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Income Tax Appellate Tribunal, MUMBAI BENCH “SMC” MUMBAI
Before: SHRI VIKAS AWASTHY & SHRI N.K. PRADHAN
ORDER PER N.K. PRADHAN, A.M.
This is an appeal filed by the assessee. The relevant assessment year is 2013-14. The appeal is directed against the order of the Commissioner of Income Tax (Appeals)-20, Mumbai [in short ‘CIT(A)’] and arises out of the assessment completed u/s 143(3) the Income Tax Act 1961, (the ‘Act’).
The short question here is whether disallowance u/s 14A r.w. Rule 8D of the Income Tax Rules, 1962 (the Rules) can be made when there is no exempt income.
The assessee filed its return of income for the assessment year (AY) 2013-14 on 28.03.2014 declaring total loss at Rs.1,365/-. It is engaged in the business of investment in shares and securities. As observed by the AO, the assessee has reported opening and closing value of investment at Rs.5,86,78,648/-. The AO has noted that “In earlier years, the assessee has earned dividend income. However, during the year, the assessee has not credited any dividend income in respect of investment reported in the balance sheet.”
However, observing that the Ld. CIT(A) has upheld the action of the AO for AY 2009-10 and further stating that as per provisions of section 14A, 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, the AO made a disallowance of Rs.2,93,393/- u/s 14A r.w. Rule 8D.
We find that vide order dated 14.03.2019 the Ld. CIT(A) dismissed the appeal filed by the assessee on the ground that Form No. 35 has not been verified and digitally signed by the Managing Director or any other Director.
Before us, the Ld. counsel for the assessee submits that the appeal has been rejected by the Ld. CIT(A) without giving reasonable opportunity of being heard to the appellant. Further it is explained by him that the AO erred in making the disallowance u/s 14A without appreciating the fact that the assessee has neither incurred any expenditure to earn exempt income nor earned any exempt income. In this regard, reliance is placed by him on the judgment of the Hon’ble Supreme Court in the case of Pr. CIT v. Caraf Builders and Constructions (P.) Ltd. (2019) 112 taxmann.com 322 (SC) and CIT v. Chettinad Logistics (P.) Ltd. (2018) 257 Taxman 2 (SC).
On the other hand, the Ld. Departmental Representative (DR) refers to Circular issued by Central Board of Direct Taxes (CBDT) clarifying disallowance of expenses u/s 14A in cases where corresponding exempt income has not been earned during the financial year and explains that the disallowance has been rightly made by the AO.
We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below.
As mentioned earlier, the AO has noted specifically that during the year under consideration, the assessee has not credited any dividend income in respect of investment reported in the balance sheet. The AO has made the disallowance on the basis that similar disallowance was made in earlier years.
Until and unless, there is a receipt of exempted income, section 14A cannot be invoked as held in CIT v. Lakhani Marketing Incl (2015) 4 ITR-OL 246 (Punj), CIT v. Holcim India (P.) Ltd. (2014) 272 CTR (Del) 282, Pr. CIT v. Vardhman Chemtech P. Ltd. (2020) 423 ITR 241, 247 (Punj).
The decision of the High Court in the case of Caraf Builders & Constructions (P.) Ltd. (supra) and Chettinad Logistics (P.) Ltd. (supra) that as the assessee had not earned any tax-free income, corresponding expenditure could not be worked out for disallowance has been affirmed by the Hon’ble Supreme Court in 112 taxmann.com 322 and 257 Taxman 2 respectively.
In view of the above factual scenario and position of law, we delete the disallowance of Rs.2,93,393/- made by the AO.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open Court on 22/12/2020.