DCIT 8(2), MUMBAI vs. MAN INFRAPROJECTS P. LTD, MUMBAI

Revenue by: Shri Mohammed Rizwan Assessee by: Shri Keshav B. Bhujle सुनवाईकीतारीख / Date of Hearing: 17.10.2016 घोषणाकीतारीख /Date of Pronouncement: 29.12.2016 आदेश / O R D E R

PER AMARJIT SINGH, JM:

ITA No.5654/M/14 A.Y. 2011-12 “1. Whether on the facts and in the circumstances of the case and in law, the learned CIT(A) erred in deleting the disallowance u/s.14A, without appreciating the fact that in the Clause 17(B)(1) in Form 3CD of the Tax Audit Report the auditors of the assessee company itself have reported Rs.1,02,03,600/- as expenditure incurred in relation to income which does not form part of total income?.

2. Whether on the facts and in the circumstances of the case and in law, the learned CIT(A) justified in deleting the disallowance made u/s.14A on the ground that there is no question cost, totally ignoring the facts that all investments made are old and in earlier years including immediately preceding assessment year, similar disallowance was upheld by him?”

3. Whether on the facts and in the circumstances of the case and in law, the learned CIT(A) in deleting the disallowance u/s.14A observing that since there is no exempt income without appreciating that as held in the decision of Supreme Court of Delhi in the case of Cheminvest 121 ITD 318 (Delhi) (SB), provisions of S 14A are applicable even though no exempt income has been earned during the year?”

ITA No.5654/M/14 A.Y. 2011-12 ISSUE NO.1 TO 3:- 5. All the issues taken by the revenue speaks about the wrongly deletion of the expenditure incurred to earn the exempt income to the tune of Rs.1,02,03,600/-. The learned representative of the revenue has argued that the clause 17(B)(1) to Form 3CD of the tax audit report speaks that the auditors of the assessee company itself reported the expenditure to the tune of Rs.1,02,03,600/- incurred in relation to income which does not form part of total income, therefore, in the said circumstances the Assessing Officer has rightly disallowed the said expenditure incurred to earn the exempt income but the CIT(A) has wrongly deleted the said addition, therefore, the order of the CIT(A) is wrong against law and facts and is liable to be set aside. On the other hand, the learned representative of the assessee has placed reliance upon the order passed by the CIT(A) in question. Before going further, it is necessary to advert the finding of the CIT(A) on record:- “1.3.1. I have carefully considered the submission and contention of the Ld. AR of the appellant and also carefully gone through the facts and explanation given by the Ld. AR of the appellant as well as Ld. AO. In this case it is an admitted fact that the appellant is a company engaged in the business of construction and real estate development. In February 2008, the appellant had acquired 100% ownership (10000 shares) of a company A.Y. 2011-12 M/s. Marino Shelters Pvt. Ltd., by investing an amount of Rs.55,12,50,000/-. The investment was by way of expansion of the appellant’s business. The said company is also in the same business i.e. construction and real estate development. The said company owned 23,089 sq. meters of land in Village Shivarane. The appellant owned only these shares and no other shares. The investment was a strategic investment in 100% subsidiary and there was no question of maintaining the portfolio or any cost in that respect. The said company M/s.Marino Shelters Pvt. Ltd. was incurring losses and was not in a position to declare any dividend. It had not declared any dividend in the relevant year. For the relevant year, the income of the appellant consisted of the income from construction business and interest income. Both the incomes are chargeable to tax and not exempt. There was no other income, in particular, there was no dividend income taxable or exempt which could have been the part of the total income of the appellant. 1.3.2. I find that recently the Punjab and Haryana High Court in the case of CIT Vs. Lakhani Marketing (P&H High Court) on June 5th, 2014 has held that from the reading of s. 14A of the Act, it is clear that before ITA No.5654/M/14 A.Y. 2011-12 making any disallowance the following conditions are to exist:- a) That there must be income taxable under the Act, and b) That this income must not form part of the total income under the Act, and c) That there must be an expenditure incurred by the assessee, and d) That the expenditure must have a relation to the income which does not form part of the total income under the Act. Therefore, unless and until, there is receipt of exempted income for the concerned assessment years (dividend from shares), s. 14A of the Act cannot be invoked (Hero Cycles 323 ITR 518 (P&H) and Winsome Textile 319 ITR 204 (P&H) followed). 1.3.3 Further in the case of CIT Vs. Delite Enterprises, the jurisdictional High Court on 25.06.2012 observed that the assessee, a partner in a firm, borrowed funds and advanced it to the firm on terms that the firm would pay interest if it made a profit. For one year, the firm paid interest which was offered as income by the assessee while for the second year it did not pay interest as it made a loss. The assesse claimed the interest paid on the borrowings as a deduction u/s.36(1)(iii). The AO disallowed the claim on the ground that as the borrowings had been invested in the firm and the income A.Y. 2011-12 from the firm was exempt u/s.10(2A), the interest expenditure was not allowable u/s.14A. This was reversed by the CIT(A). On appeal, the Tribunal upheld the CIT(A) on the ground that as there was no exemption claimed u/s.10(2A) by the assessee and there was no tax free income, s. 14A could not apply. The department filed an appeal in the High Court in which it argued that as the profits derived by the assessee from the firm was exempt u/s.10(2A), the interest on the borrowed funds used to invest in the firm was disallowable u/s.14A. The Hon’ble Court held that while dismissing the appeal of the revenue that in so far as Question (A) is concerned, on facts we find that there is no (tax-free) profit for the relevant assessment year. Hence the question as framed would not arise. 1.3.4 Further, I find that recently the same view was expressed by the Hon’ble Allahabad High Court in the case of CIT Vs. Shivam Motors (P.) Ltd. on May 22nd 2014 wherein in AY 2008-09, the assessee claimed that no s. 14A & Rule 8D disallowance could be made on the ground that (i) the assessee had not earned any tax-free income during the year and (ii) the assessee had sufficient surplus fund and borrowed funds were not ITA No.5654/M/14 A.Y. 2011-12 utilized for making the tax free investments. The AO rejected the claim and made a disallowance though the CIT(A) and Tribunal (included in file) deleted it on the basis that no section 14A disallowance could be made in the absence of tax free income. The Tribunal noted the judgment in Cheminvest 121 ITD 318 (Delhi) (SB) (which holds that s. 14A disallowance has to be made even if there is no tax free income) but followed Siva Industries (Che.). On appeal by the department to the High Court held dismissing the appeal: “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 no relation to income which does not form part of the total income under the Act. Hence, what s. 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 A.Y. 2011-12 expenditure could not be worked out for disallowance. The view of the CIT(A) & Tribunal does not give rise to any substantial question of law”. 1.3.5 I find that in February 2008, the appellant had acquired 100% ownership (10000 shares) of a company M/s. Marino Shelters Pvt. Ltd., by investing an amount of Rs.55,12,50,000/-. The investment was by way of expansion of the appellant’s business. There is no question of selling or dealing in these share. The investment was a strategic investment in 100% subsidiary and there was no question of cost of maintaining the portfolio or any other cost in the relevant year as contemplated u/s.8D(2)(iii). Such cost has to be taken as Nil. Without prejudice to this, a combined reading of the cases as cited supra revealed that the law as laid down by the Delhi Special Bench of Tribunal in the Cheminvest is not a correct law, thus the appellant having no exempt income in the year under consideration, no disallowance can be made u/s.14A. The Ld. AO is thus directed to delete the addition, these grounds of appeal are accordingly allowed.

ITA No.5654/M/14 A.Y. 2011-12