ACIT, KHANDWA vs. M/S C.P. INDUSTRIAL PRODUCTS PVT. LTD. , BURHANPUR

PER MANISH BORAD, AM.

The above captioned appeal is filed at the instance of Revenue

pertaining to Assessment Year 2010-11 and is directed against the

orders of Ld. Commissioner of Income Tax (Appeals)-II (in short

‘Ld.CIT(A)’], Indore dated 03.04.2018 which is arising out of the

order u/s 147/143(3) of the Income Tax Act 1961(In short the ‘Act’)

dated 23.11.2016 framed by ACIT, Khandwa.

C.P. Industrial Products Pvt. Ltd ITA No.603/Ind/2018 2. The brief facts of the case as culled out from the records are

that the assessee company is engaged in the manufacturing and

trading of F.P. Cotton Bales and Cotton seeds. It has filed its

original income tax return for the Assessment Year 2010-11 on

30.9.2010 declaring total income of Rs.27,62,570/-. The case was

selected for scrutiny and assessment order was passed u/s 143(3)

of the I.T. Act on 12.03.2013 assessing total income at

Rs.47,98,020/- adding disallowance out of interest paid at

Rs.18,72,945/- by holding that interest bearing funds has been

diverted as interest free loans and making disallowance u/s 14A of

the Act at Rs.1,62,500/- . Later on the case of the assessee was

reopened u/s 148 of the Act vide notice dated 21.09.2015 for

making a further disallowance u/s 14A of the Act of Rs.20,74,273/-

(Rs.22,36,773/- (–) Rs.1,62,500/-). The assessee has filed its

objection for reopening of the case, however the Learned Assessing

Officer (In short Ld. A.O) did not agreed with the same and has

finally made further disallowance u/s 14A of Rs.20,74,273/- by

passing the assessment order u/s 147 r.w.s. 143(3) of the Act dated

23.11.2016. Aggrieved assessee preferred appeal before Ld. CIT(A)

who deleted the entire amount of disallowance of Rs.20,35,445/- 2

C.P. Industrial Products Pvt. Ltd ITA No.603/Ind/2018 vide order dated 27.07.2017.

following grounds of appeal;

“1. Whether on the facts and in the circumstances case, learned CIT(A) is justified in deleting the additions of Rs.20,74,272/- made by A.O u/s 14A of the I.T. Act, 1961.

supported the orders of Ld. A.O.

the original Assessment Order the assessing officer had made

addition of Rs 1,62,500/- to the income of the assessee by applying

rule 8D read with Sec. 14A of the Act being 0.5 of the Average

Investment in Shares. That later on notice u/s 148 of the Income

Tax act was issued and completed assessment of the assessee was

re-opened. That in the re-assessment order as passed under

C.P. Industrial Products Pvt. Ltd ITA No.603/Ind/2018 section 147 r.w.s. 143(3) of the Act, addition as made in the original

assessment order under section 14A of the Income was increased

from Rs 1,62,500/- to Rs 22,36,773/- and thereby making further

addition of Rs. 20,74,273/- [22,36,773 - 162500]. That in the original

assessment order addition was made merely 0.50 of average

investment in shares. However, in the re-assessment proceeding

while calculating disallowance under section 14A of the Act net

amount of Interest paid of Rs. 1,30,16,839/- was also considered. It

is submitted that the Ld. Assessing officer has grossly erred in

considering the amount of Interest paid for computing the Addition

as made u/s 14A by holding that assessee has diverted its interest

bearing funds for earning Exempt income. That in the present case,

the assessee was having Interest free Funds in the form of Share

capital and reserves and surplus of Rs 1,44,14,000/- and Rs

1,80,83,283/totalling to Rs 3,29,73,283/- as on 31.03.2010 which

was duly reflected in the books of the assessee company and on

which no interest was paid by the company.

