividend income 1) The Appellant Company is an investment Holding Company, not accepting public deposits and governed by the Non-Banking Financial Companies Regulations, laid down by the Reserve Bank of india with the main objective of investing in shares and lending / borrowing of monies. 2) In conformity with these objectives the Appellant Company, during the previous ae, year ended March 31, 2015, borrowed funds from Shareholders and placed these funds when available in inter Corporate Deposits with Companies. On the funds borrowed, the Appellant Company incurred Rs. 7.68 crores as interest expenditure and in turn earned interest Income of Rs.11.96 crores on the ICDs placed with companies, which was offered to lax accordingly. 6 ITA NO. 3163/MUM/2019 (A.Y: 2015-16) M/s. Godrej Investments Pvt. Ltd., 3) It may be noted that as an April 1, 2014 there ae no loans outstanding in the books of the Appellant Company and hence, it is clearly apparent that there are no barrowings as at the beginning of the year, which can be attributed to the Investments held by the company as on the last day of the previous year. Thus the investments held by the company as at April 1 2014 have no borrowings attributable to them in future and there is no possibility of any interest expenditure being disallowed u/s 14A on such investments 4) During the year under consideration, the Appellant Company has invested in shares, in three separate tranches in Godrej Properties Limited for Rs.102.63 crores. This purchase was funded partly by internal accruals of the appellant company as also the investments in the taxable interest earning ICDs which were withdrawn and replaced by the investment in tax free dividend bearing investment boing the shares acquired in Godrej Properties Limited. 5) Hence, the incremental interest paid on loans taken less the interest earned on ICD's would be liable for disallowance under Section 14A of the Act, in view of the fact that such interest expenditure relates to borrowings incurred for making Investments in shares earning exempt dividend income as also ICDs. The cash flow statement showing the day wise movement of the loan funds and their investment in inter-corporate deposits during the year under consideration is attached herewith. 6) On a perusal of the cash flow statement, it is apparent that the inter-corporate deposits placed by the Assessee Company out of the borrowings during the initial part of the year are higher than the borrowings and consequent thereto, there is no amount of interest expenditure liable for disallowance. Subsequently, even during the year, the investments made by the assessee company in shares of Godrej Properties Limited have been funded out of the internal accruals as also from the ICDs which have been recalled and invested. Even after recalling the ICDs, there are still surplus funds available with the assessee company as a result of which the deposits made by the company are in excess of the borrowings made by the company. Hence, the shares have been acquired by liquidating the deposits placed in the assessee company out of its funds as at the beginning of the year. As a consequence, thereof, there is only small part of the incremental amount of interest expenditure which Is liable for disallowance under section 14A of the Act. 7 ITA NO. 3163/MUM/2019 (A.Y: 2015-16) M/s. Godrej Investments Pvt. Ltd., 7) It is also apparent from the cash flow statement that the increase in borrowings during the year has been invested in the ICDs placed by the Appellant Company and there is therefore no borrowing which is specifically attributable to the investments in shares of Godrej Properties Ltd. made by the Appellant Company during the year. 8) Based on such day-wise cash flow statement, the net interest expenditure attributable to the purchase of shares from the loan funds aggregates to Rs.4,2194/- Hence, such interest paid by the Company attracts a disallowance under Section 14A since the interest! has been paid by the Company on funds borrowed, which have been used for the purchase of shares 9) The Assessee Company has therefore disallowed the actual interest expenses totaling to Rs.4,219/ which has been incurred for the purposes of investing in equity shares earning dividend income, which is treated as exempt u/s 10(34) of the Act, while filing its Return of Income. This disallowance has been computed on the day- wise basis in respect of the actual interest expenditure, attributable to the borrowings utilized for investment in shares and hence liable for disallowance under section 14A. 10) Based on the above submissions of the Assessee Company the total interest expenditure liable for disallowance based on the day-wise cash flow statement amounts to Rs.4,219/, which is the actual interest paid on the utilization of borrowed funds for investment in shares. Thus the amount of interest expenditure attributable to the earning of dividend income, which is liable for disallowance u/s.14A of the Act read with sub clause (i) of clause (2) of Rule 8D, cannot in any event exceed Rs.4,219/-. 