DCIT 6(2), MUMBAI vs. KOHINOOR PROJECTS P.LTD, MUMBAI

The only issue in this appeal of the Revenue is against the order of the CIT (A) in directing the AO to restrict the disallowance of expenses quo the exempted income at Rs.1,16,03,269/- as against the disallowance made by the AO at Rs.6,95,98,750/- by invoking the provisions of Section 14A of the Act read with Rule 8D of the Income Tax Rules, 1963 (hereinafter “the Rules”).

We have heard the rival contentions and gone through the facts and circumstances of the case. Brief facts leading to the above issue are that the AO noticed that the assessee has incurred expenditure in relation to income not includible in total income u/s 14A of the Act and thereby applying Rule 8D of the Rules made disallowance of expenses quo exempted income at Rs.6,95,98,750/-. Before the AO, the assessee contended that there is no exempt income earned by the assessee and accordingly, the provisions of Section 14A of the Act read with Rule 8D of the Rules cannot be invoked against the assessee. But, the AO was of the view that the contention of the assessee that for making disallowance u/s 14A of the Act there has to be exempted income earned during the year is not at all tenable. Aggrieved the assessee preferred appeal before the CIT (A), who after considering the interest-free funds available with the assessee and investments made during the year, restricted the disallowance at Rs.1,16,03,269/- as against the disallowance made by the AO at Rs.6,95,98,750/. Aggrieved, the Revenue preferred second appeal before the Tribunal.

Now, before us, the learned Counsel for the assessee again reiterated the same contentions that there is no exempted income claimed by the assessee u/s 14A of the Act and, therefore, no disallowance can be made by invoking the provisions of Section 14A read with Rule 8D of the Rules. For this, the learned Counsel relied on the decision of the Hon‟ble Delhi High Court rendered in the case of Cheminvest Ltd. Vs CIT 378 ITR 33 (Delhi) wherein it is held as under:- “23. In the context of the facts enumerated hereinbefore the Court answers the question framed by holding 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 income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year.” 4.1 Further, we find that the Hon‟ble Punjab & Haryana High Court in the case of CIT Vs Lakhani Marketing Inc. [2014] 49 taxmann.com 257 (Punjab & Haryana) has considered this issue vide Para 10 of the judgment by observing as under:- “10. Vide order dated 16.5.2008, Annexure A.III, the Tribunal on appeal by the revenue while upholding the finding recorded by the CIT(A) noticed as under:— (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. "We have heard rival submissions and have perused the material on record. From the reading of section 14A of the Act, it is clear that before making any disallowance the following conditions are to exist:— 9. Therefore, unless and until, there is receipt of exempted income for the concerned assessment years (dividend from shares), we are of the view, Section 14A of the Act cannot be invoked. In this appeal, the revenue has not dispelled the findings of the CIT(A), nor the statement of the assessee before AO that assessee is not in receipt of any dividend income and hence according to us, the Assessing Officer has erred in invoking Section 14A of the Act, to disallow various interest payments on capital account, security deposits and unsecured loans. This conclusion of ours finds support in the decision of Bombay Bench of the Tribunal in the case of Joint Commissioner of Income Tax v. Holland Equipment Co. B.V. [2005] 3 SOT 810 (Mum.) and the relevant portion of the order of the Bombay Bench of the Tribunal is reproduced below:— 'Regarding application of Section 14A of the Act, the contention of the learned Department Representative has to be rejected on the face of it inasmuch as the entire income of the assessee is taxable under the Act. Section 14A is applicable only when any part of the income is not to be included in the total income of the assessee and the expenditure relating to that part of income is claimed by the assessee as deduction. In such cases only, the expenditure relating to the exempted income can be disallowed and not otherwise. Since in the present case, the entire income is found to be taxable, no disallowance can be made under section 14A of the Act.”

In the result, the appeal of the Revenue is dismissed. Order pronounced in the open court on 18-10-2016.