S.No. Particulars Amount [Rs] Share Capital 01. 14414000 Reserves & Surplus 02. 18083283 Total 32973283 4

C.P. Industrial Products Pvt. Ltd ITA No.603/Ind/2018 That investment in shares as shown in the books of account was of Rs 3,25,00,000/- which was lower than the interest free funds as available with the assessee. Hence, there was no justification for making disallowance by invoking the provision of section 14A of the Act. J Further on perusal of the Balance sheet, your Hon' our will find that the assessee@ taken loan from IDBI Bank in form of cash credit limit and was having Outstanding Balance of loan of Rs. 5,79,24,439/- as on 31.03.2010 where as it was having stock of Rs. 9,79,61,808/- and Debtors of Rs. 14,49,67,663/- as on 31.03.2010 totalling to Rs. 24,29,29,471/- . Thus from the above also it is clear that no Interest bearing fund was actually utilized by the assessee for making Investment in Shares. The amount so borrowed by the assesse on Interest was utilized towards the objects for which the said loan was taken by the assessee. Thus, from these figures it is very clear that the assessee has not diverted its interest bearing funds for Investment in shares. Thus the A.O. was wrong in considering the amount of Interest for Calculation done by him as per rule 8D as the assessee has justified the proper utilization of interest bearing funds and the department has failed to prove the contrary. Thus the said addition as made by the A.O under section 14A of Rs. 2236773/- was rightly been deleted by the Ld. CIT(A). You are very kindly requested to approve the same. It may also be pertinent to note that it has been held by various courts that no addition can be made u/s 14A of the

C.P. Industrial Products Pvt. Ltd ITA No.603/Ind/2018 Act if no exempt income was received by the assessee and in any case disallowance under section 14A cannot exceed the dividend amount received by it. For this preposition, reliance was placed on the following direct decisions:-

S.No Name of Decision Citation CIT V/s Lakhani 01. 49 taxmann.com 257 (P&H) Marketing CIT V/s Cortech Energy P. 02. 45 taxmann.com 116 (Guj) Ltd. CIT V/s Shivam Motors P. 03. 55 taxmann.com 262 (All) Ltd. Chem Investment Ltd V/s 04. 61 taxmann.com 118 (Del) CIT Joint Investments P. Ltd. 05. 372 ITR 694 (Delhi) V/s CIT

Reliance was also placed on the decision of Hon'ble ITAT, Indore bench, Indore in the case of M/s Ravi Seeds & Research P Limited [ Appeal No ITA No 978 I Ind/ 2016 dt 18- 07-2018].

That in view of the above, it is submitted that even otherwise also no addition u/s 14A can be made to the income of the assessee by invoking the provision of section 14A of the Income Tax Act. The addition as made by the Ld. A.O. of Rs. 22,36,773/- has rightly been deleted by the Ld. CIT(A). It is therefore requested to approve

C.P. Industrial Products Pvt. Ltd ITA No.603/Ind/2018 the said order passed by the Ld. CIT(A).

placed before us. Sole grievance of the revenue is against the

finding of Ld. CIT(A) deleting the interest disallowance u/s 14A of

the Act at Rs.20,74,272/-. Ld. CIT(A) while deleted the impugned

addition observing as follows;

“3.0 These grounds of appeal are with regard to making disallowance of Rs.20,74,273 [Rs. 22366773/- - Rs. 1,62,500/-] u/s 14A of the income Tax Act. I have carefully gone through the order as well as submission of the appellant in this regard.

3.1 The AO had made addition of Rs 1,6'2,500 to the income of the appellant by applying rule 8D r.w.s 14A of the Act being 0.5% of the average investment in shares while framing the original assessment order u/s 143(3) of the Act. It was further argued that in the case the appellant while framing the re assessment order u/s 147 r.w.s. 143(3) of the act, a further disallowance u/ s 14A of the Act Rs.20,74,273/- (22,36,773 - 162500) by considering the amount of net interest paid of Rs. 1,30,16,839/- fur making addition us/ 14A as per calculation mentioned on page 2 of the re-assessment order passed by the AO.

