ASST. COMMISSIONER OF INCOME TAX, CIRCLE-16(1), , HYDERABAD vs. NEKKANTI SEA FOODS IMITED, HYDERABAD

Brief facts of the case are, the assessee company engaged in the business of manufacturing/process of marine products. It filed its return of income for the AY 2013-14 on 21/09/2013 declaring total income at Rs. 18,09,92,500/- and book profit u/s 115JB at Rs. 19,36,26,011/-, which was processed u/s 143(3) of the I.T. Act. Subsequently, the case was selected for scrutiny and accordingly, notices u/s 143(2) and 142(1) of the Act were issued to the assessee. Assessment u/s 143(3) was completed by making disallowance of Rs. 58,92,004/- u/s 14A of the Act.

When the assessee preferred an appeal before the CIT(A), the CIT(A) observed that as per the statement of facts and details like

Aggrieved by the order of CIT(A), the revenue is in appeal before us raising the following grounds: “1. The CIT(A) erred in deleting the disallowance u/s 14A of Rs. 58,92,004/-. 2. The CIT(A) erred in ignoring CBDT's Circular No.5 of 2014 dated 11.02.2014. 3. The CIT(A) erred in ignoring the Hon'ble Supreme Court decision in the case of CIT Vs Walfort Share of Stock Brokers P Ltd [326 ITR 1], wherein it was held that the mandate of section 14A was to curb the practice of claiming deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by the way of exempt income without making any apportionment of expenses incurred in relation to exempt income. 4. Any other ground that may be urged at the time of hearing.” 5. Brief facts relating to the issue are, the AO observed that during the year under consideration, the assessee company has shown an amount of Rs.21,24,78,808/- towards investment in unquoted equity shares of associates & others and mutual funds as against Rs.15,42,78,808/- of last year. The dividend income earned from these investments is exempt. Further, it is seen that the assessee company debited an amount of Rs.2,04,32,375/- towards finance costs. During the course of assessment proceedings, the AO asked the assessee company to furnish the details of expenditure incurred in relation to the above investments and show cause as to why the provisions of section 14A r.w. Rule 8D may not be invoked. In response, the assessee company stated that section 14A of the Income Tax Act, 1961 is not applicable in their case as it had not invested said amount from any borrowed funds.

Considered the rival submissions and perused the material on record. It is settled position of law that the provisions of section 14A can be applied to quantify the expenses in relation to exempt income.

The assessee also filed C.O, wherein the following objections were raised: “1. Learned CIT(A) ought to have considered the other grounds of appeal also while passing the appellate order. 2.(a) The learned AD is not justified in invoking the provisions of Sec 14A of the IT Act and disallowing there by interest expenditure to the extent of Rs. 58,92,004/- of the IT Act. (b) The learned AD did not record or reach the satisfaction u/ s 14A of the IT Act which is a condition before the provisions of Sec 14A can be invoked. 3.(a) The learned AO is not justified in invoking the provisions of Sec 14A of the IT Act because the share capital along with reserves and surplus which amount to over nearly 51,04,42,375/- is far more than the investments made and therefore no funds are borrowed or interest incurred on account of making investments. (b). CIT(A) ought to have given a finding that there is no nexus between the borrowals from banks which were for specific purpose and the investments in equity capital and that therefore provisions of Sec 14A do not come into play. (c). The learned CIT(A) and the AO failed to notice that each of the items in financial costs relates directly for loans for business purposes. None of the loans / packing credit has been used for purposes of investment towards share capital.” 8. On perusal of record, we find that there was a delay of 92 days in filing this C.O. by the assessee, for which an application for condonation of delay was filed by the assessee, wherein, inter-alia, the assessee stated that since there was a delay in getting the

As we have upheld the action of CIT(A) in deciding the revenue’s appeal, the CO filed by the assessee becomes infructuous and the same is dismissed as infructuous.

In the result, both the appeal of the revenue and CO filed by the assessee are dismissed. Pronounced in the open Court on 15th November, 2018.