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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
This appeal of the Revenue is arising out of the order of Commissioner of Income Tax (Appeals)-48 Mumbai [in short CIT(A)], in appeal No. CIT(A)-8/IT-769/14-15, dated 23.12.2016. The Assessment was framed by the Asst. Commissioner of Income Tax (OSD), Circle-3, Mumbai (in short ‘ACIT/ AO’) for the A.Y. 2012-13 vide order dated 20.03.2015 under section 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).
2. The first issue in this appeal of Revenue is against the order of CIT(A) deleting the disallowance of expenses relatable to exempt income under section 14A of the Act read with Rule 8D of the IT Rules, 1962 (hereinafter the ‘Rules’) being average value of investment i.e. administrative expenses at ₹ 1,65,18,554/-. For this Revenue has raised the following 6 grounds: - “1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance of Rs. 1,65,18,554/- u/s. 1 4A r. w. r. 8D without appreciating the fact that the amount of disallowance u1s.14A of the I T. Act, 1961 has to be computed as per Rule 8D of I T. Rules, 1962 as held in the order of the Hon'ble High Court in the case of M/s. Godrej & Royce Manufacturing Co. Ltd.
Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance of Rs. 1,65,18,554/- u/s. 14A r. w. r. 8D without appreciating the fact that the assessee has neither established that no part of interest bearing fund as well as expenses so claimed has found its way into the investments in Shares nor adduced any documentary evidences during the course of assessment proceedings before the Assessing Officer.
3. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance of Rs. 1,65,18,5541- u/s. 14A r.w.r. 8D without appreciating the fact that the AO had duly recorded dissatisfaction u/s. 14A(2) and in such a situation, the interest expenditure needs to be disallowed in terms of Rule 8D.
3. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance of Rs. 1,65,1 8,554/- u/s. 14A r. w.r. 8D since no dividend income is received without appreciating the fact that section 14A provides for disallowance of expenditure incurred in relation to and not incurred for earning such exempt income which was later clarified in the CBDT Circular No.5 of 2014 dated 11/02/2014 laying down the condition that it is not necessary that exempt income should necessarily be included in a particular year's income for the disallowance u/s.14A of the l.T.Act, 1961 to be triggered.
5. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance of Rs. 1,65,18,554/- u/s. I 4,4 without appreciating that Rule SD does not provide for exclusion of investment made in subsidiaries.
Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance u/s. I 4A to the book profit u/s. 115JB of the I.T. Act, 1961 ignoring the decisions of the Hon'ble ITAT, Mumbai in the case of M/s. Viraj Profiles Ltd. in dated 21.10.2015 – 46 ITR (T) 626 (Mumbai – Trib) / 2016 and in Ferani Hotels Pvt. Ltd. in ITA No. 857/Mum/2013 dated 17.11.2014.”
Further, one more issue is as regards to the computation of income under section 115JB of the Act and disallowance of the above expenses. At the outset, the learned Counsel for the assessee took us through the order of AO and he read out Para 4.2 and 4.3 of the AY which reads as under: - “4.2 In response, the assessee, vide letter dated 15.01 .2015 furnished a reply which is summarized as follows:
with respect to disallowance u/s 14A r.w.r. 8D, it may please be noted that the assessee company has not earned any exempt income during the during the year consideration and has in fact received shares of loss from the partnership firm. Further, the remaining investments have been made in the shares of group concerns or private limited company, the possibility of earning any exempt income from such investments is practically nil and the investment made in group concerns is only to maintain controlling interest and not with the motive of earning exempts income. Further since the company also advances surplus funds to other parties the interest income is directly attributable to the interest expenses and the borrowed funds are not used for making any investment resulting in exempt income.
4.3 From the above reply, it can be inferred that the basic argument of the assessee is that the investments on which exempt income "can be earned are not made out of borrowed capital of the Company. The submission of the assessee has been carefully perused. However, the same is not found to be acceptable. It is seen that the assessee has made investment in shares which can give rise to exempt dividend income. Further, it is pertinent to mention that the assessee company has invested in shares during the year This means that funds have been used to acquire investments in the year under consideration as well. At the same time, it is seen that the assessee has claimed interest expense of Rs. 2,45,66,028/-. The contention that interest bearing funds were used only to meet working capital requirement of the business is not acceptable. The fact remains that the assessee has not clearly been able to establish that no pad of interest bearing fund has been used for investments in shares or mutual funds.”
In view of the above, the learned Counsel for the assessee stated that there is no exempt income claimed by assessee in the return of income and once there is no exempt income, no disallowance of expenses can be made by invoking the provisions of section 14A of the Act read with Rule 8D of the Rules. For this the learned Counsel for the assessee relied on the decision of Hon’ble Bombay High Court, Nagpur Bench in the case of Pr. CIT vs. Ballarpur Industries Limited in Income Tax Appeal No. 51 of 2016, wherein this issue has been considered and finally following the judgment of Hon’ble Delhi High Court in the case of Cheminvest Limited vs. CIT (2015) 378 ITR 33 (Delhi) held as under: - “On hearing the learned Counsel for the Department and on a perusal of the impugned orders, it appears that both the Authorities have recorded a clear finding of fact that there was no exempt income earned by the assessee. While holding so, the Authorities relied on the judgment of the Delhi High Court in Income Tax Appeal No. 749/2014, which holds that the expression “does not form part of the total income” in Section 14A of the Income Tax Act, 1961 envisages that there should be an actual receipt of the income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. The Income Tax Appellate Tribunal held that the provisions of Section 14A of the Income Tax Act, 1961 would not apply to the facts of this case as no exempt income was received or receivable during the relevant previous year. It is not the case of the Assessing Officer that any actual income was received by the assessee and the same was includible in the total income. In the facts of the case, the Authorities held that since the investments made by the assessee in the sister concerns were not the actual income received by the assessee, they could not have been included in the total income.”
When this was confronted to the learned Sr. Departmental Representative he fairly conceded.
After hearing rival contentions and going through the facts and circumstances of the case, admitted position on facts is that there is no exempt income claimed by assessee. Once there is no exempt income, the issue is squarely covered by the decision of Hon’ble Bombay High Court in the case of Ballarpur Industries Limited (supra). Respectfully
Hon’ble Jurisdictional High Court, we confirm the order of CIT(A) deleting the disallowance. 6. In the result, the appeal Revenue is dismissed. Order pronounced in the open court on 28-09-2018.