Loading judgment…
No AI summary yet for this case.
Before: Shri Bhavnesh Saini & Shri L.P. Sahu
ORDER Per L.P. Sahu, A.M.: This is an appeal filed by the Revenue against the order of ld. CIT(A)-3, Delhi dated 17.12.2015 for the assessment year 2012-13 on the following ground:
“ 1. Ld. CIT(A) erred in law and on facts of the case in restricting the disallowance of Rs.46,08,647/- made by the AO u/s. 14A of the I.T. Act, 1961 read with Rule 8D(ii) of the I.T. Rules, 1962 to Rs.46,636/-.
The brief facts of the case are that the assessee during the year under consideration earned exempt income of Rs.46,636/-. The assessee made investment of Rs.6 crores during the year and no disallowance of interest was made by the assessee nor did he make any disallowance of any administrative
ITA No. 979/Del./2016 2 expenditure u/s. 14A for earning exempt income. The Assessing Officer, after considering various decisions and provisions of section 14A read with Rule 8D, made disallowance of Rs.46,08,647/- , i.e., Rs.42,65,819/- u/r 8D(ii) and Rs.3,42,828/- u/r 8D(iii). The computation of disallowance u/s. 14A is made by the AO at page 6 of the assessment order. In appeal, the ld. CIT(A), after considering elaborate submissions of the assessee and various case laws, worked out the disallowable interest to Rs.46,000/- and restricted the disallowance u/s. 14A to Rs. Rs.46,636/- , i.e., to the extent of exempt income earned by the assessee, observing as under :
“3.2 Having gone through the submissions made by the appellant, the order of assessment made by the Assessing Officer and the material evidences placed on the record, it emerges from the facts that the appellant has made the investment of Rs.6 crores during the year and no disallowance of interest has been made by the assessee. During the appellate proceedings, the appellant was directed by this office to file the complete details of the investments made and the position of funds available with the appellant. It is evident from the submissions filed that the appellant has made the investment of Rs.6 crores on 30-03-2012. The investment has been made from the current account of the assessee maintained with State Bank of India. The amount of Rs.10 crores has been transferred to the current account from the cash credit account of the appellant company maintained with State Bank of India, Hissar Branch, Haryana. The cash credit account shows the debit balance of Rs.18,64,15,325/- on the day of investment, in view of the aforesaid facts, it is clear that the appellant has made the investment of Rs. 6 crores from the borrowed funds. The interest of 2 days @ 14% p.a. amounts to Rs.46,000/-.
However, with regard to the disallowance on account of administrative expenses equal to 0.5% of average investments, it is observed that earning of exempt income is not a passive activity. In the present age of making of investment, maintaining or continuing with investment and time of exit from the investment are well informed and well coordinated management decision involving not only inputs from various sources but also acumen of senior management functionaries. Therefore, the cost is inbuilt even in so called passive investment. There is incidental expenditure of collection, telephone and ITA No. 979/Del./2016 3 follow up etc. Therefore, expenses related to earning of the exempt income are embedded in the expenses debited to profit and loss account. In view of this, the disallowance u/s 14A of the Act r.w. Rule 8D(iii) on account of the administrative expenses is correctly worked out to Rs. 3,42,828/-.
3.3 The appellant has earned the total dividend income of Rs.46,636/- during the year under consideration. The Hon'ble Delhi High Court in the case of Holcim India Pvt. Ltd. & ITA No. 299/2014 held:
"14. On the issue whether the respondent-assessee could have earned dividend income and even if no dividend income was earned, yet Section 14A can be invoked and disallowance of expenditure can be made, there are three decisions of the different High Courts directly on the issue and against the appellant-Revenue. No contrary decision of a High Court has been shown to us. The Punjab and Haryana High Court in Commissioner of Income Tax, Faridabad Vs. M/s. Lakhani Marketing Incl., decided on 02.04.2014, made reference to two earlier decisions of the same Court in CIT Vs. Hero Cycles Limited, [2010] 323 ITR 518 and CIT Vs. Winsome Textile Industries Limited, [2009] 319 ITR 204 to hold that Section 14A cannot be invoked when no exempt income was earned. The second decision is of the Gujarat High Court in Commissioner of Income Tax-I Vs. Corrtech Energy (P.) Ltd. [2014] 223 Taxmann 130 (Guj). The third decision is of the Allahabad High Court in Income Tax Appeal No. 88 of 2014, Commissioner of Income Tax (li) Kanpur, Vs. M/s. Shivam Motors (P) Ltd. decided on 05.05.2014. In the said decision it has been held:
"As regards the second question, Section 14A of the Act provides that for the purposes of computing the total income under the Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Hence, what Section 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of fact is that the assessee had not earned any tax free income. Hence, in the absence of any tax free income, the corresponding expenditure could not be worked out for disallowance. The view of the CIT(A), which has been affirmed by the Tribunal, hence does not give rise to any substantial question of law. Hence, the deletion of the disallowance of Rs.2,03,752/- made by the Assessing Officer was in order".
