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Before: SHRI AMIT SHUKLA & SHRI RAMIT KOCHAR
Assessee by : Shri J.P. Bairagra Revenue by : Shri Abani Kanta Nayak (D.R.) सुनवाई क� तार�ख /Date of Hearing : 16-11-2015 घोषणा क� तार�ख /Date of Pronouncement : 08-02-2016 आदेश / O R D E R PER RAMIT KOCHAR, Accountant Member
This appeal, filed by the assessee company, being 21-02-2014 passed by the learned Commissioner of Income Tax (Appeals)- 16, Mumbai (Hereinafter called “the CIT(A)”), for the assessment year 2010-11.
The grounds raised by the assessee company in the memo of appeal filed with the Tribunal read as under:-
ITA 2712/Mum/2014 2
“I.0. Re.: Disallowance u/s 14A of the Income Tax Act, 1961 amounting to Rs. 302,500/-.
1.1 The CIT (Appeals) has erred in disallowing the expenditure aggregating to Rs.302,500/- u/s 14A of the Income Tax Act, 1961 inspite of the fact that: a. During the year under consideration the Appellant had not incurred any expenditure, whether direct or indirect for the earning of the exempt income. b. The provisions of Rule 8D of the Income tax Rules are not applicable in the present case as there is no expenditure incurred at all.
The provisions of rule 8D are attracted once there is any element of Direct/indirect expenses. In the present case the Appellant had clearly made out that it has not incurred any expenses - whether direct or indirect in relation to the Exempt income.
Besides neither the Assessing officer nor the Learned Commissioner - Appeals has found any expenses to have been incurred for earning the exempt income. Hence the disallowance computed @ 1/2 % of the average value of Investments towards indirect expenses for earning the exempt income and as confirmed by the CIT - Appeals is erroneous, incorrect and not in the accordance with the law. c. The Learned Commissioner - Appeals has erred in upholding the additions by deeming that the Appellant would have incurred an expenses for earning the Exempt Income by holding that the "expenditure incurred by the assessee in relation to the income is wide enough to cover all forms of expenses provided that have some connection with the exempt income”.
While upholding the addition made by the AO, the learned Commissioner - Appeals failed to appreciate that there was no expenses incurred whatsoever for earning the exempt income. Hence without establishing that the expenditure has been incurred the Learned Commissioner has upheld, though wrongly, that the same needs to be disallowed. d. the Learned Commissioner - Appeals has also erred in relying on unrelated decision of Honourable Mumbai ITAT in the case of Prakash Heat Treatment & Industries (P) Ltd.. v. ITO (2007) 14S0T 348 (Mum) where the expenditure eligible to be disallowed under section 14A was held to be including fixed, variable, direct, indirect, administrative, Managerial or financial". In the present case the Appellant has not incurred any expenditure - nor has the Learned Commissioner gave any ITA 2712/Mum/2014 3 finding of any expenditure having incurred - hence the said decision is not applicable to the facts of the case.”
The brief facts of the case are that the assessee company is engaged in the business of generation of power produced through wind turbine generators. During the course of assessment proceedings u/s 143(3) read with Section 143(2) of the Income Tax Act,1961 (hereinafter called “the Act”) the learned Assessing Officer( Hereinafter called “the AO”) observed that the assessee company made investment in shares , income from which does not or shall not form part of the total income . The assessee company held at the beginning of the year investment of Rs. 3 crores which were increased to 9.10 crores during the year. The AO further observed that the assessee company ought to have made disallowance of expenditure in relation to the income which does not or shall not form part of total income as required u/s 14A of the Act in accordance with the provisions of Rule 8D of Income Tax Rules, 1962. The assessee company was asked to furnish the details of its investments. The assessee company, in response, contended that it has made investment in the preference shares of its group companies and it has not received any dividend during the year. The assessee company further contended that no expenditure is incurred on making investment in these group companies, hence, no disallowance u/s 14A of the Act is called for. The assessee company further contended it has its own funds as well as free reserves out of which the assessee company has made such investments and as such no interest cost is incurred by the assessee company for making such investment and as such interest expenditure is not disallowable u/s 14A of the Act. The A.O. did not accept the contentions of the assessee company and applied Rule 8D(2)(iii) and disallowed 0.5% of average of the investments held by the assessee company, whereby total disallowance of Rs. 3,02,500/- was made by the AO vide orders dated 31.01.2013 .
