IN THE INCOME TAX APPELLATE TRIBUNAL , ‘B’ BENCH, CHENNAI
BEFORE SHRI A.MOHAN ALANKAMONY ACCOUNTANT MEMBER
AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER
I .T.A.No.1717/Mds/2013
(Assessment Year : 2009-10)
Assistant Commissioner of
Income Tax,
Company Circle- I (2) ,
Chennai-34.
Vs Mr . M.Baskaran,
11/5, Val l iammal St reet ,
Alagappa Nagar ,Ki lpauk,
Chennai-600 010.
PAN: AAFPB8375E
Appellant by : Mr. Pramod Nangia, CIT
Respondent by : Mr. M.Karunagaran, Advocate
Date of hearing : 20th June, 2014
Date of Pronouncement : 31st July, 2014
O R D E R
Per Challa Nagendra Prasad, JM:
This appeal is filed by the Revenue against the order of the Commissioner of Income Tax (Appeals)-VI, Chennai dated 22.02.013 for the assessment year 2009-10. The only grievance of the Revenue in this appeal is that the Commissioner of Income Tax (Appeals) erred in deleting disallowance made under section 14A read with Rule 8D holding that assessee has not received any exempt income and hence disallowance is unwarranted
2. The Assessing Officer while completing the assessment disallowed ` 19,28,666/- under section 14A read with Rule 8D of the Act as expenditure incurred for earning exempt income as the assessee was holding investments worth `14.05 crores and incurred interest expenses of ` 34.80 lakhs. On appeal the Commissioner of Income Tax (Appeals) deleted the disallowance holding that assessee has not derived income out of investments and investments are made
from his own source which did not suffer any interest. The Commissioner of Income Tax (Appeals) also observed that Assessing Officer should have excluded share application money from the working of the qualifying amount. Therefore
Commissioner of Income Tax (Appeals) following the ratio of the decision in the case of Hero Cycles Ltd. (320 ITR 518) deleted the disallowance made under section 14A of the Act.
3. Departmental Representative relying on the decision of
the Special Bench of the Tribunal in the case of Cheminvest
Ltd.. Vs. ITO (121 ITD 318) submits that even if the assessee
has not earned any exempt income, still disallowance under
section 14A read with Rule 8D has to be made and it is
mandatory. Departmental Representative also places
reliance on Circular No.5/2014 dated 11.2.2014 issued by
CBDT and submits that even in the case of the assessee not
receiving any exempt income during the financial year still the
disallowance under section 14A has to be made.
4. Counsel for the assessee submits that assessee has
not received any exempt income and in the absence of the
assessee receiving any exempt income, there is no
justification in deriving expenses attributable for earning
income which is not received by the assessee. He places
reliance on the recent decision of the Hon’ble Allahabad
High Court in the case of CIT Vs. M/s. Sivam Motors Pvt.Ltd.
in I.T. Appeal No.88 of 2014 dated 5.5.2014 for the
assessment year 2008-09, the decision of the Hon’ble
Gujarat High Court in the case of CIT Vs. Corrtech Energy
Pvt. Ltd. in Tax Appeal No.239 of 2014 dated 24.3.2014 for
the assessment year 2009-10 and the decision of Hon’ble
Bombay High Court in the case of CIT Vs. Delite Enterprises
in Tax Appeal No.110 of 2009 dated 26.2.2009. Counsel for
the assessee submits that even otherwise the Assessing
Officer should have excluded share application money in
various companies which will not produce any exempt
income. He submits that if such share application money is
excluded the disallowance under section 14A of the Act will
works out to `5,61,125/- as against disallowance of
`19,28,666/- made by the Assessing Officer. For the
proposition that share application money is not investment for
the purpose of section 14A, he places reliance on the
decision of the Tribunal in the case of Rainy Investments Pvt.
Ltd. Vs. ACIT in I.T. Appeal No.5491/Mum/2011 dated
16.1.2013.
5. Heard both sides. Perused orders of lower authorities
and submissions made by the assessee and the decisions in
relied on. No doubt in the decision of the Special Bench of
Delhi Tribunal in the case of Cheminvest Ltd. Vs. ITO (supra),
the Special Bench held that disallowance under section 14A
can be made even in the year in which no exempt income
has been earned or received by the assessee. This decision
of Special Bench of the Tribunal has been impliedly overruled
by the decisions of High Courts in the following cases:
6. In the case of M/s. Shivam Motors P.Ltd. (supra),
before the Hon’ble Allahabad High Court, the Revenue raised
the following question of law:-
“Whether on the facts and in the circumstances of
the case and in law, the Income Tax Appellate
Tribunal was justified in upholding the decision of
CIT(A) in deleting the disallowance of ` 2,03,752/-
u/s.14A ignoring the fact that there is difference of
opinion of various courts on the view taken by the
ITAT that in the absence of tax free income, no
disallowance u/s.14A is permissible.”