11) Without prejudice to the foregoing submissions that no further interest expenditure is liable for disallowance under Section 14A of the Act, it is submitted that: a) The first contention of the appellant company is that there is no interest expenditure which is liable for disallowance under Section 14A of the Act read with Rule 8D. On a perusal of the Share Capital and Reserves and Surplus in the Balance Sheet as at the year end, your Honour may note that the Reserves and Surplus amount to Rs.219.87 crores and the Share Capital amounts to Rs.3.39 crores. Hence, the own funds of the company aggregate to Rs.223.26 8 ITA NO. 3163/MUM/2019 (A.Y: 2015-16) M/s. Godrej Investments Pvt. Ltd., crores. The investments held by the company on which tax free dividend income could possibly be received as at the year-end aggregate to Rs.222.02 crores, and is lower as compared to the capital employed of Rs.223.26 crores. There is therefore no borrowing attributable to the investment activities of the assessee company, and the entire investment is out of the internal accruals generated by the Company itself. In this regard, reliance is placed on the following decisions:  Decision of the Hon'ble Bombay High Court in the case of CIT vs. Reliance Utilities and Power Ltd. reported in 313 (TR 340 (Bom.)  Decision of the Hon'ble Bombay High Court in the case of HDFC Bank Ltd reported in 366 (TR 505 (Bom.)  Decision of the Hon'ble Gujarat High Court in CIT vs. UTI Bank Ltd. (Tax Appeal No. 118 of 2073)  Decision of the Hon'ble Gujarat High Court in the case of Suzlon Energy e Ltd. vs. OCIT reported in 354 ITR 630 (Guj.)  Decision of the Income Tax Appellate Tribunal, Mumbai, in the case of Bayer Bio Science (P) Ltd. reported in 148 TTJ 73.  Decision of the income Tax Appellate Tribunal, Mumbai, in the case of Bunge Agribusiness India (P) Ltd. reported in 142 TTJ 817.  Decision of the Income Tax Appellate Tribunal, Mumbai, in the case of Pranik Shipping and Services Ltd. reported in 146 TTJ 543.  Decision of the Income Tax Appellate Tribunal, Mumbai in the case of Strides Arcolab Ltd. reported in 153 TTJ 181.  Decision of the income Tax Appellate Tribunal, Mumbai, in the case of Shopper's Stop Ltd. (ITA No.1448 & 4475/Mum/2010)  Decision of the Income Tax Appellate Tribunal, Agra, in the case of Lala Ram Finance & Investment Co. (P) Ltd. (ITA Nos.260 & 261/Agr/2011) b) The second contention of the appellant company is that even if interest expenditure is to be disallowed under Section 14A of the Act, then the interest income is to be reduced from the total interest expenditure incurred by the appellant company during the previous year under consideration, and only the net interest expenditure, if any, is to be considered for computing the disallowance in accordance with sub clause (ii) of clause (2) of Rule 8D. As it is on record the appellant company as part of its business operations 9 ITA NO. 3163/MUM/2019 (A.Y: 2015-16) M/s. Godrej Investments Pvt. Ltd., places ICDs from the internal accruals as also deposits taken and earns interest income. The interest expenditure of Rs.7.68 crores is directly attributable to the borrowings which have been used for placing further deposits and earning interest income with the net interest differential being the profit for the Company. Hence, such interest income is to be netted against the total interest expenditure incurred by the appellant company during the previous year under consideration, when computing the interest expendrture to be disallowed in accordance with the provisions of sub-clause (ii) of clause (2) of Rule 8D. In the case of the appellant company, the interest income of Rs.11.96 crores is far in excess of the interest expenditure of Rs.7.68 crores and hence, there is no net interest expenditure liable for disallowance under Section 14Aof the Act. In this regard, the appellant company places reliance on the following decisions, wherein it has been held that the net interest expenditure is to be considered when computing the disallowance under Section 14A of the Act  Decision of the income Tax Appellate Tribunal, Mumbai, in the case of Jiwrajka Associates Pvt. Ltd. (ITA No.2362/Munv/2013)  Decision of the Income Tax Appellate Tribunal, Mumbai, in the case of Morgan Stanley India Securities Pvt. Ltd (ITA Nos.5072/Mum/2005 & 6774/Mum/2008)  Decision of the Income Tax Appellate Tribunal, Kolkata, in the case of Trade Apartment Ltd. (ITA No.1277/Kol/2011)  