3.2 It has been submitted by the appellant that the Assessing officer had grossly erred in considering the amount of Interest paid for computing the addition as made u/s 14A by holding that assessee has diverted its interest bearing funds for earning Exempt income.

C.P. Industrial Products Pvt. Ltd ITA No.603/Ind/2018 3.3 In the present case, the assessee was having Interest free Funds in the form of Share capital and reserves and surplus of Rs.14414000/ - and Rs 18083283/- totalling to Rs 32973283/- which was duly reflected in the books of the assessee company and on which no interest was paid by the company. S.No. Particulars Amount (Rs.) 01 Share Capital 14414000 02 Reserves & Surplus 18083283 Total 32973283

Thus, It has been argued by the appellant the Addition as made by the A.O u/ s 14A by considering the amount of interest for calculation as per rule 8D was wrong since the assessee had nut not utilised any interest bearing fund but it had sufficient amount of interest free funds available with it.

3.4 On perusal of the Balance sheet, it is clear the assessee had taken loan from IDBI Bank in form of its cash credit limit and was having Outstanding Balance of loan of Rs, 5,79,24,439/- as on 31,03,2010 where as it was having stock of Rs. 9,79,61,808/- and Debtors of Rs. 14,49,67,663/- as on 31.03.2010 totalling to Rs.29,29.471/-

3.5 Thus, it is clear from the above facts that no Interest bearing fund was actually utilized by the assessee for making Investment in Shares. The amount so borrowed by the assessee on Interest was utilized towards the objects for which the said loan was taken by the assessee. Thus, from these figures it is very clear that the assessee had not

C.P. Industrial Products Pvt. Ltd ITA No.603/Ind/2018 diverted its interest bearing funds for Investment in shares.

3.6 It was argued that during the year under consideration the assesse had not claimed any expenses in its computation of income to earn the exempt income Hence, the assessing officer was totally wrong in disallowing an amount of Rs. 22,36,773/- towards 14A. Section 14A has been inserted in Chapter IV of the Income tax Act by the Finance Act, 2001, with retrospective effect from 1-4-1962. This Section provides for disallowance of expenditure incurred in relation to income which is not included in the total income of the assessee (i e. exempt income). The operative part of this Section reads as under:-

"For the purposes of computing 'the total income under this 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 this Act”. It may be noted that the explanatory memorandum issued with the Finance Bill) 2001) gives the purpose for which the amendment is made. This reads as under :-

“Certain incomes are not includible while computing the total income as these are exempt under various provisions of the Act. There have been cases where deductions have been respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i. e., gross income minus the expenditure) is taxed. Oil the analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income.

C.P. Industrial Products Pvt. Ltd ITA No.603/Ind/2018 It is proposed to insert a new S. 14A as to clarify the intention of the legislature since the inception of the Income Tax Act, 1961, that no deduction shall be made 771 respect of any expenditure incurred by the assessee in relation to income which does not form part of the total income under the Income-tax Act. '

3.7 In the present case since no expenditure was incurred and claimed by the assessee while computing; his gross taxable income, thus, provisions of section 14A of the Income Tax Act was not applicable in the present case.

3.8 The appellant has relied on the decision of the Hon’ble Punjab & Haryana High court in the case of CIT vs Hero Cycles reported in 323 ITR 518 which had held that "for invoki.ng the provision of section 14A, finding of expenses incurred by the assessee for earning of exempted income must requires”.

