SHREE VENKATESH BUILDCON PVT.LTD,,PUNE vs. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE - 6,, PUNE

This appeal filed by the assessee is emanating out of the order of 1. Commissioner of Income Tax (A) – 4, Pune dt.15.03.2017 for the assessment year 2013-14.

The relevant facts as culled out from the material on record are as under :-

Before us, at the outset, Ld.A.R. submitted that ground Nos.1 and 2 are with respect to disallowance u/s 14A of the Act. He submitted that if ground No.1 is decided in assessee’s favour then ground No.2 would not require any adjudication as it would be rendered academic.

During the course of assessment proceedings, AO noticed that assessee had made investment to the extent of Rs.5.33 crore in Venkatesh Group and had not shown any expenses related to the exempt income. The assessee was asked to show cause as to why disallowance u/s 14A of the Act not be made, to which assessee inter- alia submitted that assessee has not earned any exempt income and therefore no disallowance u/s 14A of the Act is called for. It was also submitted that the investments were made out of the own funds and therefore no disallowance is called for. The submissions of the assessee were not found acceptable to the AO. AO was of the view that even when no exempt income has been earned, disallowance u/s 14A of the Act can be made and for this proposition, he relied on the CBDT Circular No.5/2014 dated 11.02.2014. He thereafter proceeded to work out the disallowance with the methodology prescribed under Rule 8D and computed the disallowance u/s 14A r.w. Rule 8D at Rs.14,41,438/-. Aggrieved by the order of AO, assessee carried the matter before Ld.CIT(A), who upheld the order of AO.

Before us, Ld.A.R. reiterated the submissions made before AO and Ld.CIT(A) and further submitted that no exempt income has been earned by the assessee and in such a situation, no disallowance u/s 14A of the Act is called for and for the aforesaid proposition, he relied on the decision of Hon’ble Apex Court in the case of CIT Vs. Chettinad Logistics (P) Ltd., reported in (2018) 95 taxmann.com 250 SC. In support of his contention of having not earned any exempt income, he pointed to the assessee’s submissions in the order of lower authorities.

We have heard the rival submissions and perused the material on record. The issue in the present ground is with respect to disallowance u/s 14A r.w. Rule 8D I.T. Rules. Before us, it is assessee’s contention that assessee has not earned any exempt income. The aforesaid contention of the assessee has not been controverted by Revenue. We find that the Hon’ble Madras High Court in the case of CIT Vs. Chettinad Logistics (P) Ltd., reported in (2017) 80 taxmann.com 221 has held that when no exempt income was earned in relevant assessment year by the assessee, Section 14A of the Act could not be invoked. We find that against the aforesaid order of the Hon’ble Madras High Court, Revenue preferred Special Leave Petition (SLP) before the Hon’ble Apex Court. The Hon’ble Apex Court dismissed the SLP which is reported in (2018) 95 taxmann.com 250 SC.

In view of the aforesaid facts, we are of the view that since no exempt income in the form of dividend has been earned by the assessee from the investments made and relying on the aforesaid decision of the Hon’ble Apex Court, no disallowance u/s 14A of the Act is called for in the present case. We therefore direct the AO to delete the disallowance made by the AO. Thus, the ground of assessee is allowed.

Since ground No.1 is allowed hereinabove, in view of the submission of Ld.A.R., ground No.2 is dismissed as being academic.

Ground No.3 is with respect to disallowance u/s 40A(2)(b) of the Act.

Before us, Ld.A.R. reiterated the submissions made before AO and Ld.CIT(A) and pointed to the submissions of the assessee made to the lower authorities wherein it was mentioned that the rate paid to the aforesaid two ladies were comparable to the rate paid to the outside parties. He further submitted that the Revenue has not brought any material on record to substantiate that the payments were excessive and unreasonable and that disallowance has been made on adhoc basis. He therefore submitted that the no disallowance u/s 40A(2)(b) is called for. Ld. D.R. on the other hand, supported the order of AO and Ld.CIT(A).

We have heard the rival submissions and perused the material on record. The issue in the present ground is with respect to disallowance of expenses u/s 40A(2)(b) of the Act. It is an undisputed fact that assessee has made the payments amounting to Rs.1,33,34,156/- and AO has disallowed 5% of the expenses. We find that before lower authorities, it was assesses’s contention that the payments that have been made are as per the comparable rate paid to outside parties and are not excessive.

Perusal of provisions of s.40A(2)(b) of the Act shows that where an assessee incurs any expenditure in respect of which payment is required to be made or has been made to any person referred to in cl.

In the present case, it is seen that AO has not done any exercise to determine as to whether the amount paid by the Assessee to the aforesaid two ladies were excessive or unreasonable by comparing the prevalent market rates. He has not arrived at an exact figure of excessive payment by comparing the amount paid by the assessee with the market rates for similar services but he has rather proceeded to disallow the expenses @ 5% on adhoc basis.

Considering the totality of facts, we are of the view that in the present case, no case has been made out for disallowance u/s 40A(2)(b) of the Act and therefore no disallowance can be made u/s 40A(2)(b) of the Act. We therefore delete the disallowance made by the AO. Thus the ground of the Assessee is allowed.

In the result, the appeal of assessee is partly allowed.