Disallowance of expenses under section 14A cannot exceed exempt income; deductions under section 80IA(4) require valid agreements demonstrating the Assessee's eligibility for maintaining infrastructure.

ORDER

PER : T.R. SENTHIL KUMAR, JUDICIAL MEMBER:-

These cross appeals are filed by the Assessee and the Revenue as against the two appellate orders both dated 30.08.2019 and 11.10.2019 passed by the Commissioner of Income Tax (Appeals)-2, Ahmedabad arising out of two assessment orders passed under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) relating to the Assessment Years 2015-16 and 2016-17. Since common issues are involved in all these appeals and also inter connected, therefore for the sake convenience the same are disposed of by this common order.

2. Brief facts of the case is that the assessee is a Private Limited company engaged in the business of Operating container handling terminal and container freight station operations. For the assessment year 2015-16 the assessee filed its Return of Income on 27-11-2015 declaring total income of Rs.14,09,75,340/=. The return was taken for scrutiny assessment and made the following disallowances:

2.1. Disallowance u/s. 14A of the Act: The assessee has earned dividend income of Rs.25,32,679/- which is exempt from tax but the assessee has not allocated any expenditure to earn the exempt income. Therefore, AO invoking the provisions of section 14A of the Act made disallowance of Rs.35,00,000/- as per Rule 8D. The assessee contended that it has not incurred any expenditure to earn the exempt income and therefore disallowance u/s. 14A is uncalled for. The assessee has further claimed that the peak investment in the mutual fund was approximately Rs.137 crores and it has got sufficient interest free fund in the form of cash profit of Rs.284.85 crores. The assessee also submitted that the total investment is Rs.70 crores as on 31-03-2015, against which there is a total interest free fund in the form of equity and reserve and surplus of Rs.414 crores. Therefore, no disallowance is called for u/s.14A of the Act. The assessee also submitted that exempt income has been received from mutual fund and there is no opening and closing balance and therefore 0.5% of the investment will be NIL. Without Prejudice to the above, the assessee suo-moto made disallowance of Rs.35,00,000/- u/s.14A even though the exempt income is only Rs.25,32,679/-. However the Ld AO confirmed the disallowance to Rs.35 lacs invoking Rule 8D.

2.2. On appeal against this issue the Ld CIT[A] restricted the disallowance to the extent of dividend income earned by the assessee relying upon various case laws by observing as follows:

“…. I do not agree with the submission of the appellant that it has not incurred any expenditure towards the exempt income. As regard to appellant's argument that it has got its own fund to make the investment, the Assessing Officer has not made any disallowance of interest as per Rule 8D(2)(i). The AO has made disallowance as per Rule 8D(2) (ii) which is relating to administrative expenses. The appellant's argument that only 0.5% of average value of investment is to be considered for the purpose of computation of disallowance-under Rule 8D(2) (iii) is also not tenable as the average value of investment is to be considered from which income does not or shall not form part of the total income as appearing in the balance sheet of the assessee. Assessing Officer, was therefore, justified to make disallowance u/s. 14A r.ws, 8D. However, the AO has made the disallowance as per Rule BD of Rs.35.00,000/- against the exempt income of Rs.25,32,679/- The Honourable High Court in the case of Corrtech Energy Ltd. (223 Taxaman 130) has held that the disallowance u/s.14A has he