M/S NASA AGRO INDUSTRIES PVT. LTD,FAZILKA vs. THE ASSTT. COMMISSIONER OF INCOME TAX,CIRCLE- II, BATHINDA

In both the appeals the issue is identical and similar therefore for the sake of convenience and brevity have been taken into consideration simultaneously and facts of the ITA No.536/Asr/2017 shall be quoted in the order and result of the same shall mutatis mutandis apply to ITA No.537/Asr/2017.

The assessee has raised the following ground in ITA No.536/Asr/2017 which is as under: “On the facts & circumstances of the case, the Ld. CIT(A), Bhatinda has erred in upholding disallowance of Rs.2,29,812/- under provision of

Sole issue in this case relates to the disallowance under the provisions of section 14A of the Act read with Rule 8D of the Income-tax Rules, 1962, the addition was made by the AO on the ground that income from shares is exempt from tax and does not form part of the total income of the Assessee. No separate accounts are maintained by the Asseeee in relation to investments made in shares and expenditure incurred thereon. Therefore claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the act is not acceptable being not satisfied. The Assessing officer finally made the disallowance od Rs. 10,25,213/- as of Rs. 2,29,812/- being 0.5 % of average value of investments . In appeal, the CIT (A) although deleted the disallowance of Rs. 10,25,213/- by observing that since the appellant company had non-interest bearing funds far exceeding the investments made and there was no exempt income which was included in the total income during the year under consideration, there cannot be any proportionate disallowance [Rs. 10,25,213] of interest paid which is not directly attributable to any particular income in the proportion of averge value of investments to theaverage value of the total assets, however the affirmed the disallowance Rs. 2,29,812/- being 0.5 % of average value of investments, by holding that the amount equal to one half percent (2,29,812) of the average of the value of the investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the appellant, on the first day and the last day of the previous year, needs to be disallowed as per the provisions of section14A read with Rule 8D. This component of disallowance does not pertain to proportionate disallowance of interest paid but accounts for an estimate general and administrative expense for acquisition of investment. Accordingly the AO is directed to restrict the addition to Rs.2,29,812/- under the provisions of section 14A. The Asseeee is in appeal, against the disallowance

Having heard the parties and examined the orders of authorities below. The Hon'ble Delhi High Court in the case of CHEMINVEST LTD. V. CIT, 378 ITR 33 (Del) considered the similar and identical issue under consideration and has categorically held that section 14A envisages that there should be actual receipt of income which was not includible in the total income during the relevant previous year for the purpose of disallowing any expenditure in relation to the said income. Wherever there is no exempt income includible in the total income of the assessee, the provisions of section 14A cannot be invoked. Relevant conclusion drawn by jurisdiction High Court is reproduced herein below for the sake of convenience and brevity and ready reference:

The Hon’ble Madras High Court also dealt with the identical issue in the case of CIT, Central 1, Chennai vs. Chettinad Logistics (P.) Ltd. [2017] 80 taxmann.com 221 (Madras) against which SLP was filed before the Hon’ble Apex Court and the Apex Court vide judgment dated 2nd July, 2018 dismissed the SLP while upholding the decision of the High Court.

The jurisdictional High Court in the case of Lakhani Marketing Inc. (2014) 49 taxmann.com 257 also dealt with similar issue, relevant part of the order is reproduced below: "4. We have heard learned counsel for the parties and perused the record. 5. Learned counsel for the appellant submitted that the CIT(A) as well as the Tribunal were in error in deciding the issue in favour of the assessee without properly appreciating the provisions of section 14A of the Act. According to the learned counsel, the assessee had invested in shares of M/s Lakhani Marketing Incl. which had yielded dividend income and was not forming part of total income by virtue of Section 10(33) of the Act and hence interest liability claimed for deduction from the income was impermissible.

On the other hand, learned counsel for the assessee besides supporting the order passed by the CIT(A) and the Tribunal relied upon judgments of this Court in CIT v. Hero Cycles Ltd. [2010] 323 ITR 518/189 Taxman 50 and CIT v. Winsome Textile Industries Ltd. [2009] 319 ITR 204, to contend that finding has been recorded by the CIT(A) as well as the Tribunal that there was no dividend income and in such a situation, provisions of Section 14A of the Act had no applicability. According to the learned counsel, the CIT(A) and the Tribunal had held the assessee to be entitled to claim deduction on account of interest liability.

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 appeals 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 section14A of the Act was justified.

The CIT(A) vide order dated 24th June, 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

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. [2005] 3 SOT 810 (Mum.) and the relevant portion of the order of the Bombay Bench of the Tribunal is reproduced below:--

While respectfully following the ratio laid down by the Delhi High Court, Madras High Court and Jurisdictional High Court in the aforesaid decisions, as it is well settled position of law that whenever assessee did not earn any exempt income, no disallowance could be made u/s. 14A of the Act. In the instant case, admittedly the assessee did not earn any exempt income under the relevant financial year, hence applicability of section 14A read with Rule 8D cannot be justified. Therefore in our considered opinion as the assessee did not earn any income during the relevant financial year, thus no disallowance can be made under section 14A of the Act and hence addition made on the basis of disallowance u/s 14A by the Assessing officer as affirmed by the Ld CIT(A) stands deleted .

In the result, the appeal i.e. ITA no. 536/Asr/2017 filed by the assessee stands allowed.

Consequently in view of decision in ITA no. 536/Asr/2017, second appeal i.e. ITA no. 537/Asr/2017 also stands allowed.