7. The High Court while answering the said question held
as under:-
“As regards the second question, Section 14A of the
Act provides that for the purposes of computing the
total income under the Chapter, no deduction shall
be allowed in respect of expenditure incurred by the
assessee in relation to income which does not form
part of the total income under the Act. Hence, what
Section 14A provides is that if there is any income
which does not form part of the income under the
Act, the expenditure which is incurred for earning the
income is not an allowable deduction. For the year in
question, the finding of fact is that the assessee had
not earned any tax free income. Hence, in the
absence of any tax free income, the corresponding
expenditure could not be worked out for
disallowance. The view of the CIT(A), which has
been affirmed by the Tribunal, hence does not give
rise to any substantial question of law. Hence, the
deletion of the disallowance of Rs.2,03,752/- made
by the Assessing Officer was in order.”
8. The Gujarat High Court in the case of CIT Vs. Corrtech
Energy Pvt.Ltd.(supra) held as under:-
“We have given our thoughtful consideration to the facts
and the decision relied upon by the Id AR. The Hon'ble
Punjab & Haryana High Court in the case of CIT vs.
Winsome Textile Industries Ltd. reported at (2009) 3191TR
204(P&H) has held that in the present case, admittedly, the
assessee did not make any claim for exemption. In such a
situation, section 14A could have no application. In this
case also, the assessee has not claimed any exempt
income in this year. Therefore, respectfully following the
judgement of Hon'ble High Court of Punjab & Haryana in
the case of CIT vs. Winsome Textile Industries Ltd. (supra),
we hereby allow this ground and direct the AO to delete the
addition. Therefore, ground Nos 1 to 1.2 raised by the
assessee in its cross objection are allowed."
4. Counsel for the Revenue submitted that the Assessing
Officer as well as CIT(Appeals) had applied formula of rule
80 of the Income Tax Rules, since this case arose after the
assessment year 20092010. Since in the present case, we
are concerned with the assessment year 20092010, such
formula was correctly applied by the Revenue. We
however, notice that subsection (1) of section 14A provides
that for the purpose of computing total income under
chapter IV of the Act, no deduction shall be allowed in
respect of expenditure incurred by the assessee in relation
to income which does not form part of the total income
under the Act. In the present case, the tribunal has
recorded the finding of fact that the assessee did not make
any claim for exemption of any income from payment of tax.
It was on this basis that the
tribunal held that disallowance under section 14A of the Act
could not be made. In the process tribunal relied on the
decision of Division Bench of Punjab and Haryana High
Court in case of Commissioner of Income Tax v Winsome
Textile Industries Ltd reported in (2009) 319 ITR 204 (Punj
& Har) in which also the Court had observed as under:
"7. We do not find any merit in this submission. The
judgement of this court in Abhishek Industries Ltd
(2006) 286 ITR 1 was on the issue of allowability of
interest paid on loans given to sister concerns, without
interest. It was held that deduction for interest was
permissible when loan was taken for business purpose
and not for diverting the same to sister concern without
having nexus with the business. The observations
made therein have to be read in that context. In the
present case, admittedly the assesse did not make any
claim for exemption. In such a situation section 14A
could have no application."
5. We do not find any question of law arising, Tax appeal is
therefore dismissed.”
9. The Hon’ble Bombay High Court in the case of CIT
Vs.Delite Enterprises(supra) held as under:-
“The Revenue is in appeal on the following questions:-
"Whether on the facts and in the circumstance of the
case and in law the Hon 'ble Tribunal was right in
deleting the disallowance made by the Assessing Officer
of interest paid by the Assessee Company on borrowed
funds amounting to Rs.241.10 lakhs overlooking the fact
that the borrowed funds were used by the Assessee
Company to invest in the Capital of another Partnership
Firm and since profits derived by the Assessee Company
from a Partnership firm were exempt from tax u/s.10(2A)
of the Income-tax Act, the interest expense related to
such tax free profits is to be disallowed u/s.14A of the
Income Tax Act?
(B) Whether on the facts and in the circumstance of the case and
in law the Hon'ble Tribunal was right in holding that the Assessing
Officer cannot consider notional interest on deposit received by
the Assessee Company while arriving at the fair market value
u/s.23(1) (a) of the Income-tax Act?"
2. In so far as Question (A) is concerned, on facts we find that
there is no profit for the relevant assessment year.
