VAKRANGEE LTD,MUMBAI vs. ASST CIT CEN CIR 29, MUMBAI

This appeal by the assessee is directed against the order of the CIT(A)- 40, Mumbai dated 18.07.2014 for A.Y. 2009-10.

The Commissioner of Income Tax (Appeals) -40 Mumbai has erred in confirming the action of Assessing Officer in respect of disallowance u/s 14A amounting to `74,31,1010/- whereas as per facts & circumstances the disallowance should not be made.” 3.2.1 The learned A.R. for the assessee was heard in support of the grounds raised. According to the learned A.R. no disallowance under section 14A r.w. Rule 8D was warranted in the facts and circumstances of the case for the following reasons. Firstly, it was submitted, the assessee had earned Nil exempt dividend income in the year under consideration and therefore no disallowance could have been made under section 14A r.w. Rule 8D. In support of this proposition the learned A.R. placed reliance on the decision of the Hon'ble Delhi High Court in Cheminvest Ltd. (2015) 378 ITR

33. (Del) dated 02.09.2015 which has been followed by a Coordinate Bench of this Tribunal in the case of Fair Exports (India) Pvt. Ltd. in 1881 & 899/Mum/2011 and others dated 17.05.2016. 3.2.2 The learned A.R. further submitted that disallowance under section 14A of the Act r.w. Rule 8D of the I.T. Rules also ought not to have been made by the authorities below since the entire investments in shares/ securities made by the assessee amounting to `52,15,95,000/- were made entirely in subsidiary companies as strategic investments to have control over those companies and not for investment purposes or with the intention of earning of dividend/tax exempt income. In support of this M/s. Vakrangee Limited proposition, the learned A.R. placed reliance on the decision of the Coordinate Bench of this Tribunal in the case of Fiduciary Euromax Global Markets Ltd. in dated 29.06.2016. 3.2.3 The learned A.R. for the assessee contends that in view of the above factual matrix of the case and the judicial pronouncements cited for both proportions put forth, in para 3.2.1, that since there is no exempt dividend income earned by the assessee in the period under considerations and in para 3.2.2 that since the entire investment in shares were in subsidiary concerns as strategic investments, no disallowance under section 14A w.r. Rule 8D was called for and therefore, it was prayed, that the said disallowance of `74,31,010/- be deleted. 3.3 Per contra, the learned D.R. for Revenue supported the orders of the authorities below. 3.4.1 We have heard the rival contentions of both the parties and perused and carefully considered the material on record, including the judicial pronouncements cited and placed reliance on in support of propositions put forth by the assessee for deletion of the disallowance of `74,31,010/- under section 14A r.w. Rule 8D. Admittedly, the assessee has not earned any exempt income in the year under consideration and this fact has not been controverted by the learned CIT(A). The applicability of the provisions of section 14A of the Act is in respect of expenditure incurred is in relation to the earning of income not includible in total income. A plain reading of the provisions of section 14A of the Act envisages that there should be actual receipt of income not includible in the total income. Therefore, the provisions of section 14A of the Act will not apply when no exempt income is received or receivable by the assessee during the relevant previous year. This proposition has been upheld by the Hon'ble Delhi High Court in the case of Cheminvest Ltd. vs. CIT (2015) 278 ITR 33 (Del) vide order dated 02.09.2015 wherein at para 23 thereof their Lordships have 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 M/s. Vakrangee Limited 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.” 3.4.2 In the case on hand, admittedly the factual position is that the assessee has not earned any exempt income in the year under consideration. In these circumstances, in our considered view, the ratio of the decision of the Hon'ble Delhi High Court in the case of Cheminvest Ltd. (supra) would squarely apply. The Hon'ble High Court in the aforesaid judgement held that no disallowance under section 14A of the Act can be made in the year in which no exempt income is earned. It was held that the expression ‘does not form part of the total income’ in section 14A of the Act envisages that there should be an actual earning of income which is not includible in the total income during the relevant year for the purpose of disallowing any expenditure incurred in relation to the said exempt income. Therefore, in the factual matrix of the case on hand, as discussed above, we respectfully following the decisions of the Hon'ble Delhi High Court in the case of Cheminvest Ltd. (supra) and the Coordinate Bench of this Tribunal in the case of Fair Exports (India) Pvt. Ltd. (supra) hold that no disallowance under section 14A of the Act can be made in the case on hand for the year under consideration since the assessee has not earned any exempt income. We therefore set aside the decision of the authorities below and direct the AO to delete the disallowance of expenditure amounting to `74,31,010/- under section 14A of the Act. 3.5.1 Further the learned A.R. for the assessee has submitted that, even otherwise, the said disallowance under section 14A w.r. Rule 8D ought not to have been made as the entire investment in shares made by the assessee of `52,15,95,000/- was strategic investment in group companies for control over these companies and not for investment purpose with the intention of earning of tax exempt dividend income. On a perusal of the details on record, i.e. the impugned order of the learned CIT(A) and the order of assessment we find that the averments of the learned A.R. that the entire shares held by the assessee are in respect of its strategic investments in subsidiary/group concerns is factually correct. We find that a Coordinate Bench of this Tribunal in the case of Fiduciary Euromax M/s. Vakrangee Limited Global Markets Ltd. in and others dated 29.06.2016, relied on by the assessee, at para 14 thereof on similar factual circumstances has held that: - “14. ...................... .......... strategic investment in group companies therefore cannot be held to be for investment purposes or with the object of earning of dividend/tax exempt income, but the same, in the light of above referred to judicial decisions can safely be said to be related to the business activity of the assessee and no disallowance, therefore, is attracted on such an income u/s 14A of the Act. In the light of the above referred to decisions and respectfully following the same, we direct the AO to exclude the strategic investments made by the assessee in group companies while calculating the disallowance under section 14A read with rule 8D of the Income Tax Act.” 3.5.2 Following the aforesaid decision of the Coordinate Bench of this Tribunal in the case of Fiduciary Euromax Global Markets Ltd. (supra), we hold and direct that the strategic entire investments made by the assessee in group companies are to be excluded while computing the disallowance under section 14A r.w. Rule 8D.