SRI JAYAJOTHI AND COMPANY LTD.,RAJAPALAYAM vs. DCIT CORPORATE CIRCLE 2, MADURAI

Both the appeals filed by the assessee are directed against separate orders of the ld. Commissioner of Income Tax (Appeals) 1, Madurai, dated 16.04.2019 & 15.04.2019 relevant to the assessment years 2014-15 and 2013-14 respectively. The only common ground raised in both the appeals of the assessee relates to confirmation of disallowance made under section 14A of the Income Tax Act, 1961 [“Act” in short) r.w. Rule 8D.

Brief facts of the case are that the assessee has filed the return of income for the assessment year 2013-14 declaring a loss of ₹.16,87,65,152/-. The case of the assessee was selected for scrutiny and against the statutory notices, the assessee furnished the details as called for. After verification of the details furnished by the assessee, the assessment under section 143(3) of the Act was completed by assessing total loss of the assessee at ₹.14,75,56,046/- after making various additions including disallowance under section 14A of the Act at ₹.1,97,24,155/-. On appeal, the ld. CIT(A) upheld the disallowances made by the Assessing Officer, which was confirmed by the ld. CIT(A) on appeal.

Before us, by relying on the decision in the case of Redington (India) Ltd. v. Addl. CIT 392 ITR 633 (Mad) and CIT v. Chettinad Logistics (P) Ltd. reported in [2017] 80 taxmann.com 221 (Madras), wherein, the Hon’ble Madras High Court has held that no disallowance of expenditure can be made by invoking provisions of section 14A of the Act, when there is no exempt income earned by the assessee, the ld. Counsel for the assessee has submitted that the assessee has not at all earned any exempt income and prayed for deleting the addition for both the assessment years. On merits, ld. DR submitted that disallowance of expenditure under section 14A of the Act is to be made even if no exempt income is earned by the assessee. The learned DR would rely on orders of authorities below.

We have heard both the sides, perused the materials available on record and gone through the orders of authorities below. In the assessment year 2013-14, the Assessing Officer observed that there is some possibility of interest payments for earlier years investment even though there was no investment in the current financial year. Accordingly, by invoking the provisions of section 14A r.w. Rule 8D, the Assessing Officer made disallowance at ₹.1,97,24,155/- for the assessment year 2013-14.

In the assessment year 2014-15, the assessee made investments in shares to the tune of ₹.6,75,000/- and therefore, the Assessing Officer disallowed the expenditure component under section 14A r.w. Rule 8D at ₹.42,925/- and brought to tax. The assessee has not earned any dividend income in both the assessment years under consideration and hence no exempt income was claimed by assessee in return of income.

Now it is a well settled proposition that in case no exempt income is earned during year under consideration, no disallowance of expenditure can be made by invoking provisions of section 14A of the Act. It is a matter of fact that the assessee earned no exempt income during the year under consideration. Further, it is observed that Assessing Officer has not recorded any satisfaction before invoking Rule 8D of the 1962 Rules and has simply invoked provisions of section 14A of the Act r.w.r. 8D.. The Assessing Officer has not analysed modus operandi followed by the assessee in making investments in the assessment year 2014-15, personnel deployed nor has looked into books of accounts of the assessee to compute expenditure incurred in relation to earning of an exempt income.

We find that the in the case of Chettinad Logistics Private Limited(supra), the Hon’ble Madras High Court has held that no disallowance of expenditure under section 14A of the Act can be made when no exempt income is earned by the assessee. The SLP filed by Revenue against decision of Hon’ble Madras High Court decision in case of Chettinad Logsitics Private Limited reported in [2018] 95 taxmann.com 250 (SC) has been dismissed by Hon’ble Supreme Court. It is also relevant here to mention decision of Hon’ble Madras High Court in case of Redington (India) Limited v. Addl. CIT 392 ITR 633, wherein, similar view was taken and in fact, the Hon’ble Madras High Court in case of Chettinad Logistics Private Limited (supra) relied upon this decision of Hon’ble Madras High Court in case of Redington India Limited (supra) to hold and decide the issue in favour of the assessee. Thus, keeping in view decision of the Hon’ble jurisdictional High Court cited above, we are of considered view that no disallowance of expenditure by invoking provisions of section 14A of the Act is warranted as the assessee has not earned any exempt income in both the assessment years under consideration and hence, the disallowance made by the Assessing Officer under section 14A of the Act stands deleted.