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Income Tax Appellate Tribunal, DELHI BENCH ‘G’ : NEW DELHI
Before: SHRI N.K. SAINI & SHRI A.T. VARKEY
IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH ‘G’ : NEW DELHI) BEFORE SHRI N.K. SAINI, ACCOUNTANT MEMBER and SHRI A.T. VARKEY, JUDICIAL MEMBER & 1151/Del./2013 (ASSESSMENT YEARS : 2008-09 & 2009-10) Shri Suresh Verma, vs. ACIT, Central Circle 13, A – 6, Derawal Nagar, New Delhi. Model Town, Delhi – 110 009. (PAN : AACPV6441N) (APPELLANT) (RESPONDENT) ASSESSEE BY : S/Shri Salil Kapoor, Shubham Rastogi and Sumit Lokchandani, Advocates REVENUE BY : Smt. Sunita Kejriwal, CIT DR Date of Hearing : 16.10.2015 Date of Pronouncement : 27.11.2015 ORDER PER A.T.VARKEY JUDICIAL MEMBER :
These appeals, at the instance of the assessee, are directed against the orders of CIT (Appeals)-I, New Delhi both dated 20.12.2012 for the assessment years 2008-09 & 2009-10. Both the appeals are disposed of by this common order because the facts & circumstance and grounds in both the assessment years are similar.
2. The grounds of appeal taken by the assessee in both the years are similar and read as under :-
“1. That the Ld. Commissioner of Income Tax (Appeals) [‘CIT (A)’] grossly erred in law & on facts in upholding the order passed by the Ld. Income Tax Officer [‘ITO’] under section 153A r.w.s. 143 (3) of the Income Tax Act, 1961 [‘Act’] is bad in law.
2. That in the facts and circumstances of the case & in law the Ld. CIT (A) grossly erred in interpreting Section 14A and Rule 8D by concluding that Rule 8D provides for allocation of expenditure relatable to exempt income and that such expenditure is to be disallowed even when there is actually no exempt income during the previous year.”
The facts and circumstances in both the years are similar. Therefore, we are discussing the facts for assessment year 2008-09. A search and seizure action u/s 132 of the Income Tax Act, 1961 (hereinafter ‘the Act’) was carried out in M/s. Diamond Hut Group of cases on 27.10.2009. The case of the assessee was also covered in operation u/s 132 of the Act and accordingly, notice u/s 153A was issued on 13.04.2010. In response to the notice, the assessee had filed return of income, declaring a total Income of Rs.23,01,940/- on 07.09.2010. The AO issued notice u/s 143(2) on 14.09.2010 and subsequently another notice u/s 143(2) was issued on 12.07.2011. Thereafter, a detailed questionnaire u/s 142(1) was issued on 12.08.2011. In response to the same, the AR for the assessee attended the proceedings from time to time and filed necessary details / clarifications.
3.1 During the course of assessment proceedings, the AO observed that the assessee had investment of Rs.3,35,00,000/- during the year under consideration. The expenses disallowed / added back in total income by the assessee on account of expenses incurred on earning exempt income were Rs.NIL. The AO asked the assessee to give detailed note on applicability of the provisions of section 14A read with Rule 8D vide questionnaire dated 12.08.2011. In reply thereto, the assessee submitted that "In this regard we would like to submit that the assessee has not received any exempted income during the year under consideration hence section 14A of Income Tax Act, 1961 has no applicability during the year under consideration.” The AO, after examining the reply of the assessee, did not find it tenable because of the following reasons :-
(i) As per the provisions of Section 14A, it is not at all mandatory that assessee should have actually earned the exempt income (here in this case dividend income from shares) or even that he should have actually incurred any expense for earning such income during that year for disallowing the expenditure incurred in relation to such exempt income. It is the potential of earning such exempt income (here in this case dividend from investment) and the expenses calculated on presumptive basis (as per method given in Rule 8D) which makes the assessee eligible for such disallowance. (ii) It is just like the case where assessee has earned some exempt income during the relevant assessment year from its investment but still it has incurred certain expenses in relation to such investment (which are to be calculated as per Rule 8D) from where such exempt income has been generated. Hence whatever expenses (as calculated as per rule 80) have been incurred shall be reduced from that exempt income and there will be loss in exempt income head, where such loss (loss in exempt income head) cannot be claimed from non-exempt income.
