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Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार PER RAJENDRA, AM- अनुसार Challenging the order dated 25/11/2014 of the CIT (A)-17,Mumbai the Assessing Officer(AO) has filed the present appeal.Assessee-company is a civil contractor and builder.It filed its return of income on 30/09/2009, declaring total income at Rs. 55.73 lakhs.The AO completed the assessment u/s.143 (3) of the Act, on 27/ 12/2011,determining its income at Rs.3,73,99,410/-. 2.The solitary ground of appeal
is about deleting the disallowance made u/s.14A of the Act.During the assessment proceedings, the AO found that the assessee had shown investment in shares of Future Infra India Private Ltd.of Rs.8.15 crores as on 31.03.2009 as against Rs.8.05 crores as on 31.03.2008,that it had not made any disallowance u/s.14 A of the Act. He directed it to explain as to why disallowance as per the provisions of section 14A read with Rule 8D of the Income Tax Rules,1962 (Rules)should not be made.Vide its reply dated 20/ 12/ 2011,the assessee made its submission.After considering the same,the AO held that the term expenditure appearing in the section 14. A would take in its sweep not only direct expenditure but also all forms of expenditure regardless of whether they were fixed,variable, direct, indirect, administrative, managerial or financial. He referred to the case of Godrej and Boyce Manufacturing Company
727/M/15-nandraj Ltd (234 CTR 1)of the Hon’ble Bombay High Court.He further held that the disallowance had to be worked out-even if there was no exempt income, that the assessee had paid interest of Rs.96.70 lakhs on borrowing for the year, that the assessee had made investment out of the borrowed funds on which interest cost was incurred by it, that interest expenditure had to be considered for the purpose of calculation formula prescribed under Rule 8D of the Rules. Accordingly he made a disallowance of Rs. 35.13 lakhs(Rs. 31.08 lakhs under the head interest expenditure + Rs. 4.05 lakhs-an amount equal to 0.05% of the average value of the investments).
3.Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority(FAA).Before him,it was contended that a bare reading of the provisions of section 14 A stipulated that no deduction would be allowed in respect of the expenditure incurred by an assessee in relation to the income which did not form part of the total income,that during the year under consideration it had not claimed any income as exempt,that when there was no exempt income no disallowance u/s. 14 A could be made,that the assessee was not availing any benefit of exempt income, that there should not be any tax liability in that regard, that the funds borrowed by it had been used in the business of sand dredging, that the investment in the share had been made out of the surplus funds available with it,that the balance sheet of the assessee was an evidence to prove that assessee had sufficient surplus funds for making investment, that it had not utilised borrowed funds for investment purposes.It relied upon several cases in that regard and argued that no ad hoc disallowance of expenditure u/s.14A was warranted where the assessee had sufficient funds available with it.
3.1.After considering the submission of the assessee and the assessment order, the FAA referred to the case of Lakhani Marketing of the Hon’ble Punjab and 2
727/M/15-nandraj Haryana High Court (dated 05/06/2014) and held that before making any disallowance u/s. 14A of the Act following conditions had to exist: i.There must be income taxable under the Act ii. the said income was not form part of the total income under the provisions of the Act,iii. the assessee must incur expenditure and iv. the expenditure must have a relation to the income which does not form order of the total income under the Act. He also referred to the cases of Hero Cycles (323 ITR 518) and Winsome Textile (319 ITR 204) and held that the assessee had not earned any exempt income for the year under consideration,that the AO was aware of the fact,that even then he made a disallowance,that he was not justified in invoking the provisions of section 14A read with Rule 8D of the Rules.
4.During the course of hearing before us, the Departmental Representative(DR) supported the order of the AO.None appeared on behalf of the assessee,as stated earlier.
5.We have perused the material available on record.The undisputed facts of the case are that the assessee had not shown any exempt income in its return filed for the year under consideration, that it had not claimed any expenditure against any exempt income.After the prolonged litigation at various levels,now the principles governing the disallowance with respect to section 14 A of the Act read with rule 8D of the Rules have crystallised. It has been held by the various Hon’ble High Courts that until and unless the assessee shows exempt income no disallowance can be made.The second limb for computing the disallowance is claiming the expenditure against the exempt income.If an assessee having exempt income does not claim any expenditure against it,the provisions of Sec. 14A cannot be invoked.Similarly, if the assessee is not claiming any exempt income no disallowance can be made. It is not difficult to understand the logic behind it.The Act debars the assessee’s from claiming double deduction. So, if 3
727/M/15-nandraj an assessee claims exempt income on one hand and on the other shows incurring of expenditure for earning the said income it would result in double benefit.To prevent the misuse the of the exemption provisions,the legislature has laid down a mechanism and that find place in the provisions of section 14 A of the Act.For invoking the provisions of the said section the AO has to establish two basic facts i.e.earning of exempt income by an assessee and incur -ing of expenditure for earning the said income. If the print conditions are not satisfied,the AO cannot invoke the provisions of section 14 A of the Act. Now it has been held by several High Courts that if the assessee has sufficient own funds then no disallowance can be made under the head interest expenditure, while invoking the provisions of section 14 A of the Act. Besides, if the assessee incurs any interest expenditure for its regular investment i.e. not for making the investment, then also no disallowance can be made.In the case of (380 ITR652)the Hon’ble P &H High Court has held as under: “Section 14A of the Income-tax Act, 1961, empowers an Assessing Officer to disallow expenditure in relation to exempted income from shares if interest bearing funds have been used by the assessee. Section 14A may only be invoked if the assessee has made investments in purchase of shares out of borrowed funds. As a consequence, if the assessee has invested his own money in purchase of shares, there is no question of disallowance u/s. 14A . Section 14A requires the Assessing Officer to record satisfaction that interest bearing funds have been used to earn tax-free income. The satisfaction to be recorded must be based upon credible and relevant evidence. The onus, therefore, to prove that interest bearing funds were used, lies squarely on the shoulders of the Revenue. Thus, if the Assessing Officer is able to refer to relevant material while recording satisfaction that borrowed funds were used to earn interest- free income as opposed to the assessee’s own funds, the Assessing Officer may legitimately disallow such a claim. The Assessing Officer, however, cannot, by recording general observations, particularly where the assessee has denied using interest bearing funds, proceed to infer that interest bearing income must have been used to earn exempted income. Section 14A , being in the nature of an exception, was to be construed strictly and only where the Assessing Officer records satisfaction, on the basis of clear and cogent material, shall an order be passed u/s. 14A disallowing such a claim.” The Hon’ble Delhi High Court, in the case of Cheminvest(378ITR33)has deliberated upon the issue of the 14A disallowance as under: “The expression “does not form part of the total income” in section 14A of the Income-tax Act, 1961, 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 727/M/15-nandraj purpose of disallowing any expenditure incurred in relation to the income. In other words, section 14A will not apply if no exempt income is received or receivable during the relevant previous year.” In the case of Omprakash Khaitan(376 ITR 390),the Hon’ble High Court has held that in order to disallow the expenditure there must be a nexus between the expenditure incurred and the income not forming part of the total income. Considering the above,we are of the opinion that the order of the FAA does not suffer from any legal or factual infirmity.Therefore, upholding his order, we decide the effective ground of appeal against the AO.