ANAND ISPAT UDYOG LIMITED,,HYDERABAD vs. INCOME TAX OFFICER, WARD-1(4), HYDERABAD

Facts concerning the only issue in dispute are stated in brief. Assessee is engaged in the business of manufacture of ingots, billets and CTD bars. It has also made non-current investment of Rs. 1.20 Crs in the equity shares of M/s. Agras Residency Private Limited.

In respect of previous year relevant to the assessment year under consideration it declared total income of Rs. 28,94,216/- under normal provisions and Rs. 49,57,214/- under MAT provisions. During the course of assessment proceedings, A.O. noticed that the assessee incurred huge expenditure and he was of the opinion that the expenditure might have been incurred for making investment in

The claim of the assessee was that it had not incurred any expenditure for making investment. It was further pointed out that no disallowance can be made if there is no exempt income earned in this year.

The A.O. observed that as per the instructions issued by the CBDT vide Instruction No.5/2014, disallowance can be made u/s 14A read with Rule 8D even where taxpayer has not earned any exempt income. He further observed that though the assessee contended that it had not incurred any expenditure for making investment, the same was not proved beyond doubt. For these reasons, he computed the disallowance under Rule 8D and the same was added back while completing the assessment.

Though the assessee reiterated the contentions before the Ld. CIT(A), she rejected the contention on the ground that in order to invoke the provisions of section 14A of the Act, earning of exempt income is not mandatory and in this regard explanatory notes given in Finance Bill, 2001 was extensively referred, to come to the conclusion that the expression “in relation to”, appearing in section 14A, applies to both the earning of taxable as well as non-taxable income. She further observed that as per the Balance Sheet and Profit & Loss Account, there were huge term loans / long term borrowing / short term borrowings / trade payables, which indicate that the assessee had no surplus funds at their disposal and hence the investments in equity shares might have been made out of borrowed funds.

Further aggrieved, assessee is in appeal before the Tribunal.

At the outset it may be noticed that there is no dispute with regard to the fact that the assessee has not earned any exempt income in the year under consideration. This issue was considered by the Hon’ble Delhi High Court in the case of Principal Commissioner of Income Tax vs. IL&FS Energy Development Company Ltd (297 CTR 452) wherein the Court observed that the CBDT Circular No.5/2014 does not refer to Rule 8D and only refers to the word “includible” and any assumption that the said Circular applies even when there is no taxable income is only attributable to truncated reading of section 14A. The Court thus concluded that when there is no exempt income in any particular year, provisions of section 14A need not be invoked. Similar view was taken by the Hon’ble Madras High Court in the case of Redington (India) Ltd vs. ADIT (392 ITR 633). The ITAT, Hyderabad Benches have been consistently holding that in the absence of any exempt income in the year under consideration, the provisions of section 14A read with Rule 8D are not applicable.

Consistent with the view taken by this Bench earlier, we set aside the orders passed by the A.O. as well as the Ld. CIT(A) and hold that the disallowance made u/s 14A read with Rule 8D is not permissible. Under these circumstances, there is no need for this Bench to go into the other aspects as to whether the assessee had invested interest free funds in purchase of equity shares.

In the result, appeal filed by the assessee-company is allowed.