DCIT 9(2), MUMBAI vs. L.R. ENTERPRISES P. LTD, MUMBAI

This is an appeal filed by the revenue and is directed against the order of the Ld. CIT(A)-20, Mumbai dated 21.10.2013 pertaining to A.Y.2009-10.

Only issue raised in the grounds No.1 by the revenue is against the deletion of disallowance of Rs.59,94,422/- by the ld. CIT(A) as made by the AO under section 14A of the Income Tax act, 1961 read with rule 8D of the Income Tax Rules, 1962 without appreciating the facts that the investment in shares and securities made out of interest bearing funds and the same was worked out by relying upon the Special Bench decision of Delhi Tribunal in the case of Cheminvest V/s ITO (2009), 124 TTJ 577 (Del)(SB).

Facts of the case are that the assessee filed its return of income on 30.9.2009 declaring total income of at NIL and book profit u/s 115JB of the Act at Rs.73,96,271/-which was processed u/s 143(1) of the Act. Thereafter, scrutiny proceedings were initiated against the assessee and statutory notices under section 143(2) and 142(1) were issued and served upon the assessee. During the course of assessment proceedings, the AO noticed that the assessee has made some investment and derived income there from which is not forming part of the total income i.e. income from said investment was exempt income u/s 10 of the Act and whereas the assessee has not made any disallowance of expenses attributable u/s 14A of the Act and accordingly, issued show cause notice to the assessee calling upon it to explain as to why the expenses relating to exempt income should not be disallowed in terms of section 14A r.w.r 8D which was replied by the assessee vide letter dated 15.10.2011, wherein it was submitted that the assessee has not earned any exempt income and no expenses were incurred toward earning of this income and therefore, the disallowance u/s 14A was not applicable. It was further submitted that the investments were made mainly out of its own funds and no interest disallowance was called for and so was the position as regards disallowance under rule 8D (2)(iii). The AO, finally, assessed the income of the assessee by rejecting the submissions and by relying on the decision of Hon‟ble Jurisdictional High Court in the case of „Godrej & Boyce Manufacturing Co. Ltd.‟ 328 ITR 81 and the decision of Special Bench of Delhi Tribunal in the case of Cheminvest Ltd V/s ITO (2009) 121 ITD 318 (Delhi) (SB) and calculating the disallowance u/s 14A at Rs.59,94,422/- comprising the disallowance of Rs.54,72,622/- under Rule 8D(2)(ii) and Rs.5,21,800/- under rule 8D 2(iii) of the Income Tax Rules vide order dated 30.12.2011 passed under section 143(3) assessing the total income at Rs.3,28,02,720/- under the normal provisions of Act and Rs.17,40,072/- under the provisions of section 115JB of the Act. Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority on various additions including the issue of disallowance of expenses u/s 14A of the Act. The ld.CIT(A) after taking into account the submissions deleted the disallowance of expenditure by observing and holding as under : “8.3 I have considered the finding of the, Assessing Officer and rival submission of the appellant, carefully. I find that Assessing Officer has not brought on record as to whether there is any income earned out of investment which is exempt u/s.10 of the IT.Act. If no such income is there which is exempt, no expenditure can be, presumed to be there. Further, Assessing Officer has failed to brought on record as to which expenditure pertains to earning of exempt income. Hence section 14A and rule 8D cannot be applied mechanically. As regards, investment, Assessing Officer has not clarified as to how some expenditure is there and relevant for disallowance as per the decision of Hon‟ble Special Bench of ITAT Delhi in the case of Cheminvest Ltd V/s ITO (2009) 121 ITD 318 (Delhi) (SB). If any expenditure is there in relation to investment which does not show any income, then corresponding expenditure can be disallowed u/s.36 of the LT.Act. Furthermore, it is relevant to mention that such investment of Rs.10,43,60,000/-, is not of current year but as mention by the appellant, was made in accounting year 2005~06, hence there cannot be presumption of any expenditure, in this year. Thus, in the light of all these factual aspects notional disallowance of expenditure of Rs.59,94,422/- is deleted.”

We have carefully considered the submissions of the parties, perused the material placed before us including the orders of authorities below and case laws relied upon by the parties. We find from the facts placed before us and on hearing the arguments of the ld.AR that there is no exempt income during the year and the investment made in shares and securities was made in the assessment year 2005-06 and thus submitted that no expenditure was incurred in relation to the investments in shares and securities. We find merit in the submissions of the ld.AR that the investment in the shares and securities were made primarily out of own funds and not out of interest bearing borrowed funds. The ld. DR strongly relied on the order of AO and submitted that the ld.CIT(A) has wrongly reversed the order of AO by appreciating the facts in wrong perspective. Having considered the rival submissions and facts on record and the orders of authorities below, we find that it is settled proposition of law that where there is no exempt income from the investment in shares and securities , the provisions of section 14A r.w.rule 8D could not be applied where no borrowed fund used for making investments in the shares. Moreover, the decision of the Special Bench in the case of Cheminvest Ltd(supra) has been reversed by the Hon‟ble Delhi High Court in the case of Cheminvest Ltd. v. CIT (Delhi High Court)(2015) 378 ITR 0033 (Del). Considering the above facts, we are of the considered view that the order of the ld.CIT(A) do not suffer from any infirmity and accordingly, same is upheld by dismissing the appeal of the revenue.