2018 (1) TMI 1404

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....2011 by accepting income declared by the assessee under normal provisions of the Act and book profit u/s 115JB of the Act. Thereafter, the case was reopened u/s 147 of the Act, on the ground that income chargeable to tax had been escaped assessment and hence, notice u/s 148 of the Act was issued on 24-12-2013. In response to the notice, assessee attended and filed written submissions on 17-09-2014 by stating that the return filed earlier on 30-09-2009 u/s 139(1) may be treated as return filed in response to notice u/s 148. The case has been selected for scrutiny and notices u/s 143(2) and 142(1) were issued. In response to the notices, the authorised representative of the assessee appeared from time to time and filed the requisite details, as called for. The assessment was completed u/s 143(3) r.w.s. 147 by making addition towards disallowance of expenditure incurred in relation to exempt income not includible in total income u/s 14A @ 0.5% of average value of investments by invoking Rule 8D(2)(iii) of Income-tax Rules, 1962. 3. Aggrieved by the assessment order, assessee preferred appeal before the CIT(A). Before the CIT(A), the assessee has challenged reopening of assessment o....

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....f average value of investments to determine disallowance of expenditure u/r 8D(2)(iii) by following the decision of Hon'ble Delhi High Court in the case of Cheminvest Ltd vs CIT 374 ITR 272 (Del) and re-worked disallowance determined by the AO by considering only those investments which are capable of earning exempt income. Accordingly, the CIT(A) has determined disallowance of Rs. 51,47,177 as against Rs. 1,06,56,506 worked out by the AO by considering the investments in HDIL and DHFL and long term capital gain derived from Wadhwan Food Retail Pvt Ltd during the relevant period. The relevant portion of the CIT(A)'s order is extracted below:- "6.3.4 Coming to the computation of disallowance u/s.!4A, I am inclined to accept the alternative plea of the appellant for considering only those investments from which exempt income was received by the appellant as per the ratio of judgment of Hon'ble Delhi High Court In the case of Chetninvest Ltd, v. CIT (ITA 749/2014). Accordingly, it is held that while calculating the disallowance as per Rule 8D(2)(iii), the average value of investment is to be worked out by taking into account not the entire opening and closing investments ....

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....) has erred in allowing partial relief to the assessee in respect of disallowances computed by the AO u/s 14A ignoring the provisions of section 14A that as per the said provisions, even if no exempt income is actually earned or received during the year the disallowances contemplated u/s 14A should be determined by applying Rule 8D(2) of Income-tax Rules, 1962. The Ld.DR referring to the circular issued by the CBDT in circular No.5 of 2014 dated 11-02-2014 submitted that as per the circular of CBDT, the disallowance provided u/s 14A has to be computed even where the assessee in a particular year has not earned any exempt income. The Ld.DR further submitted that the Ld.CIT(A) has erred in partly deleting the disallowance u/s 14A relying upon the decision of Hon'ble Delhi High Court in the case of Cheminvest Ltd vs CIT (supra) overlooking the fact that the above decision is not accepted by the revenue and civil appeal has been preferred before the Hon'ble Supreme Court and the same is pending. 6. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The AO has disallowed expenditure incurred in relation to e....

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....n expenditure. Therefore, the possibility of certain portion of expenditure attributable to its investment activity cannot be ruled out. Therefore, we are of the considered view that the AO as well as the CIT(A) were right in computing disallowance of expenditure by invoking Rule 8D2)(iii) of Income-tax Rules, 1962. 8. Having said so, let us examine determination of disallowances by the CIT(A). The CIT(A) has allowed partial relief to the assessee by following the decision of Hon'ble Delhi High Court in the case of Cheminvest Ltd vs CIT (supra) and recomputed disallowances by considering those investments which yield exempt income. The Ld.CIT(A) has considered investments in HDIL & DHFL and laso investments in shares of Wadhwa Food Retail Pvt Ltd. It is the contention of the assessee that investments in Wadhwa Food Retail Pvt Ltd did not yield any exempt income for the relevant period and also long term capital gain from sale of shares of Wadhwa Food Retail Pvt Ltd is taxable @20%, therefore, for the purpose of determining average value of investments, investments in Wadhwa Food Retail Pvt Ltd cannot be considered. We find merit in the arguments of the assessee for the reason th....