M/S. FLORIND SHOES P. LTD.,CHENNAI vs. THE ADDL. CIT, CHENNAI

This appeal filed by the assessee is directed against the order of the ld. Commissioner of Income Tax (Appeals) II, Chennai dated 29.11.2013 relevant to the assessment year 2008-09. The only effective ground raised in the appeal of the assessee is that the ld. CIT(A) has erred in sustaining the notional disallowance expenses amounting to ₹.90,74,583/- made under section 14A of the Income Tax Act, 1961 [“Act” in short].

Brief facts of the case are that the assessee has filed the return of income on 29.09.2008 declaring the total income of ₹.1,22,37,531/-. While completing the assessment under section 143(3) of the Act, the Assessing Officer has assessed the taxable income at ₹.2,16,84,023/- by making a disallowance of ₹.90,74,583/- under section 14A of the Act r.w. Rule 8D.

The assessee carried the matter in appeal before the ld. CIT(A) and made various submissions. After considering the submissions of the assessee and by following various decisions the ld. CIT(A) has confirmed the disallowance made under section 14A of the Act.

On being aggrieved, the assessee is in appeal before the Tribunal. The ld. Counsel for the assessee has submitted that when there was no ‘earning’ of exempt income on the investments, the question of determining expenditure does not arise. By filing copy of the judgement in the case of Redington (India) Ltd. v. Addl. CIT in T.C.A. No. 520 of 2016 dated 23.12.2016, wherein, the Hon’ble Jurisdictional High Court has held that when there is no exempt income, there cannot be a disallowance of expenditure, the ld. Counsel for the assessee has submitted that the assessee has not earned any exempt income or incurred any expenditure and prayed for deletion of disallowance made under section 14A of the Act.

On the other hand, the ld. DR strongly supported the orders of authorities below.

We have heard both sides, perused the materials available on record and gone through the orders of authorities below. In the assessment order, the Assessing Officer has observed that the assessee has made investments to the tune of ₹.12,41,44,270/- as on 31.03.2008 in shares and mutual fund units and capable of earning exempt income. It was further noticed that the assessee has not admitted any expenditure for the above investments. Further, the Assessing Officer has noticed that the assessee has claimed interest expenditure to the tune of ₹.3,44,50,626/-. When the Assessing Officer has pointed out that the disallowance under section 14A r.w. Rule 8D is applicable, the assessee has submitted that the interest expenditure was due to term loan interest paid for the fixed assets created, packing credit interest for the working capital used and bank charges paid for import LC’s and foreign bills connections. Moreover, the assessee has submitted that no dividend was received during the year and no direct or indirect expenditure has been incurred for the investments warranting disallowance under section 14A of the Act. However, by applying the provisions of section 14A r.w. Rule 8D, the Assessing Officer has determined the expenditure component and disallowed the same. By reiterating the submissions made before the Assessing Officer, on appeal, before the ld. CIT(A), the assessee has submitted that no portion of the borrowings on which interest was paid has been used for making investments in shares and mutual funds and the borrowings have been used for the business operations of the assessee company. Moreover, it was submitted that the assessee has not taken any steps to redeem/change the mutual funds and earned any exempt income in the relevant assessment year. Therefore, it was argued that no disallowance under section 14A of the Act could be made. Before us, the ld. Counsel for the assessee has strongly contended that the assessee has not earned any exempt income as well as no direct or indirect expenditure was incurred and therefore, there should not be any disallowance of expenditure in view of the decision in the case of Redington (India) Ltd. v. Addl. CIT (supra) and prayed for deleting the disallowance made under section 14A of the Act. We find force in the arguments of the ld. Counsel. We have perused the case law relied on by the ld. Counsel for the assessee in the case of Redington (India) Ltd. v. Addl. CIT (supra), wherein, the Hon’ble Jurisdictional High Court has held as under: “15. 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. v. 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.