Decision of the Income Tax Appellate Tribunal, Ahmedabad, in the case of Karnavati Petrochem Pvt Ltd. (ITA No.2228/Ahd/2012) 12) In the Appellant’s own case for the Assessment Years 2008- 09, 2009-10, 2010-11, 2012-13 and 2013-14 the learned CIT(A) has deleted the disallowance made by the Assessing Officer under Rule 8D(2)(ii) and has upheld the disallowance of interest expenditure made by the Appellant in the Return of income. It is therefore submitted that the Appellant Company has in fact provided the exact amount of interest liable for disallowance under sub-clause i of clause 2 of Rule 8D and an adhoc disallowance by resorting to the provisions of sub-clause ii of clause 2 of Rule 8D is unwarranted and unjustified. 10 ITA NO. 3163/MUM/2019 (A.Y: 2015-16) M/s. Godrej Investments Pvt. Ltd., The Assessing Officer has, however, disallowed an amount of Rs.6.04 crores as interest expenditure incurred towards earning of exempt dividend income, which has been computed in accordance with sub-clause (ii) of clause (2) of Rule 8D. The Assessing Officer has also not given any reasoning whatsoever as to why the method adopted by the Appellant Company is erroneous in any way. It is respectfully submitted that the observations of the Assessing Officer are erroneous in view of the following facts. The Assessing Officer has stated that the majority of the income is from dividend and the majority of investments are in shares, which generate tax-free income, and the advances as a loan were a small part of such investments. Consequent thereto, the entire interest expenditure was liable to be disallowed as per Rule 8D(2)(i) of the Act. The observations of the Assessing Officer are unwarranted in view of the following i) The assessee has placed deposits to earn interest income directly out of the borrowed funds. ii) There is a direct nexus between the placing of the deposits and the borrowings made, and hence, the interest income has off-set the interest expenditure incurred by the assessee (iii) The assessee company has, therefore, made a day- wise computation of the interest expenditure incurred and the interest income earned, and a day-wise disallowance of the incremental interest expenses has been computed. (iv) Hence, the observation of the Assessing Officer that the entire interest expenditure is to be disallowed is not borne out by the facts on record The Assessing Officer has stated that the expenditure must be allocated to the income to which it is connected to avoid distortions in the computation of taxable and exempt income, based on the matching principle of accountancy. It is respectfully submitted that the assessee company has followed these principles and has in fact matched the interest expenses incurred against the interest income and the dividend income on a daily basis and has computed the interest expenditure liable for disallowance on a scientific and rationale manner. 11 ITA NO. 3163/MUM/2019 (A.Y: 2015-16) M/s. Godrej Investments Pvt. Ltd., The Assessing Officer has stated that the interest income earned by the assessee on ICDs is merely incidental to the business of the company and consequent thereto, the entire managing expenses are required to be disallowed under Section 14A of the Act. It is respectfully submitted that taking and placing of inter-corporate deposits is one of the main business objects of the company and in fact the assessee is a non-banking financial company which has been duly approved by the Reserve Bank of India. Administrative and Other Expenditure Allocated to Dividend Income: The Appellant Company had disallowed any amount towards Administrative Expenditure incurred for earning tax free dividend income. The Appellant Company has incurred the following expenditure during the previous year under consideration: Particulars Amount Rs. Remuneration to Auditors 2,24,720 Employee Costs 4,80,000 Rates & Taxes 2,000 Professional Fees 5,618 Miscellaneous Expenses 4,82,307 Total 11,94,645 The aforesaid expenses have been incurred by the Appellant Company for maintaining the status as a Company and are, hence, allowable under Section 57 of the Act. It is respectfully submitted that the aforesaid expenditure has been incurred for the very existence of the Company and is necessary for its sustenance. Such expenses have no correlation to any income earned by the Company and have to be incurred irrespective of the fact whether the Company has earned any income or not. These are statutory expenses, which are fixed and recurring in nature and have to be incurred by the Company on an annual basis. Such expenses are not related, directly or indirectly, to the earning of dividend income and can by no stretch of imagination be notionally allocated to the earning of such income. It is further submitted that such expenses are clearly allowable under Section 57 of the Act. Such expenses are incurred for complying. with the legal obligations of the company and have no connection whatsoever with the earning of dividend income by the Company. Such expenses are incurred on a regular basis, year after year, irrespective of the fact whether the Company has earned an dividend income or not. Such expenses have not been incurred in relation to the earning of dividend income and hence the disallowance of such expenses under Section 14A of the Act is unwarranted. 