ACIT, CIRCLE-2 (1), GUNTUR vs. SRI MAHALAKSHMI INVESTMENTS, GUNTUR

IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM BEFORE SHRI V. DURGA RAO, HON’BLE JUDICIAL MEMBER & SHRI D.S. SUNDER SINGH, HON’BLE ACCOUNTANT MEMBER

ITA No. 28/VIZ/2018 (Asst. Year : 2013-14)

ACIT, Circle-2(1), vs. M/s. Sri Mahalakshmi Guntur. Investments, D.No. 8-24-31, Mangalagiri Road, Guntur. PAN No. ABAFS 4221 L (Appellant) (Respondent)

Assessee by : None. Department By : Shri D.J.P. Anand – Sr.DR

Date of hearing : 10/07/2018. Date of pronouncement : 31/07/2018. O R D E R PER V. DURGA RAO, JUDICIAL MEMBER

This appeal by the Revenue is directed against the order of Commissioner of Income Tax (Appeals)-1, Guntur, dated 10/01/2018 for the Assessment Year 2013-14. 2. The sole issue involved in this appeal is disallowance of interest expenditure under section 14A of the Income Tax Act, 1961 (hereinafter referred to as "Act").

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239/2014). The ld. CIT(A) considered the submissions made by the assessee and observed that during the year, the assessee has not earned any income, which does not form part of the total income. In view of this, provisions of section 14A of the Act cannot be invoked to disallow the interest as done by the Assessing Officer. Moreover, it is seen from the balance sheet that the capital of the partners stood at Rs.11.56 crores where the investment in shares was only at Rs. 6.6. crores. On this count also, no disallowance of interest or expenditure can be made under section 14A of the Act. To support his above view, he relied on the decision of the Hon'ble Delhi High Court in the case of Pr.CIT vs. IL & FS Energy Development Company Ltd. (84 taxmann.com 186) wherein the Hon'ble High Court has observed that the words “in relation to income which does not form part of the total income under the Act for such previous year” the above Rule 8D(1) indicates a correlation between the exempt income earned in the assessment year and the expenditure incurred to earn it. In other words, the expenditure has claimed by the assessee has to be in relation to the income earned in „such previous year‟. This implies that there is no exempt income earned in the assessment year, the question of disallowance of the

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expenditure incurred to earn exempt income in terms of section 14A read with rule 8D would not arise.

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the expenditure which is relatable to earning exempt income has to be considered for disallowance, irrespective of the fact whether any such income has been earned during the financial year or not. The Hon'ble Madras High Court has considered the issue in the case of M/s. Redington (India) Ltd. (supra) and directed the Assessing Officer to delete the addition. A similar view has been taken by the coordinate bench of the tribunal in the case of D.Veerabhadra Reddy (HUF) vs. DCIT in ITA No. 263/VIZ/2014, by order dated 23/06/2017 for the Assessment Year 2009-10, wherein the Tribunal has held that no disallowance can be made when there is no exempt income. The relevant portion of the order is extracted as under:-

“6. We have heard the rival submissions and perused the material on record. The assessee has rental income from godowns and the business loss. The assessing officer has completed the assessment u/s 143(3) by order dated 04.11.2011. The Ld.CIT has called for the record u/s 263 and issued the notice for revision for incorrect set off of business loss against the rental income. After verification of the material on record, the Ld.CIT has dropped the issue with regard to incorrect set off of business loss against the income from property which was examined by the assessing officer. During the course of revision proceedings, it has come to the notice of Ld.CIT that the assessee has made investments in shares and bonds and did not make disallowance which was required to be made u/s14A of IT Act. The assessee explained that there were no expenses incurred in relation to the exempt income which was claimed as deduction for the assessment year 2009-10. Hence, the assessee argued before the Ld.CIT that Section 14A is not applicable in assessee‟s case. As per the observation of the Ld.CIT, the

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assessee made the investments to the tune of Rs.19,90,625/- in shares and bonds from the borrowed funds and the interest expenditure relating to the earning of dividend income is required to be disallowed u/s 14A. Though CIT opined that the expenditure relating to the earning of dividend income required to be disallowed, there was no finding given by the CIT in his order with regard to earning of dividend income. The CIT also did not rebut the explanation offered by the assessee stating that no expenditure was incurred for making the investments. The Ld.DR did not make any clarification with regard to the quantum of dividend income earned by the assessee. The Ld.AR submitted paper book enclosing the copy of statement of computation, return of income, balance sheet and profit and loss account. It is seen from the profit and loss account and the statement of computation of income that the assessee has not derived any dividend income. When the assessee has no exempt income, the question of disallowance u/s14A r.w.Rule 8D is not called for. The same view is expressed by the decision of Hon‟ble Madras High Court in Redington (India) Ltd. Vs. Addl.CIT, 77 taxman.com 257, Hon‟ble Delhi High Court in Chem Investments Vs. CIT, 61 taxman.com 118 and the Hon‟ble Gujarat High Court in Principal CIT Vs. Sintex Industries Ltd., 82 taxman.com 171 held that no disallowance is called for when assessee makes small investment from the surplus funds. There was no dividend income earned by the assessee and the case was taken for revision to disallow the business loss claimed against the property income which was examined by the AO and dropped the assessment proceedings and the Ld.CIT also satisfied that there is no case for revision on account of incorrect set off of business loss. With regard to the issue of disallowance u/s 14A as per the judicial pronouncements no disallowance is called for when there is no exempt income. Therefore, we are of the considered opinion that there is no case for revision of order u/s 263 and accordingly we set aside the orders of the CIT and allow the appeal of the assessee.” 9. We therefore, respectfully following the decision of the Hon'ble Madras High Court in the case of M/s. Redington (India) Ltd. (supra) and also the decision of the coordinate bench of the

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Tribunal in the case of D. Veerabhadra Reddy (HUF) (supra), this appeal filed by the Revenue is dismissed.

Sd/- sd/- (D.S. SUNDER SINGH) (V. DURGA RAO) Accountant Member Judicial Member Dated : 31st July, 2018. vr/- Copy to: 1. The Assessee – M/s. Sri Mahalakshmi Investments, D.No. 8-24-31, Mangalagiri Road, Guntur. 2. The Revenue – ACIT, Circle-2(1), Guntur. 3. The Pr.CIT, Guntur. 4. The CIT(A)-1, Guntur. 5. The D.R., Visakhapatnam. 6. Guard file. By order

(VUKKEM RAMBABU) Sr. Private Secretary, ITAT, Visakhapatnam.