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Before: Shri Duvvuru RL Reddy & Shri S. Jayaraman
O R D E R
PER DUVVURU RL REDDY, JUDICIAL MEMBER:
This appeal filed by the Revenue is directed against the order of the Commissioner of Income Tax (Appeals) 6, Chennai dated 16.08.2017 relevant to the assessment year 2013-14. The only effective ground raised in the appeal of the Revenue is that the ld. CIT(A) erred in directing the Assessing Officer to quantify the exempt income and restrict the disallowance to the exempt income as the assessee has not claimed any exempt income in the return of income.
Brief facts of the case are that the assessee is engaged in the engineering contract, civil work and development of flats. The assessee filed its return of income on 29.09.2012 for the assessment year 2012-13 admitting total income of ₹.3,97,76,230/-. After scrutiny proceedings, the assessment under section 143(3) of the Act dated 25.03.2015 was completed by accepting the total income returned by the assessee. Subsequently, by invoking the provisions of section 263 of the Income Tax Act, 1961 [“Act” in short], the ld. PCIT set aside the assessment order and directed the Assessing Officer for fresh assessment to consider the issue of application of section 14A r.w. Rule 8D. Accordingly, during the course of revision proceedings, the Assessing Officer noticed that the assessee has claimed under the head expenditure as financial expenses of ₹.3,76,84,996/- out of which interest paid was ₹.3,51,90,546/-, whereas in the balance sheet, the assessee has invested a huge investment of shares i.e., ₹.29,13,83,032/-. It was also noted in the profit and loss account as on 31.03.2011 that the assessee had claimed under the head expenditure as financial expenses of ₹.3,24,103/- out of which interest paid was ₹.3,16,227/- whereas, in the balance sheet, the assessee had invested a huge investment in shares i.e., ₹.10,11,36,000/-. The difference in this two amount shows that the assessee had invested ₹.19,02,47,032/- in shares for the assessment year 2012-13. Accordingly, by applying the provisions of Rule 8D, the Assessing Officer worked out the disallowance of ₹.1,05,78,618/- [₹.95,97,321/- under Rule 8D(2)(ii) and ₹.9,81,297/- under Rule 8D(2)(iii)] and brought to tax.
The assessee carried the matter in appeal before the ld. CIT(A) and challenged the above disallowances.. After considering the submissions of the assessee and by relying upon various case law, the ld. CIT(A) partly allowed the appeal filed by the assessee.
Aggrieved, the Revenue is in appeal before the Tribunal and challenged the direction given to the Assessing Officer to quantify the exempt income and restrict the disallowance to the exempt income as the assessee has not claimed any exempt income in the return of income.
On the other hand, by reiterating the submissions made before the ld. CIT(A), the ld. Counsel for the assessee has submitted that the assessee made strategic investments in its subsidiary and not for the purpose of earning dividend income and no exempt income has been earned by the assessee during the year under consideration.
We have heard rival submissions, perused the materials on record and gone through the orders of authorities below. In compliance to the order passed under section 263 of the Act, the during the course of revision proceedings, the Assessing Officer noticed that the assessee has made huge investment in shares and accordingly, by invoking provisions of section 14A r.w. Rule 8D, the Assessing Officer worked out the disallowance and brought to tax. However, we find that nowhere in the assessment order passed under section 143(3) r.w.s. 263 of the Act, the Assessing Officer stated that the assessee has earned exempt income against the investments made in assessee’s subsidiary. Once the investment made in subsidiary for acquiring controlling interest/strategic investment, then no disallowance could be made under section 14A r.w. Rule 8D in view of the decision of the Tribunal in the case of DCIT v. EIH Associated Hotels Ltd. in & 1920/Mds/2015 dated 01.07.2016. Moreover, by following the decision in the case of Redington India Ltd. v. Addl. CIT in TCA No. 520/2016 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 relevant portion of the judgement is reproduced 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. 16. In conclusion, we are of the view that the provisions of s. 14A read with Rule 8D of the Rules cannot be made applicable in a vacuum i.e., in the absence of exempt income. The questions of law are answered in favour of the assessee and against the department and the appeal allowed. No costs.”
6.1 Admittedly, the Assessing Officer has not given any findings that the assessee has earned any exempt income in the relevant assessment year under consideration. Therefore, the ld. CIT(A) directed the Assessing Officer to quantify the exempt income and restrict the disallowance to the exempt income as the assessee has not claimed any exempt income in the return of income. Thus, we find no infirmity in the order passed by the ld. CIT(A) and accordingly, the ground raised by the Revenue is dismissed.
In the result, the appeal filed by the Revenue is dismissed. Order pronounced on the 31st January, 2018 at Chennai.