12 ITA NO. 3163/MUM/2019 (A.Y: 2015-16) M/s. Godrej Investments Pvt. Ltd., The Appellant Company, inter alia, relies on the following decisions of various High Courts, wherein it has been held that expenditure incurred by a Company to fulfill its statutory legal obligations is allowable in any view of the matter: (a) CIT v. Ganga Properties Ltd. (199 ITR 94, Cal.) (b) CIT v. New Savan Sugar and Gur Refining Co. Ltd. (185 ITR 564, Cal) (c) CIT v. Rampur Timber and Turnery Co. Ltd. (129 ITR 58, All.) (d) Kulgam Holdings Pvt Ltd vs ACIT, CC - 1(1) & others. Without prejudice to the contentions of the Appellant Company that such expenses are allowable u/s. 57 of the Act, it is respectfully submitted that such expenses are not liable to be disallowed under section 14A of the Act, in view of the reasons enumerated hereunder: i) The exemption u/s. 10(34) of the Act is to be allowed only on net dividend income. However, one cannot notionally and on sheer conjecture ascribe the aggregate expenditure incurred by the company for its day to day running, as expenses incurred for the earning of dividend income, by taking recourse to the provisions of Section 14A of the Act, when in actual fact no such expenditure has been incurred. ii) It may be noted that exempt dividend income was received from only from three companies in four solitary transactions during the year. iii) The only task involved for earning the dividend, after the investment has been made is depositing the dividend warrant into the bank. Even this is now mainly done by the Electronic Clearing System (ECS) and therefore, no manpower is involved in such collection. Hence, no expenditure can be apportioned towards earning of dividend income in the year under consideration. iv) The expenditure incurred is for the day to day running and management of the Company and has no nexus whatsoever to the earning of dividend income by the Company. v) The Assessee Company has, however, disallowed the entire salary paid to the Managing Director in its Return of Income. Hence, an aggregate amount of Rs. 4,80,000/- has been disallowed as administrative expenses under Section 14A of the Act. 13 ITA NO. 3163/MUM/2019 (A.Y: 2015-16) M/s. Godrej Investments Pvt. Ltd., vi) The Appellant Company, inter alia, relies on the following decisions to contend that any adhoc allocation of expenditure to the earning of dividend income is not justified: (a) CIT V/s. Mahendra Sobhagchand Shah-203 ITR, pg. 178 (Bom) (b) CIT V/s. United Collieries Ltd. ~ 203 ITR. Pg.857 (Cal.) (c) CIT V/s. Central Bank of India (Bom) — 264 ITR 522 (Bom) (d) CIT V/s. GIC of India (No.1) - 254 1TR 203 (Bom) (e) State Bank of Indore V/s. CIT - 275 ITR 23 (MP) vii) Considering what is stated in the foregoing, it is respectfully submitted that the aforesaid expenses have been incurred to maintain the status of the Appellant as a Company, and cannot be allocated towards the earning of dividend, and any notional allocation, for the purposes of disallowance under Section 14A of the Act, would be highly unjustified and unwarranted. The Assessing Officer has, however, disregarded the submissions made by the Appellant Company and has disallowed an amount of Rs.11,94,645/- being the entire administrative expenditure incurred by the Assessee as having been incurred towards the earning of exempt dividend income. Hence, as against the actual aggregate expenditure incurred by the Appellant Company of Rs.4,80,000/- for earning exempt dividend income, the Assessing Officer has disallowed an amount of Rs.11,94,645/-. The Assessing Officer has stated that it is difficult to accept the hypothesis that one can earn substantial dividend income without incurring expenses of an administrative nature and it is difficult to accept the logic that only expenditure on collection of dividend is liable for disallowance. It is respectfully stated that the assessee company has suo-moto disallowed entire Managing Directors salary. Hence, the assessee has disallowed the expenditure for even managing the investments and it is not the contention of the assessee that expenses have been incurred only on collection of dividend. Without prejudice to the above submissions and in any event, the Appellant Company submits that the notional disallowance of administrative and other expenditure estimated at Rs.11,94,645/- is grossly erroneous and arbitrary, since the actual aggregate expenditure incurred by the Appellant Company during the year was Rs.4,80,000/- and in any view of the matter, the disallowance cannot exceed such amount. 