Hence the question as framed would not arise.”
10. Similar view has been taken by the Hon’be Punjab &
Haryana High Court in the case of CIT Vs. M/s. Lakhani
Marketing Incl. in ITA No.970 of 2008 dated 2.4.2014. The
Hon’ble High Court while affirming the decisions of CIT(A) as
well as the Tribunal in deleting the disallowance made under
section 14A observed as under:-
“7. After hearing learned counsel for the parties, we do
not find any merit in the appeals.
8. The primary issue that arises for consideration in
these apepals is whether the CIT(A) as well as the Tribunal
were right in allowing deduction of interest liability out of
other income and the claim of the revenue to disallow the
same under section 14A of the Act was justified.
9. The CIT(A) vide order dated 24.6.2004 annexure A.II
recorded as under:-
"7.2 Keeping in view the above facts and
circumstances of the case it is held that the AO
was not correct in applying section 14A of the IT
Act in disallowing the expenditure on account of
interest amounting to ` 46,91,684/-. It was
incumbent on the AO to establish a nexus
between the expenditure incurred and the income
which was exempt under the Act. Facts clearly do
not support the action of the AO. Disallowance is
accordingly deleted. The AO is directed to
recompute the income accordingly."
10. Vide order dated 16.5.2008, Annexure A.III, the Tribunal on
appeal by the revenue while upholding the finding recorded by
the CIT(A) noticed as under:-
"We have heard rival submissions and have perused
the material on record. From the reading of section
14A of the Act, it is clear that before making any
disallowance the following conditions are to exist:-
a) That there must be income taxable under the
Act, and
b) That this income must not form part of the total
income under the Act, and
c) That there must be an expenditure incurred by
the assessee, and
d) That the expenditure must have a relation to the
income which does not form part of the total
income under the Act.
9. Therefore, unless and until, there is receipt of
exempted income for the concerned assessment years
(dividend from shares), we are of the view, Section 14A of
the Act cannot be invoked. In this appeal, the revenue has
not dispelled the findings of the CIT(A), nor the statement
of the assessee before AO that assessee is not in receipt
of any dividend income and hence according to us, the
Assessing Officer has erred in invoking Section 14A of the
Act, to disallow various interest payments on capital
account, security deposits and unsecured loans. This
conclusion of ours finds support in the decision of
Bombay Bench of the Tribunal in the case of Joint
Commissioner of Income Tax v. Holland Equipment Co.
B.V. reported in (2005) 3 SOT 810 (Mumbai) and the
relevant portion of the order of the Bombay Bench of the
Tribunal is reproduced below:-
'Regarding application of Section 14A of the Act,
the contention of the learned Department
Representative has to be rejected on the face of
it inasmuch as the entire income of the
assessee is taxable under the Act. Section 14A
is applicable only when any part of the income
is not to be included in the total income of the
assessee and the expenditure relating to that
part of income is claimed by the assessee as
deduction. In such cases only, the expenditure
relating to the exempted income can be
disallowed and not otherwise. Since in the
present case the entire income is found to be
taxable, no disallowance can be made under
section 14A of the Act.'
10. Moreover, the AO has not established the nexus
between invested funds and the interest bearing funds,
since the investments in shares are in the years 1995-96,
1998-99 and 1999-2000 and the interest disallowance is
for the assessment years 2000-01 and 2001 -02. On the
contrary perusal of the balance sheet for the year ending
31.3.1995, 31.3.1998 and 31.3.1999, it is clear that interest
bearing funds have not been utilized for
investment for purchase of shares.
11. For the aforesaid reasons, we see no reason to
interfere with the order of ClT(A) concerning assessment
year 2000-01 and 2001-02 and hence the decision of CIT
(A) in deleting the disallowance of interest by invoking
section 14A of the Act is correct and in accordance with
law."
11. In view of the aforesaid findings, which could not be shown to
be erroneous, the plea of the revenue cannot be accepted.”
11. In the case of CIT Vs. Winsome Textiles Industries Ltd.
(319 ITR 204) the Hon’ble Punjab & Haryana High Court held
that when there is no claim for exemption of income in such
situation section 14A has no application. Respectfully
following the above decisions, we delete the disallowance
made under section 14A as the assessee has not earned /
received for exempt income during the previous year relevant
to the assessment year under appeal. Thus, we sustain the
order of the Commissioner of Income Tax (Appeals) on this
issue.
12. In the result, appeal of the Revenue is dismissed.
Order pronounced in the open court on Thursday , the 31st day of July,
2014 at Chennai.
Sd/- Sd/-
( A.Mohan Alankamony ) ( Challa Nagendra Prasad )
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