MEDALL SCANS AND LABS PVT. LTD.,CHENNAI vs. ITO CORPORATE WARD 4(1), CHENNAI

Brief facts of the case are that the assessee has filed the return of income for the assessment year 2015-16 with NIL income. The assessee is engaged in the business of medical diagnostic, testing and allied services. The case of the assessee was selected for scrutiny and against the statutory notices, the assessee furnished the details as called for. From the balance sheet filed by the assessee, the Assessing Officer has observed that the assessee has made an investment of ₹.7,50,10,100/- in equity shares of various companies. The assessee has not earned any dividend income earned during year under consideration and hence no exempt income was claimed by assessee in return of income. However, by invoking the provisions of section 14A of the Act r.w.r. 8D of the Income-tax Rules, 1962, determined the disallowance of ₹.4,47,618/- and also disallowed the same while computing book profits under section 115JB of the Act. On appeal, the ld. CIT(A) confirmed the disallowance against which the assessee preferred further appeal before the Tribunal.

The ld. Counsel for assessee has submitted before the Bench that assessee has not earned any dividend income during the year under consideration and hence no exempt income was claimed by it in return of income. The ld. counsel for assessee would submit that in view of no exempt income earned by assessee, no disallowance of expenditure is warranted under section 14A of the Act. The assessee has relied upon decision of Hon’ble Madras High Court in the case of CIT v. Chettinad Logistics (P.) Ltd. reported in [2017] 80 taxmann.com 221 (Madras), wherein, 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 SLP filed by Revenue before Hon’ble Supreme Court in the case of CIT v. Chettinad Logistics (P.) Ltd., reported in [2018] 95 taxmann.com 250 (SC), has since been dismissed by Hon’ble Supreme Court. Similarly, it was submitted that no addition can be made to book profit under section 115JB as the assessee has not earned an exempt income. 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 this case, the assessee has made investments to the tune of ₹.7,50,10,100/- in equity shares of various companies. The assessee has not earned any dividend income earned during year under consideration and hence no exempt income was claimed by assessee in return of income. However, by invoking the provisions of section 14A of the Act r.w. Rule 8D made disallowance of expenditure to the tune of ₹.4,47,618/-, which was confirmed by ld. CIT(A). Now it is a well settled proposition that in case no exempt income is received 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, 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 (supra) 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 during the year under consideration and hence, the disallowance made by the Assessing Officer under section 14A of the Act stands deleted

So far as additions to be made in computing book profits u/s 115JB of the Act ,the decision of Special Bench of Delhi-tribunal in the case of ACIT v. Vireet Investment Private Limited reported in (2017) 165 ITD 27(Delh-trib.)(SB) is relevant, wherein, it is held at para 6.22 that computation under clause (f) of Explanation 1 to Section 115JB(2) is to be made without resorting to the computation as contemplated under section 14A read with Rule 8D of the 1962 Rules. The matter is remitted to AO to compute books profits u/s 115JB of the Act in accordance with ratio of decision of Special Bench of Delhi-tribunal in the case of Vireet Investments (supra) read with clause(f) of Explanation 1 to Section 115JB(2) of the Act. We order accordingly.

In the result, the appeal filed by the assessee is partly allowed for statistical purposes in the manner indicated above. Order pronounced on the 29th November, 2019 in Chennai.