(iii) In this context, the decision of ITAT, Delhi in the case of ACIT Vs. Cheminvest Ltd. 317 ITR 86 is relied upon. In the above mentioned case the ITAT has observed that the disallowance U/s 14A can be made even if there is no exempt income generated from that investment.
Accordingly, the AO computed the expenses incurred in relation to exempt income as per the provision of section 14A read with Rule 8D, which is reproduced as under :-
S.No. Particulars Amount (Rs.) 1 The amount of expenditure directly relating to income which does not A NIL form part total income 2 Expenditure on Interest B 81,13,085 3 The average of value of investment income from which does not or shall not form part of the total income C 1,67,50,000 [(Rs.Nil + Rs.3,35,00,000) / 2] 4 The average of total asset appearing in the balance sheet of the assessee D 5,68,26,002 [(Rs.2,47,24,108/- + Rs.8,89,27,895/-) / 2] 5 B X C/D 23,91,408 6 ½ % of the average of the value of investment, income from which does E 83,750 not or shall not form part of the total income. TOTAL (Sl.No.5 + Sl.No.6) 24,75,158 Thus, the AO completed the assessment u/s 153A read with section 143 (3) of the Act by adding the addition made on account of disallowance u/s 14A read with Rule 8D of Rs.24,75,158/- in the income declared by the assessee of Rs.23,01,940/-. Accordingly, the total income recomputed by the AO came to Rs.47,77,098/- in assessment year 2008-09. (Total income as declared in ITR Rs.23,01,940/- + disallowance made by the AO Rs.24,75,158/- = Rs.47,77,098/-). For assessment year 2009-10, the total income recomputed by the AO is Rs.78,43,899/- (Total income as declared in ITR Rs.34,58,360/- + disallowance made by the AO Rs.43,85,539/- = Rs.78,43,899/-).
Aggrieved, the assessee filed appeals for both the assessment years in appeal before the first appellate authority and the ld. CIT (A) confirmed the orders of the AO in both the assessment years.
The assessee, being aggrieved, filed the appeals for both the assessment years before us.
The ld. Counsel for the assessee reiterated the submissions made before the authorities below and further submitted that as there was no dividend income received by the assessee, the provisions of section 14A of the Act were not applicable and no disallowance was called for. It was further stated that there should have been a positive income for making the disallowance u/s 14A of the Act read with Rule 8D of the Act. Reliance was placed on the following case laws:
(i) CIT Vs M/s Lakhani Marketing Incl., in (O&M) order dated 02.04.2014 Hon’ble P & H High Court; (ii) CIT Vs Holcim India (P) Ltd. in ITA Nos. 486/2014 and 299/2014 order dated 05.09.2014 of Hon’ble Delhi High Court; (iii) CIT vs. Holcim India (P) Ltd. in ITA Nos.486 & 299/2014 vide order dated 05.09.2014
7. On the other hand, ld. DR relied on the orders of the authorities below and further submitted that the earning of income is not a criteria for making the disallowance u/s 14A of the Act and even if no income has been earned the disallowance has to be made u/s 14A of the Act read with Rule 8D of the IT Rules. Reliance was placed on the following case laws:-
(i) Cheminvest Ltd. Vs ITO (2009) 121 ITD 318 (Del) (SB) (ii) Maxopp Investment Ltd. Vs CIT (2011) 15 Taxmann.com 390 (Del)
We have heard both the sides and perused the material on record. In the present case it is an admitted fact that the assessee had not earned any dividend income during the year under consideration. Now this issue is no longer Res-Integra as held by the Hon’ble jurisdictional High Court in Holcim (P) Ltd (supra) and by Punjab and Haryana High Court in M/s Lakhani Marketing Incl (Supra). We take a look at section 14 A(1) of the Act which is reproduced as under below:
“For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.”