14 ITA NO. 3163/MUM/2019 (A.Y: 2015-16) M/s. Godrej Investments Pvt. Ltd., Ground No. 7 Incorrect levy of interest u/s 234B of the Act The Appellant Company submits that the Assessing Officer erred in levying interest under Section 234B of the Act as a consequence of the disallowance made in the Assessment Order. The Appellant denies the liability to the levy of such interest and the Assessing Officer be directed to delete the same accordingly. Ground No. 8 Incorrect levy of interest u/s 234D of the Act The Appellant Company submits that the Assessing Officer erred in levying interest under Section 234D of the Act. The Appellant denies the liability to the levy of such interest and the Assessing Officer be directed to delete the same accordingly.” 6. After considering the detailed submissions of the assessee, Ld.CIT(A) rejected the submissions of the assessee and sustained the disallowance made by the Assessing Officer. However, with regard to Rule 8D(2)(iii) of I.T. Rules disallowance, he gave part relief to the assessee by reducing the disallowance to the extent of ₹.9,81,998/-. 7. Aggrieved assessee preferred an appeal before us and assessee has raised following grounds in its appeal: - “1. The learned Commissioner of Income Tax (Appeals) erred in ignoring the ground regarding the action of the Assessing Officer in assuming jurisdiction under Section 14A(2) of the Act without recording objective satisfaction. 2. The learned Commissioner of Income Tax (Appeals) erred in confirming the action of the Assessing Officer in computing the disallowance under Section 14A of the Act in accordance with sub- 15 ITA NO. 3163/MUM/2019 (A.Y: 2015-16) M/s. Godrej Investments Pvt. Ltd., clause (ii) and (iii) of clause (2) of Rule 8D, when the Appellant has suo moto computed the actual amount liable for disallowance under Section 14A of the Act read with Rule 8D(2)(1). 3 Without prejudice to ground 1, the learned Commissioner of Income Tax (Appeals) erred in confirming the action of the Assessing Officer in disallowing interest expenditure w/s.14A of the Act aggregating to Rs.6,04,86,540/- towards the earning of dividend income, by applying clause 2(ii) of Rule 8D. Having regard to the facts and circumstances of the case, the Appellant submits that the unwarranted and arbitrary disallowance be deleted. 4. Without prejudice to ground 1, the learned Commissioner of Income Tax (Appeals) erred in relying on factually erroneous presumptions and rejecting the contention raised by the Appellant, that no interest expenditure was liable for disallowance as the own funds constituting the share capital and reserves were sufficient to meet the investments made by the Appellant. 5. Without prejudice to ground 1, the learned Commissioner of Income-tax (Appeals) erred in relying on factually erroneous presumptions and rejecting the contention raised by the Appellant that even if interest expenditure was to be disallowed under Section 14A of the Act, then the interest income arising from the utilization of such borrowed funds was to be reduced from such interest expenditure and only the net interest expenditure was to be considered for computing the disallowance under Rule 8D(2)(ii). 6. Without prejudice to ground 1 and without prejudice to the Appellant’s contention that no interest is allocable to the earning of exempt dividend income under clause 2(ii) of Rule 8D, and in any view of the matter, the Appellant submits that the aggregate disallowance computed at Rs.6,04,86,540/- is arbitrary and grossly excessive and the same requires to be reduced substantially. 7. Without prejudice to ground 1, the learned Commissioner of Income Tax (Appeals) erred in disallowing administrative and other expenditure u/s.14A of the Act aggregating to Rs.9,81,998/- as incurred for earning of dividend income, by making an adhoc allocation of administrative expenses between the taxable and tax free income of the Appellant. Having regard to the facts and circumstances of the case, the Appellant submits that the unwarranted and arbitrary disallowance in unwarranted and the same requires to be deleted. 