Micro Age Instruments Pvt. Ltd, Pune, Pune V. The Income Tax Officer, NFSC, Delhi, Delhi

ITA 530/PUN/2022

AI Insights

Micro Age Instruments Pvt. Ltd. appealed against the order of the CIT(A) which confirmed the disallowance under section 14A of the Income-tax Act, 1961, amounting to Rs.3,94,25,461. The disallowance was initially computed by the Assessing Officer based on the provisions of rule 8D, which pertains to the expenses incurred in relation to income not forming part of the total income. The Tribunal found that the method of averaging used by the AO for calculating the disallowance was incorrect and required recalibration. Furthermore, the Tribunal examined the disallowance of interest and found that the funds used for investments in exempt income yielding securities were non-interest bearing and exceeded the investments, thus no disallowance should have been made.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 137852 (ITAT-PUNE)
• Duration Of Justice: 7 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-02-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: A
• Next Hearing Date: 14-02-2023
• Assessment Year: 2018-2019
• Appeal Filed On: 13-07-2022
• Other Referred Cases: Godrej & Boyce Manufacturing Co. Ltd. vs. DCIT (2017) 394 ITR 449 (SC)
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Rule 8D
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH, „A‟ PUNE BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER आयकर अपीऱ सं. / ITA. No.530/PUN/2022 निर्धारण वषा / Assessment Year : 2018-19 Micro Age Instruments Pvt. Ltd., D-1 Block, Plot No.18/2, Chinchwad, Pune – 411019 PAN: AABCM1787E Vs. ITO, National e- Assessment Centre, Delhi Appellant Respondent आदेश / ORDER PER R.S. SYAL, VP : This appeal by the assessee is directed against the order dated 18.05.2022 passed by the CIT(A) in National Faceless Appeal Centre (NFAC), Delhi, in relation to assessment year 2018-19. 2. Four grounds have been raised in the Memorandum of appeal. The last ground about the addition of Rs.68,13,866 on account of difference between the income appearing in Form No.26AS and income as per books of account of the assessee, was Assessee by S/Shri CH Naniwadekar and Kiran Sanmane Revenue by Shri Ramnath P Murkunde Date of hearing 15-02-2023 Date of pronouncement 16-02-2023 ITA No.530/PUN/2022 Micro Age Instruments Pvt. Ltd. 2 not pressed by the ld. AR. The same is therefore, dismissed as not pressed. 3. The only other issue which survives in the first three grounds is against the confirmation of disallowance u/s 14A of the Income-tax Act, 1961 (hereinafter referred to as „the Act‟) amounting to Rs.3,94,25,461. 4. Briefly stated, the facts of the case are that the assessee claimed exempt income of Rs.10,71,22,273 on account of Dividend u/s 10(34) and Long term capital gain on equity u/s 10(38) of the Act. No disallowance was offered u/s 14A. On being called upon to explain the reasons, the assessee submitted that no such expenditure was incurred. The Assessing Officer (AO) computed the disallowance u/s 14A read with rule 8D in two parts viz. (i) Rs.1,90,57,300 towards 1% of average investments and (ii) Rs.2,03,68,161 consisting of interest of Rs.1,95,62,471; STT on shares of Rs.2,02,312; brokerage on shares of Rs.5,27,206; and Demat charges of Rs.76,172. The ld. CIT(A) did not provide any succor to the assessee, who has brought the matter before the Tribunal. ITA No.530/PUN/2022 Micro Age Instruments Pvt. Ltd. 3 5. We have heard the rival contentions and perused the relevant material on record. The first component of the disallowance is a sum of Rs.1,90,57,300 which has been made by the AO u/s 14A read with rule 8D(2)(ii), which provides for making 1% disallowance “of the annual average of the monthly averages of the opening and closing balances of the value of investment”, income from which does not form part of total income. The ld. AR did not dispute the making of disallowance @ 1%. He however, submitted that the AO computed disallowance by taking average of opening and closing annual figures as against the average of monthly averages. It