ASST CIT 10(3)(2), MUMBAI vs. PATEL ENERGY RESOURCES LTD, MUMBAI

This appeal by Revenue is directed against the order of the CIT(A)-17, Mumbai dated 30.09.2014 for A.Y. 2011-12.

M/s. Patel Energy Resources Ltd. challenging the disallowance made under section 14A r.w. Rule 8D. The learned CIT(A) allowed the assessee’s appeal vide the impugned order dated 30.09.2014 deleting the disallowance made by the Assessing Officer (AO) under section 14A r.w. Rule 8D. 3.1 Aggrieved by the order of the CIT(A)-17, Mumbai dated 30.09.2014 for A.Y. 2011-12, Revenue has preferred this appeal, raising the following ground: - “On the facts and circumstances of the case and in law the Ld. CIT(A) erred in deleting the disallowance made u/s 14A without appreciating that the legislative intent is to allow only that expenditure which is relatable to earning of income and it therefore follows that the expenses which are relatable to earning of exempt income have to be considered for disallowance, irrespective of the fact whether any such income has been earned during the financial year or not.” The learned D.R. for Revenue was heard in support of the ground raised and placed strong reliance on the order of the Assessing Officer (AO) on this issue. 3.2 Per contra, the learned A.R. of the assessee submitted that there is no error in the order of the learned CIT(A) in deleting the disallowance made by the AO under section 14A r.w. Rule 8D after considering the AO’s views, the assessee’s submissions in the matter and the judicial pronouncements on this issue. It is submitted that the facts of the assessee’s case is squarely covered by the decision of the Hon'ble Delhi High Court in the case of Cheminvest Ltd. (378 ITR 33) (Del). 3.3.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited. It is seen that the learned CIT(A) deleted the disallowance made by the AO under section 14A r.w. Rule 8D after considering the AO’s views, the assessee’s contentions, the facts of the case and the judicial pronouncements on this issue in para 1.3 to 1.3.5 of the impugned order, before holding as under at para 1.3.6: - “1.3.6 Adverting to the facts in the appellant case, I find that the entire investment was made in the previous assessment year and not in the current assessment year. The Ld. CIT(A). AO in the assessment year 2010-11 has not made any addition while assessing the case of the appellant as it was found that the borrowings as on 31.03.2010

M/s. Patel Energy Resources Ltd. was Rs.3,10,795/- and the same was not utilized for the purpose of investment. In the current year the borrowing has been increased by Rs. 11 lakhs and the same were invested in the subsidiary concern of the appellant. The remaining investment is in a non-resident concern namely Naulo Nepal, the dividend income of which is not exempt under the Act. The Ld.AO while computing the disallowances under rule 8D has taken the entire interest and financial charges amounted to Rs. 1, 90, 99, 276/- which by no means is correct as investment of Rs. 11 lakh will not attract such financial charges even if it is presumed that the entire borrowing were used for the purposes of making investment. Therefore, I fact find that the Ld.AO is factually incorrect in taking the entire financial charges for the purposes of computation of disallowances under rule 8D. Further, the Ld.AO missed out the point that appellant has not earned any exempt income and therefore the provision of section 14 A are not applicable as decided by the various high courts in the decision as cited supra. The reliance placed by the Ld.AO on the decision of Cheminvest is of no good assistance in making the disallowances as the finding of the special bench in Cheminvest has been overruled by the Hon'ble high courts, In view of the foregoing the addition made by the Ld.AO is hereby deleted and this ground of appeal is thus allowed.” 3.3.2 On a combined perusal and appreciation of the facts of the case from the orders of the authorities below, it is not disputed that the entire investment was made, not in the assessment year under consideration, i.e. A.Y. 2011-12 but in the period relating to earlier assessment years. The learned CIT(A) observed that in the immediately preceding assessment year 2010-11, no disallowance under section 14A r.w. Rule 9D was made by the AO as it was found that borrowings made in that year, amounting to `3,10,795/-, were not utilised for the purpose of investment. The learned CIT(A) has further noticed that in the year under consideration, borrowing have increased by `11 lakhs and the same has been invested in a subsidiary concern of the assessee and the remaining investment is made in a non-resident concern; Naulo Nepal, dividend of which is not exempt under the Act. Revenue has not been able to controvert these facts before us and we therefore uphold the finding of the learned CIT(A) that the AO erred factually in taking the entire financial charges for the purpose of computing the disallowance under section 14 r.w. Rule 8D. 3.3.3 We find that there is no dispute with regard to the fact that the assessee has not earned any exempt income in the year under consideration, i.e. A.Y. 2011-12. In similar factual circumstances, the Hon'ble Delhi High Court in the case of Cheminvest Ltd. vs. CIT (2015) 378 M/s. Patel Energy Resources Ltd. ITR 33 (Del) has held that when no exempt income was earned by the assessee in the relevant assessment year, no disallowance could be made under section 14A of the Act. In this regard the Hon'ble High Court observed that the expression ‘does not form part of the total income’ in section 14A of the Act envisages that there should be an actual receipt of exempt income in the relevant assessment years for the purpose of disallowing any expenditure incurred in relation to such exempt income. In other words, section 14A of the Act will not apply if there is no exempt income received or receivable during the period under consideration. In our considered view, the aforesaid decision of the Hon'ble Delhi High Court in the case of Cheminvest Ltd. (supra) would squarely apply to that of the assessee in the case on hand on all fours and respectfully following the same we uphold the order of the learned CIT(A) in deleing the disallowance made by the AO under section 14A r.w. Rule 8D. Consequently ground No. 1 of the Revenue’s appeal is disallowed.