From a bare perusal of the section it is clear that before making the disallowance the following conditions are to exist as noted by co-ordinate Bench in M/s Kee Pharma Ltd. ITA NO 5108/Del/2012:
(i) There must be income taxable under the Act; (ii) The said income must not form part of the total income under the Act; (iii) There must be an expenditure incurred by the assessee; and (iv) The said expenditure must have a relation to the income which does not form part of the total income under the Act.
It was further observed by the Tribunal that from the aforesaid condition it would be clear that in the concerned assessment year as there is no income which does not form part of the taxable income under the Act i.e. dividend from the shares, in our opinion, the provisions of section 14A of the Act cannot be invoked. In the present case, it is an admitted fact that the assessee was not in receipt of any dividend income as such there was no income from the investment in question which was taxable under the Act, therefore, the AO wrongly invoked the provisions of section 14A of the Act. On a similar issue, their lordships of the Hon’ble Punjab High Court in the case of CIT Vs M/s Lakhani Marketing Incl. in vide order dated 02.04.2014 observed at paras 9 to 11 as under:-
9. The CIT(A) vide order dated 24.6.2004, Annexure A.II recorded as under:- “7.2 Keeping in view the above facts and circumstances of the case it is held that the AO was not correct in applying section 14A of the IT Act in disallowing the expenditure on account of interest amounting to Rs.46,91,684/-. It was incumbent on the AO to establish a nexus between the expenditure incurred and the income which was exempt under the Act. Facts clearly do not support the action of the AO. Disallowance is accordingly deleted. The AO is directed to recompute the income accordingly.
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:- “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:-
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.
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. reported in (2005) 3 SOT 810 (Mumbai) and the relevant portion of the order of the Bombay Bench of the Tribunals 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.’
Moreover, the AO has not established the nexus between invested funds and the interest bearing funds, since the investments in shares are in the years 1995-96, 1998-99
and 1999-2000 and the interest disallowance is for the assessment years 2000-01 and 2001-02. On the contrary perusal of the balance sheet for the year ending 31.3.1995, 31.3.1998 and 31.3.1999, it is clear that interest bearing funds have not been utilized for investment for purchase of shares.
11. For the aforesaid reasons, we see no reason to interfere with the order of CIT(A) concerning assessment year 2000-01 and 2001-02 and hence the decision of CIT (A) in deleting the disallowance of interest by invoking section 14A of the Act is correct and in accordance with law.”
11. In view of the aforesaid findings, which could not be shown to be erroneous, the plea of the revenue cannot be accepted. Further, this Court in Hero Cycles Limited’s case (supra) recorded as under:-
“5. In view of finding reproduced above, it is clear that the expenditure on interest was set off against the income from interest and the investments in the share and funds were out of the dividend proceeds. In view of this finding of fact, disallowance under section 14A was not sustainable. Whether, in a given situation, any expenditure was incurred which was to be disallowed, is a question of fact. The contention of the revenue that directly or indirectly some expenditure is always incurred which must be disallowed under section 14A and the impact of expenditure so incurred cannot be allowed to be set off against the business income which may nullify the mandate of section 14A, cannot be accepted. Disallowance under section 14A requires finding of incurring of expenditure; where it is found that for earning exempted income no expenditure has been incurred, disallowance under section 14A cannot stand. In the present case finding on this aspect, against the revenue, is not shown to be perverse. Consequently, disallowance is not permissible. We have taken this view earlier also in IT Appeal No.504 of 2008, CIT vs. Winsome Textile Industries Limited, decided on 25th August, 2009 wherein it was observed as under:-
‘6. The contention raised on behalf of the revenue is that even if the assessee had made investment in shares out of its own funds, the assessee had taken loans on which interest was paid and all the money available with the assessee was in common kitty, as held by this Court in CIT vs. Abhishek Industries Limited , (2006) 205 CTR (P&H) 304 : (2006) 286
ITR 1 (P&H) and therefore, disallowance under section 14A was justified.
