M/S. A.V. ENTERPRISES,KOLKATA vs. ACIT, CIRCLE-34, KOLKATA, KOLKATA

The assessee in the present case is a partnership firm, which is engaged in the business of trading in shares. The return of income for the year under consideration was filed by it on 25.10.2007 declaring a loss of Rs.15,28,670/-. In the assessment originally completed under section 143(3) vide an order dated 11.12.2009, the loss as returned by the assessee was accepted by the Assessing Officer. The said assessment, however, was subsequently set aside by the concerned ld. CIT by ./2014 Assessment year: 2007-2008 Page 2 of 3 exercising the powers conferred upon him under section 263 with a direction to the Assessing Officer to do the same afresh. As per the direction of the ld. CIT, proceedings under section 143(3) read with section 263 were initiated by the Assessing Officer. During the course of said proceedings, it was noticed by the Assessing Officer that the investment made by the assessee in shares held as stock-in-trade was capable of earning exempt income either in the form of dividend or long- term capital gain. He also noticed that substantial interest expenditure incurred by the assessee during the year under consideration was claimed as deduction. According to him, disallowance under section 14A read with Rule 8D, therefore, was required to be made in the case of the assessee. In this regard, it was submitted by the assessee that Rule 8D introduced with effect from 24.03.2008 had no application to the year under consideration. It was also submitted by the assessee that there being no exempt income actually earned by it during the year under consideration, the disallowance under section 14A was not warranted. These submissions of the assessee were not found acceptable by the Assessing Officer and relying on the decision of the Delhi, Special Bench of ITAT in the case of Cheminvest Limited –vs.- ITO [121 ITD 318], he held that disallowance under section 14A was attracted even where there was no exempt income actually earned by the assessee. He, therefore, proceeded to compute the expenses incurred by the assessee in relation to the earning of exempt income at Rs.39,23,448/- by applying Rule 8D and made disallowance to that extent under section 14A. On appeal, the ld. CIT(Appeals) confirmed the said disallowance made by the Assessing Officer.

I have heard the arguments of both the sides and also perused the relevant material available on record. As rightly submitted by the ld. counsel for the assessee, Rule 8D introduced with effect from 24.03.2008 is applicable only from A.Y. 2008-09 and the same, therefore, cannot be applied to the year under consideration, i.e. A.Y. 2007-08 to compute the disallowance to be made under section 14A. Moreover, the decision of ./2014 Assessment year: 2007-2008 Page 3 of 3 Delhi, Special Bench of ITAT in the case of Cheminvest Limited (supra) relied upon by the Assessing Officer has been subsequently overruled by the Hon’ble Delhi High Court by holding that the disallowance under section 14A cannot be made where the assessee has not earned any income, which is exempt from tax. In the present case, no income exempt from tax was actually earned by the assessee during the year under consideration and this being so, I hold that the disallowance made by the Assessing Officer under section 14A and confirmed by the ld. CIT(Appeals) is not sustainable. The same is, therefore, deleted allowing this appeal filed by the assessee.

In the result, the appeal of the assessee is allowed. Order pronounced in the open Court on October 04, 2016.