16 ITA NO. 3163/MUM/2019 (A.Y: 2015-16) M/s. Godrej Investments Pvt. Ltd., 8. At the time of hearing, Ld. AR of the assessee submitted with reference to Para No 3.3 of the Assessment Order that assessee has incurred interest expenditure of ₹.7.68 Crores whereas assessee has earned interest income of ₹.11.96 Crores. The net result is net taxable interest income, there is no interest expenditure incurred by the assessee. He submitted that by relying on the decision of the Hon'ble Jurisdictional High Court in the case of CIT v. Jubiliant Enterprise (P.) Ltd, [416 ITR 58 (Bombay)] wherein it held that disallowance u/s. 14A of the Act was to be made with reference to net interest paid on loan and not on gross interest. Further he relied on the case of Pr.CIT v. Nirma Credit & Capital (P.) Ltd., [85 taxmann.com 72 (Gujarat)] in which Hon'ble Gujarat High Court held that where the assessee pays interest on borrowings as also earns taxable interest on investments, the amount of expenditure by way of interest would be interest paid by the assessee on borrowings minus taxable interest earned during the Financial Year. 9. Further he relied on the decision of the Coordinate Bench in the case of DCIT v. Edelweiss Financial Services Ltd., in ITA.No. 2249/Mum/2017 dated 24.08.2018 and submitted that since in the case of the assessee, assessee has earned net interest income, therefore no interest expenditure can be disallowed. 17 ITA NO. 3163/MUM/2019 (A.Y: 2015-16) M/s. Godrej Investments Pvt. Ltd., 10. With regard to administrative expenses, he submitted that assessee has suomoto disallowed expenditure incurred in earning exempt income in which actual salary paid to Managing Director was disallowed. He submitted that the Assessing Officer should have adopted the investment which earned the exempt income and not the total investment. 11. On the other hand, Ld. DR submitted that assessee is an investment company and it is fact on record that short term borrowing increased during the year vis-à-vis investments made during the year, therefore, short term borrowings were utilized for making investment. Hence, he supported the findings of the lower authorities. 12. Considered the rival submissions and material placed on record, we observe from the record that no doubt assessee has earning exempt income to the tune of ₹.55.21 crores and assessee has suomoto declared direct expenses relating to interest to the extent of ₹.4219/- and administrative expenses to the extent of ₹.4.8 lakhs. We observed from the Assessment Order that Assessing Officer while perusing the Profit and Loss Account clearly brought on record that assessee has earned interest income of ₹.11.96 crores which is taxable and claimed interest expenditure to the extent of ₹.7.68 crores. In the net result assessee is 18 ITA NO. 3163/MUM/2019 (A.Y: 2015-16) M/s. Godrej Investments Pvt. Ltd., actually earned net taxable interest during this year, it clearly indicates that assessee has used own funds for the purpose of making investments in shares only from which assessee has earned exempt income, as held in the cases of CIT v. Jubiliant Enterprise (P.) Ltd, (supra) and Pr.CIT v. Nirma Credit & Capital (P.) Ltd., (supra), the tax authorities can disallow interest expenditure after reducing the interest income earned by the assessee for the purpose of disallowance u/s. 14A of the Act. In the given case since assessee has earned net interest income the disallowance of interest under Rule 8D(2)(ii) of I.T. Rules can be made only if there is any positive expenditure. Considering the fact that assessee has net interest income, there is no interest expenditure claimed by the assessee which can be applied to disallow u/s. 14A r.w. Rule 8D(2)(ii) of I.T.Rules. Accordingly, ground raised by the assessee is allowed. 13. With regard to administrative expenses disallowable under Rule 8D(2)(iii) of I.T. Rules, we agree that Rule 8D is applicable in the case of the assessee. Therefore, the administrative expenses have to be disallowed by applying Rule 8D(2)(iii) of I.T. Rules, we observe from the disallowance made by the Assessing Officer by applying average investments. We do not know whether all the investments made by the assessee has ended up earning exempt income. Therefore, in our view, 19 ITA NO. 3163/MUM/2019 (A.Y: 2015-16) M/s. Godrej Investments Pvt. Ltd., the disallowance should be restricted to 0.50% of the average investments which actually earned dividend income. Accordingly, we direct the Assessing Officer to recompute the disallowance as per above direction. 14. In the net result, appeal filed by the assessee is partly allowed. Order pronounced on 26.11.2021 as per Rule 34(4) of ITAT Rules by placing the pronouncement list in the notice board. Sd/- Sd/- (MAHAVIR SINGH) (S. RIFAUR RAHMAN) VICE PRESIDENT ACCOUNTANT MEMBER Mumbai / Dated 26.11.2021 Giridhar, Sr.PS Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. The CIT(A), Mumbai. 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. //True Copy// BY ORDER (Asstt. Registrar) ITAT, Mum