was submitted that if the calculation is done in terms of clause (ii) of rule 8D(2), the disallowance would get substantially reduced. It is clear from the language of the rule that 1% disallowance is to be made “of the annual average of the monthly averages of opening and closing balances of the value of the investment” and not the average of opening and closing balances on annual basis. We, therefore, set aside the impugned order on this score and remit the matter to the AO for computing 1% disallowance by ITA No.530/PUN/2022 Micro Age Instruments Pvt. Ltd. 4 considering the annual average of the monthly averages of opening and closing balances of the value of investments. 6. The next component of the disallowance is Rs.2,03,68,161. We have noticed above that the amount includes disallowance on account of interest amounting to Rs.1,95,62,471; disallowance on account of STT on shares; brokerage on shares; and Demat charges. The ld. AR did not press the remaining three items and contested only the disallowance of interest made by the AO at Rs.1,95,62,471. This figure of disallowance of interest has been picked up by the AO from the Notes to financial statements having reference to Note number 19 giving breakup of “Finance cost”. This breakup includes interest on HDFC loan amounting to Rs.1,95,62,471. It is this exact amount of interest on HDFC loan paid by the assessee that has been taken cognizance of by the AO in the disallowance u/s 14A. However, it is pertinent to note that the above referred interest on HDFC loan is in respect of loan taken for acquisition of properties, which emerges from page 56 of paper book. Referring to Notes to financial statement for the year having reference to `HDFC property loan‟, the ld. AR brought to our notice that the assessee took loan from HDFC only ITA No.530/PUN/2022 Micro Age Instruments Pvt. Ltd. 5 for the purpose of purchase of certain properties which were totally unconnected with the investments yielding exempt income. Be that as it may, it is seen from the assessee‟s balance sheet that the investments in securities yielding exempt income has been reflected as “Non Current Investments” amounting to Rs.197.98 crore under the broad head “Non Current Assets”. As against that, the assessee‟s balance sheet shows shareholders fund to the tune of Rs.166.20 crore plus “Other long term borrowings – Unsecured” to the extent of Rs.127.50 crore taken from related parties and directors which are non-interest bearing. If we add up the total amount of non interest bearing funds available with the assessee, it clearly emerges that the said amount is far in excess of the amount of investment in exempt income yielding securities to the tune of Rs.197.98 crore. The Hon'ble Supreme Court in Godrej & Boyce Manufacturing Co. Ltd. vs. DCIT (2017) 394 ITR 449 (SC) has held that no disallowance of interest can be made as per rule 8D when interest bearing funds are more than the investments made by the assessee in securities yielding exempt income. In view of the above position, it is clear that the disallowance of interest of Rs.1,95,62,471 made by the AO as ITA No.530/PUN/2022 Micro Age Instruments Pvt. Ltd. 6 sustained in the first appeal, cannot be countenanced. We, therefore, order to delete the addition to this extent. 7. In the result, the appeal is partly allowed. Order pronounced in the Open Court on 16 th February, 2023. Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; दिन ांक Dated : 16 th February, 2023 GCVSR आदेश की प्रतितिति अग्रेतिि/Copy of the Order is forwarded to: 1. अपील र्थी / The Appellant; 2. प्रत्यर्थी / The Respondent 3. 4. DR, ITAT, „A‟ Bench, Pune Guard file आदेशानुसार/ BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अदिकरण ,पुणे / ITAT, Pune ITA No.530/PUN/2022 Micro Age Instruments Pvt. Ltd. 7 Date 1. Draft dictated on 15-02-2023 Sr.PS 2. Draft placed before author 16-02-2023 Sr.PS 3. Draft proposed & placed before the second member JM 4. Draft discussed/approved by Second Member. JM 5. Approved Draft comes to the Sr.PS/PS Sr.PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order. *