We do not find any merit in this submission. Judgment of this Court in Abhishek Industries (supra) was on the issue of allowability of interest paid on loans given to sister concerns, without interest. It was held that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. Observations made therein have to be read in that context. In the present case, admittedly, the assessee did not make any claim for exemption. In such a situation, section 14A could have no application.”
Similarly, the Hon’ble Jurisdictional High Court in the case of CIT Vs Holcim India (P) Ltd. in & 299/2014 vide order dated 05.09.2014 dismissed the appeal of the revenue and observed in para 14 as under:
“14. On the issue whether the respondent-assessee could have earned dividend income and even if no dividend income was earned, yet Section14A can be invoked and disallowance of expenditure can be made, there are three decisions of the different High Courts directly on the issue and against the appellant-Revenue. No contrary decision of a High Court has been shown to us. The Punjab and Haryana High Court in Commissioner of Income Tax, Faridabad Vs. M/s. Lakhani Marketing Incl., decided on 02.04.2014, made reference to two earlier decisions of the same Court in CIT Vs. Hero Cycles Limited, [2010] 323 ITR 518 and CIT Vs. Winsome Textile Industries Limited, [2009] 319 ITR 204 to hold that Section 14A cannot be invoked when no exempt income was earned. The second decision is of the Gujarat High Court in Commissioner of Income Tax-I Vs. Corrtech Energy (P.) Ltd. [2014] 223 Taxmann 130 (Guj.). The third decision is of the Allahabad High Court in Income Tax Appeal No. 88 of 2014, Commissioner of Income Tax (II) Kanpur, Vs. M/s. Shivam Motors (P) Ltd. decided on 05.05.2014. In the said decision it has been held :
“As regards the second question, Section 14A of the Act provides that for the purposes of computing the total income under the Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Hence, what Section 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of fact is that the assessee had not earned any tax free income. Hence, in the absence of any tax free income, the corresponding expenditure could not be worked out for disallowance. The view of the CIT(A), which has been affirmed by the Tribunal, hence does not give rise to any substantial question of law. Hence, the deletion of the disallowance of Rs.2,03,752/- made by the Assessing Officer was in order.”
We take note of the fact that the Hon’ble jurisdictional High Court has also considered the decisions of the Hon’ble Punjab and Haryana, Gujarat and Allahabad High Court which are in favour of the assessee and as per the ratio laid down by the Hon’ble Jurisdictional High Court in the case of CIT Vs Holcim India (P.) Ltd. order dated 05.09.2014 and the Hon’ble P & H High Court in the case of C IT Vs M/s Lakhani Marketing (supra) we find force in the contention of the Ld. AR that no disallowance u/s 14A of the Act can be made if there is no income earned. In that view of the matter, we delete the disallowance made by the AO and later confirmed by the ld. CIT(A) in both the assessment years.
During the course of proceedings, the assessee has also raised the following additional grounds of appeal in assessment year 2008-09 :-
“1. That the additions made are illegal, bad in law and without jurisdiction as the same are not based on any incriminating material found during the search.
That the assessment for the relevant Assessment Year 2008- 09 was already completed. Hence in the absence of any incriminating material no addition could have been made while completing assessment u/s 153A.
3. That the CIT (A) has erred in law and on facts in not appreciating the fact that the AO had no jurisdiction to make the additions which were not based on any incriminating seized material and hence the said additions are illegal and bad in law.”
10. Since we have deleted the disallowance made in the assessment year 2008-09, the issues raised in additional grounds are not adjudicated since it has become academic in nature. Similarly since the facts and grounds raised in the appeal for AY 2009-10 are identical, we order deletion of the disallowance made u/s 14A of the Act.
In the result, both the appeals filed by the assessee are allowed.
Order pronounced in open court on this 27th day of November, 2015.