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Income Tax Appellate Tribunal, VISAKHAPATNAM BENCH, VISAKHAPATNAM
Before: SHRI N.K. CHOUDHRY, HON’BLE & SHRI D.S. SUNDER SINGH, HONBLE
Assessee by : None. Department by : Shri B.Satyanarayana Raju, Sr.DR Date of hearing : 18/08/2021. Date of pronouncement : 08/09/2021. O R D E R PER D.S. SUNDER SINGH, ACCOUNTANT MEMBER
This appeal by the Revenue is directed against the order of ld.Commissioner of Income Tax (Appeals)-1, dated 16/09/2020 for the A.Y.2017-18.
The Assessee is a company, engaged in processing, preserving and export of shrimp and filed its return of income on 27/09/2017. The case was taken up for scrutiny and during the course of assessment proceedings, the AO found that Assessee has made the investments of Rs.71,10,76,228/- and the income
(M/s. Devi Fisheries Ltd.) derived from such investment is exempt u/sec. 10(34) of the Act and the Assessee did not make any disallowance representing the expenditure related to the exempt income. Therefore, the AO issued show-cause notice proposing the disallowance and in response to which the Assessee submitted its explanation objecting the disallowance stating that Assessee had interest free funds of Rs.204,96,09,683/- in reserves, which the assessee is free to utilise for investments. The Assessee also submitted that no exempt income was received by the Assessee in the year under consideration, hence requested not to make any disallowance. Not being satisfied with the explanation, the AO held that even though there is no exempt income disallowance is required to be made u/sec. 14A r.w.r. 8D of the Act, as per board circular No. 05/2014 dated 11/02/2014 and accordingly, made the disallowance of Rs. 1,49,12,838/- applying the provisions of section 14A r.w.r 8D.
The Assessee went on appeal before the ld. CIT(A) and the ld. CIT(A) deleted the addition placing reliance on the order of this Tribunal in the case of Radhakrishna Automobiles Pvt. Ltd. in and also the decision in the case of D.Veerabhadra Reddy in ITA No. 263/VIZ/2014 dated 23/06/2017 and held that in order to invoke provision of section 14A r.w.r. 8D, the deemed income which is exempt from tax must be earned by the assessee.
We have heard both the parties and perused the material placed on record. In the instant case, there is no dispute that the Assessee has not earned any dividend income which is exempt from tax. The AO has not made out a case that it had earned the (M/s. Devi Fisheries Ltd.) dividend income, but not made the disallowance. This Tribunal has taken a consistent view that in the absence of exempt income there is no case for making the disallowance u/sec. 14A. The ld.CIT(A) followed the order of this Tribunal and deleted the addition. For the sake of clarity and convenience, we extract the relevant part of the order of ld.CIT(A) which reads as under:-
“4.1.2 I have carefully considered the issue and facts of the case. Primarily, the appellant argues that the investments are non-current and they are not made out of borrowed funds as there were surplus funds in the form of reserves at Rs.204 crores. On the other hand the appellant's investment is to the extent of Rs.7 1.10 crores. It is also argued that there is no exempt income earned out of the investment and there is no expenditure incurred towards the investment. 4.1.3 On the other hand, the Assessing Officer is of the opinion that the accounts are composite and individual and the P&L account is a solitary statement representing expenditure of all activities. He is also of the opinion that the appellant had not furnished cash flow statement. The Assessing Officer is also of the opinion that the appellant failed to demonstrate that interest bearing funds were not used for investment. Finally, the Assessing Officer relied on the circular of CBDT No. 5/2014 and computed disallowance of interest of Rs. 1,49,12,838/- u/s. 14A r.w.Rule 8D in the absence of exempt income. 4.1.4 I have considered the issue carefully and the judicial pronouncements inthis regard, both Hon'ble High Court and Jurisdictional ITAT (Vizag). Before dealing into these decisions, it is worthwhile to examine the facts to an extent possible. In the first place, the appellant argued that there is no exempt income earned out of investments. The Assessing Officer has not disproved this fact. Secondly, the appellant argued that the investments are made out of reserves. The Assessing Officer has not controverted the arguments, it is for the Assessing Officer to establish that the interest bearing funds are invested by the appellant. There is no such evidence on record. Not forming cash flow statement can't be a ground to disprove all the facts of the case. This can't be a ground for disallowance without establishing nexus with the investment and exempt income, there can't be any disallowance u/s.14A r.w.Rule 8D of the Rules. 4.1.5 The Hon'ble Madras High Court in the case of Redington (India) Limited(392 ITR 633) held that "earning exempt income is a sine quo non in 14A." The Hon'ble Court also held that "wherever deemed income is earned then only the provision of section 14A is applicable on the basis of 'Matching concept' 4.1.6 In the case of Chettinad Logistics (P.) Ltd (80 Taxmann.com 221), the Hon'ble Court has held that "Rule 8D (M/s. Devi Fisheries Ltd.) can't be read in a manner in which it takes the scope beyond the provisions of section 14A". 4.1.7 The Hon'ble ITAT, Visakhapatnam in the case of Radhakrishna Automobiles Pvt.Ltd. (ITA No.511/Vizag/2017) and D.Veerabhadra Reddy (ITA No.263/Vizag/2017) have held that "in order to invoke provision of section 14A r.w.Rule 8D, the deemed income exempt income must be earned by the appellant". Following the decision of Hon'ble ITAT and the Hon'ble High Court of Madras, the disallowance made by Assessing Officer is deleted as there is no exempt income in this case.”
Since, the ld. CIT(A) followed the order of Hon'ble High Court and this Tribunal and the ld. DR did not place any decision to controvert the decision relied upon by the ld. CIT(A), we find no error in the order of the ld. CIT(A) and the same is upheld. Appeal of the Revenue is dismissed.
In the result, appeal of the Revenue stands dismissed.
Order Pronounced in open Court on this 08th day of Sep., 2021.