SUDARSHAN YARNS & FABRICS P. LTD., ,KOLKATA vs. ITO, WARD - 5(1), KOLKATA

This appeal filed by assessee is against the order of Ld. CIT(A) - 2, Kolkata dated 23.08.2018 for AY 2009-10.

, at the time of hearing only presses ground no.

3. So, ground no1 & 2 are dismissed since not pressed. By raising ground no. 3 the assessee has raised the ground that on the facts that the assessee has neither earned nor claimed any exempt income, the disallowance of Rs.3,94,955/- u/s. 14A of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) read with Rule 8D of the Income-tax Rules, 1962 (hereinafter referred to as the “Rules”) made by AO and confirmed by Ld. CIT(A) is erroneous.

3. The only question that has been poised before us is as to whether any disallowance u/s. 14A read with Rule 8D can be made by the AO/Ld. CIT(A) when the assessee has not earned any exempt income. According to assessee, the assessee had not earned any dividend income. However, the AO taking note that assessee has invested in unquoted equity shares and taking note of Circular no. 5 of 2014 issued by the CBDT, the AO was of Sudarshan Yarns & Fabrics Pvt. Ltd, AY 2009-10 the view that the assessee is liable for disallowance of expenses u/s. 14A read with Rule 8D which he computed at Rs.3,94,955/- which was added back to the total income of the assessee. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) and contended that it has not earned any dividend income. However, the Ld. CIT(A) did not agree on the plea that assessee had not filed any evidence to support its contention. Aggrieved, the assessee has preferred this appeal.

4. Rival submissions have been heard and gone through the facts and circumstances of the case. In order to point out that the assessee had not received any dividend income, the Ld. AR took me through the audited financials of the company wherefrom it is noted that the assessee has not received any dividend income. The Ld. DR could not controvert this fact after perusal of the paper book. In such a scenario, as per the law laid by the Hon’ble Delhi High Court in CIT Vs. Holcim India (P) Ltd. (2015) 57 taxmann.com 28 (Del.), wherein it was held that section 14A of the Act cannot be invoked when there is no exempt income earned in the relevant assessment year. Therefore, I find merit in the ground no. 3 of the assessee and is of the view that no disallowance u/s. 14A read with Rule 8D of the Rules was warranted since assessee has not earned any exempt income in this assessment year. However, the Ld. DR vehemently contended that since CBDT Circular No. 5 of 2014 mandates that disallowance u/s. 14A should be made irrespective of earning or not of any exempt income, I note that this contention of the Revenue is no longer res integra and has been dealt with by the Hon’ble Punjab & Haryana High Court in the case of Pr. CIT-1, Chandigarh Vs. Vardhman Chemtech (P) Ltd. (2019) 102 taxmann.com 132 (P&H), wherein their Lordships held as under: “10. We now advert to the judicial decisions relied upon by the learned counsel for the assessee. In Ratan Melting & Wire Industries' case (supra), it was held by the Supreme Court that 'circulars and instructions issued by the Board are no doubt binding in law on the authorities under the respective statutes, but when the Supreme Court or the High Court declares the law on the question arising for consideration, it would not be appropriate for the court to direct that the circular should be given effect to and not the view expressed in a decision of this court or the High Court. So far as the clarifications/circulars issued by the Central Government and of the State Government are concerned they represent merely their understanding of the statutory provisions. They are not binding upon the court. It is for the Court to declare what the particular provision of statute says and it is not for the Executive. Looking at from another angle, a circular which is contrary to the statutory provisions has really no existence in law. In Lakhani Marketing Inc.'s case (supra), this Court while dismissing the appeal of the revenue had observed that unless and until there is receipt of exempted income for the concerned assessment years Section 14A of the Act cannot be invoked. Similarly, in Sudarshan Yarns & Fabrics Pvt. Ltd, AY 2009-10 Holcim India (P) Ltd.’s case (supra), the Delhi High Court had laid down that Section 14A of the Act cannot be invoked when no exempt income was earned. Identical view was expressed by Madras High Court in Redington (India) Ltd.'s case (supra), where it was enunciated that no disallowance under Section 14A read with Rule 8(d) of the Income Tax Rules, 1962 (in short "1962 Rules") can be made in respect of an assessment year in which no exempt income is earned. In IL&FS Energy Development Co. Ltd. 's case (supra), the Delhi High Court had expressed that the CBDT Circular dated 11.2.2014 cannot override the express provisions of Section 14A read with Rule 8 D of the 1962 Rules. In Cheminvest Ltd. 's case (supra), it was reiterated that Section 14A of the Act envisages that there should be an actual receipt of income, which is not includable in the total income during the relevant previous year for purpose of disallowing any expenditure under Section 14A of the Act in relation to said income.”

5. Therefore, respectfully taking note of the aforesaid ratio decidendi of the Hon’ble High Court, cited supra, I find no merit in the contention of the Ld. DR that in the light of the CBDT Circular No. 5 of 2014 disallowance u/s. 14A of the Act is mandatory ir- respective of the fact whether the assessee earns exempt income or not. Since the law declared by the Hon’ble High Court cannot be overridden by the Circular of the CBDT, the addition made in this behalf is directed to be deleted. Therefore, the appeal of the assessee succeeds and stands allowed.

6. In the result, the appeal of assessee is partly allowed. Order pronounced in the open court on 3rd May, 2019 Sd/- (A. T. Varkey) Judicial Member Dated: 3rd May, 2019 Jd.(Sr.P.S.) Copy of the order forwarded to: 1 Appellant –M/s. Sudarshan Yarns & Fabrics Pvt. Ltd., C/o, V. N. Purohit & Co., Chartered Accountants, Diamond Chambers, Unit-III, 4th floor, Suit No. 4G, 4, Chowringhee Lane, Kolkata-700 016. . 2 Respondent – ITO, Ward-5(1), Kolkata. 3 CIT(A)- 2 , Kolkata. (sent through e-mail) CIT , Kolkata 4 DR, Kolkata Benches, Kolkata (sent through e-mail) 5