Income exempt under Section 10 in a particular assessment year, may not have been exempt earlier and can become taxable in future years. Further, whether income earned in a subsequent year would or would not be taxable, may depend upon the nature of transaction entered into in the subsequent assessment year. For example, long term capital gain on sale of shares is presently not taxable where security transaction tax has been paid,
ITA No. 979/Del./2016 4 but a private sale of shares in an off market transaction attracts capital gains tax. It is an undisputed position that respondent assessee is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to management. Possibility of sale of shares by private placement etc. cannot be ruled out and is not an improbability. Dividend may or may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend. When declared, it is subjected to dividend distribution tax.
What is also noticeable is that the entire or whole expenditure has been disallowed as if there was no expenditure incurred by the respondent-assessee for conducting business. The CIT(A) has positively held that the business was set up and had commenced. The said finding is accepted. The respondent-assessee, therefore, had to incur expenditure for the business in the form of investment in shares of cement companies and to further expand and consolidate their business. Expenditure had to be also incurred to protect the investment made. The genuineness of the said expenditure and the fact that it was incurred for business activities was not doubted by the Assessing Officer and has also not been doubted by the CIT(A).
In these circumstances, we do not find any merit in the present appeals. The same ore dismissed in limine."
The various High Courts have uniformly held that no disallowance u/s 14A can be made if there is no exempt income and in that context overruled the decision of Special Bench, New Delhi in the case of Cheminvest Ltd. vs. ITO reported in 317 ITR 86. In the case in hand, it is clear from the submissions filed during the appellate proceedings that there is dividend income of Rs.46,636/-which is exempt from the tax during the year. In view of the aforesaid discussion, the addition to the extent of Rs.46,636/- is sustained u/s 14A read with Rule 8D of the Income Tax Rules, 1962 and the Assessing Officer is directed to modify the order of assessment accordingly.”
We have heard the submissions of both the parties and have gone through the entire material on record. The ld. DR submitted that the ld. CIT(A) was not justified in restricting the additions made by the AO u/s. 14A read with Rule 8D of the IT Act. It was submitted that the Assessing Officer has determined the disallowable expenditure after keeping in view the formula contained in the ITA No. 979/Del./2016 5 statutory provisions of Rule 8D and also taking into consideration the fact that no income can be earned without expenditure. The ld. CIT(A) is stated to have not considered these vital aspects in right perspective.
On the other hand, the ld. AR reiterated the submissions made before the ld. CIT(A) and submitted that the disallowance only to the extent of exempt income has been approved in various decisions of Hon’ble High Court, as also relied on by the ld. CIT(A) in the impugned order. It was submitted that in the case of assessee itself, the ITAT Delhi Bench has restricted the similar disallowance to the extent of exempt income vide order dated 08.11.2017 in Revenue’s appeal No. 5651/Del./2015 and CO of assessee No. 445/Del./2015.
Having considered the rival submissions in the light of assessment order and the findings reached by the ld. CIT(A), we find no justification to interfere with the reasoned order made by the first appellate authority. The ld. CIT(A) has observed in the impugned order that the assessee has made the investment of Rs.6 crores on 30.03.2012 from the current account of the assessee maintained with State Bank of India. The amount of Rs.10 crores has been transferred to the current account from the cash credit account of the assessee company maintained with State Bank of India, Hissar Branch and the cash credit account showed the debit balance of Rs.18,64,15,325/- on the date of investment. He accordingly
ITA No. 979/Del./2016 6 rightly observed that investment of Rs.6 crores was made out of the borrowed funds. Therefore, the ld. CIT(A) was justified to work out two days’ interest @ 14% amounting to Rs.46,000/- for disallowance. The ld. CIT(A) further relied on the decision of Hon’ble jurisdictional High Court in the case of Holcim India Pvt. Ltd. (supra) for the proposition that disallowance of administrative expenditure for earning the exempt income can at the most be made to the extent of exempt income earned. Similar view has also been taken by Co-ordinate Bench in the case of assessee itself for A.Y. 2011-12 (supra). No contrary material is brought on record on behalf of the Revenue to discard the decision reached by the ld. CIT(A).
We, therefore, find no merit in the appeal of the Revenue and the same deserves to be dismissed.
In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open court on 15.11.2017.