3.9 The appellant has further argued that the assessee had an appeal before the Ld. CIT (A) against the Addition made u/s 14A in the Original Assessment Order as passed u/s 143(3) of the Act. It was further submitted that the assessee company in the year under consideration did not receive any dividend and as held by various courts that no addition could be made u/s 14A of the Act if not exempt income was received by the assesse and in case, dividend amount was received in any year then addition u/s 14A could not exceed the amount of dividend received by it. For this preposition, reliance was placed on the following direct decisions:- S.No. Name of Citation Decision 01 CIT V/s 49 taxmann.com Lakhani 257 (P&H)

C.P. Industrial Products Pvt. Ltd ITA No.603/Ind/2018 Marketing 02 CIT v/s Cortech 45 taxmann.com Energy P. Ltd 116 (Guj) 03 CIT V/s Shivam 55 taxmann.com Motors P. Ltd 262 (All) 04 Chem 61 taxmann.com Investment Ltd 118 (Del) V/s CIT 05 Joint 372 ITR 694 Investments P. (Delhi) Ltd V/s CIT

3.10 The undersigned had passed the order in appeal filed against order u/s 143(3) in the case of assessee’s company for the A.Y. 2010-11 vide order dt. 27.07.2017 and had deleted the entire amount of addition made u/ s 14A of the .Act by holding that unless there was receipt of exempted income during the year Sec. 14A could not be invoked. Hence, in view of the above even otherwise also no addition u/s 14A can be made to t-he income of the assessee by invoking the provision of section 14A of the Income Tax Act. The addition as made by the A.O. of Rs.22,36,773/- now requires to be deleted in full and accordingly, these grounds of appeal are allowed”.

no dividend income earned during the year. The ratio that no

disallowance u/s 14A of the Act is to be made in case “NIL”

dividend income find its support by the judgment of Hon’ble Delhi

High Court in the case of Cheminvestment Limited vs. CIT (supra). 11

C.P. Industrial Products Pvt. Ltd ITA No.603/Ind/2018 Similar view was taken by the Co-ordinate Bench in the case of

Ravi Seeds V/s ACIT 4(1) (supra) wherein the Tribunal following the

judgment of Cheminvestment Limited vs. CIT (supra) held that if no

exempt income is received or receivable during the previous year

then provision of Section 14A will not apply in relation to the

interest disallowance. Relevant findings of the Tribunal is as

follows;

“6. We have heard both the parties and perused the material which is. not includible in the total income, during the relevant available on record. After going through the judgment of the Hon'ble High Court of Delhi in the case of Cheminvest Limited (supra), we find that the Hon'ble High Court has categorically held that "the expression 'does not form part of the total income' in section 14A of the Act envisages that there should be an actual receipt of income, previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, section 14A will not apply if no exempt income is received or receivable during the relevant previous year." We, therefore, respectfully following the judgment of the Hon'ble High Court of Delhi (supra) hold that since during the year, under consideration, no exempt income has been earned by the assessee, no disallowance u/s 14A of the Act was called for. In this view of the matter, the orders of the authorities below are set aside and the ground of appeal taken by the assessee is allowed”.

C.P. Industrial Products Pvt. Ltd ITA No.603/Ind/2018 8. Revenue has been unable to controvert this fact that no

dividend income has been earned by the assessee during the year

and also could not rebut the finding of Ld. CIT(A). Even otherwise

the assessee has been successful to demonstrate that interest free

funds in the form of share capital and reserve and surplus were

sufficient to cover up the investments fetching tax free interest

income. Case of assessee is also covered in its favour by the

judgment of Hon’ble Bombay High Court in the case of CIT V/s

Reliance Utilities & Power Ltd. (2009) 313 ITR 340 (Bom).

The order pronounced in the open Court on 27.02.2019.

Sd/- Sd/-

( V. DURGA RAO) (MANISH BORAD) JUDICIAL MEMBER ACCOUNTANT MEMBER �दनांक /Dated : 27 February, 2019

C.P. Industrial Products Pvt. Ltd ITA No.603/Ind/2018 /Dev Copy to: The Appellant/Respondent/CIT concerned/CIT(A) concerned/ DR, ITAT, Indore/Guard file. By Order, Asstt.Registrar, I.T.A.T., Indore