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Before: Shri Duvvuru RL Reddy & Shri S. Jayaraman
आदेश /O R D E R
PER DUVVURU RL REDDY, JUDICIAL MEMBER:
This appeal filed by the assessee is directed against the order of the ld. Commissioner of Income Tax (Appeals)-1, Chennai dated 26.02.2019 relevant to the assessment year 2014-15. The grounds raised
by the assessee are reproduced as under: “1. The order of the CIT(A) has completely ignored the written submissions made by the Assessee.
2. The CIT(A) has erred in not following the decisions of the jurisdictional High Court as well as the Honourable Supreme Court in the following cases. i. Redington (India) Ltd., vs. AddI CIT., 392 ITR 633 (Mad.) (HC) [2016] ii. CIT vs. Chettinad Logistics (2017) 80 taxmann.com 221(Mad) iii. CIT vs. Chettinad Logistics (2018) — Supreme Court In this case, the department filed a SLP on this issue before the Hon. Supreme Court. Cn hearing the case, the Honourable Supreme Court dismissed the revenue’s SLP and passed an order in favour of the assessee (Copy of judgement enclosed) 3. The rationale of the above cited decisions will squarely apply to the instant case which the CIT(A) has overlooked.
For these reasons cited above and those that may be adduced at the time of the hearing, the assessee prays that the order of the CIT(A) be quashed and justice rendered.”
Brief facts of the case are that the assessee is a domestic company engaged in the business of manufacturing and sale of cotton yarn in both domestic and export markets. The assessee filed return of income for the assessment year 2014-15 on 28.11.2014 declaring income as ‘Nil’. The case was selected for scrutiny and during the scrutiny proceedings, the ld. Assessing Officer proposed the addition of Rs. 2,78,373/- towards disallowance u/s. 14A of the Income Tax Act, 1961 r/w r. 8D of the Income Tax Rules, 1962.
Aggrieved, the assessee preferred an appeal before ld. CIT(A). After considering the submissions of the assessee, the ld. CIT(A) confirmed the disallowance made by the AO u/s. 14A of the Act r/w r. 8D of the Rules.
4. The main contention of the assessee is that the assessee did not earn any income which was exempt from tax during the year under consideration therefore, there should not be any disallowance u/s. 14A of the Act r/w r. 8D of the Rules. The ld. counsel for the assessee has submitted that the appellant has not earned exempt income and all the investments had been out of its own fund. Therefore, the order of disallowance in relation to exempt income should not be restored. He further submits that the appellant did not incur any expenditure towards earning of exempt income which does not form part of the total income. The ld. AR also relied on the following decisions of Hon’ble Jurisdictional High Courts in the cases of Redington (India) Ltd. vs. Addl. CIT [2016] 392 ITR 633 (Mad) and CIT vs. Chettinad Logistics [2017] 80 taxmann.com 221 (Mad.). Therefore, the orders of the ld. CIT(A) should be reversed.
On the other hand, the ld. DR had submitted that the appellant had not maintained proper books of accounts with regard to investments made. The appellant incurred interest income of Rs. 2,24,14,168/-. It was the further submission of the DR that the investments are complex in nature and the company run by its Board of Directors and these investments managed by its key management personal, executives etc. for which experts are consulted. The very existence of a corporate entity and its structure requires administrative expenses which require incurring of multifarious expenses including establishment, general and administrative expenses. He further submits that the AO has recorded his satisfaction regarding the investment.
Therefore, the disallowance u/s. 14A of the Act has to be determined as per mechanism provided u/r. 8D of the Rules. Hence, the order passed by the ld. CIT(A) be confirmed.
We have heard both the sides, perused the materials available on record and gone through the orders of authorities below and also decision relied on by the ld. AR and also ld. DR. The ld. AR heavily relied on the decision of the Hon’ble Jurisdictional High Court in the case of Redington (India) Ltd. (supra) and Chettinad Logistics (supra). The ratio laid down by the Hon’ble Jurisdictional High Court in the case of Redington (India) Ltd. has mentioned herein under:
“Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in confirming the disallowance under Section 14A of the Income Tax Act, of an amount of Rs.55,00,000/- in relation to assessment year 2007- 2008?”
Nothing much turns on the use of the word ‘includable’ and the phrase ‘under the act’ in s. 14A and we are not persuaded to accept the emphasis laid or the interpretation of the same by the Revenue. An assessment in terms of the Income tax Act is specific to an assessment year and the related previous year. S.4 of the Act, which imposes the charge to tax reads thus:
Charge of income-tax 4. (1) Where any Central Act enacts that income –tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person:
Provided that where by virtue of any provision of this Act income- tax is to be charged in respect of the income of a period other than the previous year, income tax shall be charged accordingly. Thus, where the statute indented that income shall be recognized for taxation in respect of any previous other than that immediately preceding the relevant assessment year, the provision shall expressly state so. The provisions of s.10 in Chapter III of the Act dealing with ‘Incomes not included in total income’ commences with the phrase ‘In computing the total income of a previous year, any income falling within any of the following clauses shall not be included .....'
The exemption extended to dividend income would relate only to the previous year when the income was earned and none other and consequently the expenditure incurred in connection therewith should also be dealt with in the same previous year. Thus, by application of the matching concept, in a year where there is no exempt income, there cannot be a disallowance of expenditure in relation to such assumed income. (Madras Industrial Investment Corporation Ltd vs. CIT (225 ITR 802)). The language of s.14A (1) should be read in that context and such that it advances the scheme of the Act rather than distort it.
In conclusion, we are of the view that the provisions of s. 14A read with Rule 8D of the Rules cannot be made applicable in a vacuum i.e. in the absence of exempt income. The questions of law are answered in favour of the assessee and against the department and the appeal allowed. No costs.”
Further considering the above ratio laid down by the Hon’ble Jurisdictional High Court, we are of the considered opinion that when there is no dividend income earned by the assessee there should not be any disallowance u/s. 14A of the Act r/w. r. 8D of the Rules. The decision relied by the ld. DR in the case of Lally Motors India (P.) Ltd. [2018] 93 taxmann.com 39, ITAT, Amritsar is not applicable to the facts of the present case. Therefore, the grounds raised by the assessee are allowed. We direct the AO to delete the disallowance u/s. 14A of the Act r/w. r. 8D of the Rules as per the ratio laid down by the Hon’ble Jurisdictional High Court in the case of Redington (India) Ltd. Hence, the grounds raised by the assessee are allowed.
In the result, the appeal filed by the assessee is allowed. Order pronounced on the 21st August, 2019 at Chennai.