ITA 2712/Mum/2014 4 4.Aggrieved by the orders dated 31.01.2013 passed by the AO, the assessee company preferred an appeal before the CIT(A).
Before the CIT(A), the assessee company reiterated the submission what was made before the A.O. and submitted that the investments were made out of its own reserves and surplus and the assessee company has not borrowed any funds for investing in the shares of its group companies. The assessee company submitted that it is in the business of generation and sale of power generated through Windmills and the company set up 8.4 MW of wind farm project consisting of 14 nos. of Wind Turbine Generators in Chitradurga Dist. in Karnataka. The assessee company submitted that it has made investments in shares of its group companies out of its own funds and that no direct or indirect expenditure has been incurred during the year for making the above investments. The assessee company submitted its bank book and bank statement to support its contentions. The CIT(A) held that all expenses connected with the exempt income have to be disallowed u/s 14A of the Act regardless of whether they are direct or indirect, fixed or variable and managerial or financial and whether the income is earned or not earned , thus the CIT(A) vide orders dated 21.02.2014 upheld the additions made by the A.O..
6.Aggrieved by the orders of the CIT(A) dated 21.02.20014, the assessee company is in appeal before the Tribunal.
The ld. Counsel for the assessee company submitted that the A.O. has applied Rule8D(2)(iii) of Income Tax Rules, 1962 to disallow 0.5% of average investment i.e. Rs. 3,02,500/-. The ld. Counsel submitted that no expenditure is incurred on making investment in the group companies. The Ld. Counsel contended that the assessee company has its own funds as well as free reserves out of which the assessee company has made such ITA 2712/Mum/2014 5 investments. No loan is appearing in the balance sheet. No direct or indirect expenditure has been incurred during the year for making the investments. The ld. Counsel of the assessee company contended that the assessee company has not incurred any expenditure during the financial year 2009-10 to earn the exempt income. The ld. Counsel for the assessee company showed us the balance sheet of the assessee company which is placed in paper book filed with the Tribunal, wherein the share capital and reserves and surplus was shown at Rs. 40.79 crores and the investments were appearing to the tune of Rs. 9.1 crores as at 31-03-2010. The ld. Counsel also drew our attention to the P&L account wherein it reflected Rs. 9.24 crores as income from operations , and Rs. 42.13 lacs towards other income which mainly comprises interest income which is taxable. The ld. Counsel relied on the decision of Hon’ble Delhi High Court in the case of Cheminvest Ltd. v. CIT [2015] 61 taxmann.com 118 (Delhi) and submitted that since there is no dividend received by the assessee during the year, the ratio laid in the above case is applicable to the present case. The assessee company also relied upon the decision of Hon’ble Bombay High Court in the case of CIT v. HDFC Bank Limited , 366 ITR 505(Bom.).
The ld. D.R., on the other hand, relied upon the orders of authorities below and submitted that the A.O. has rightly applied Rule 8D of Income Tax Rules ,1962 in the case of the assessee company to make disallowance u/s 14A of the Act. He submitted that disallowance of expenses which are attributable for earning exempt income is to be made and the same has to be computed as provided in Rule 8D of the Income Tax Rules,1962 which are applicable w.e.f. the assessment year 2008-09 as laid down by the Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd.(2010) 194 taxman 203( Bom.)
ITA 2712/Mum/2014 6
We have considered the rival contention and also perused the material on record. We have observed that the assessee company has made investment in its group companies of Rs. 9,10,00,000/- as at 31-03-2010 , while the same was Rs.3,00,00,00.00 as at 31-03-2009. We have observed that the assessee company has own funds of around Rs. 40.79 crores as at 31-03-2010 which comprises share capital and reserves as per balance sheet filed in the paper book. We have also perused the copy of balance sheet as well as the P&L account where it is clear that the assessee company has earned no dividend income during the previous year relevant to the assessment year and in view of the decision of Hon’ble Delhi High Court in the case of Cheminvest Ltd.(supra), the ratio laid down therein is squarely applicable to the present case of the assessee company . The ratio laid down by the Hon’ble Delhi High Court reads as under:- “…. The expression ‘does not form part of the total income’ in section 14A of the 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 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.” In our considered view based on our above discussions and reasoning , the CIT(A) is not correct in upholding the orders of the A.O. and hence we delete the disallowance made by the A.O. and as confirmed by the CIT(A) and allow the appeal filed by the assessee company. We order accordingly.
In the result, the appeal filed by the assessee company is allowed. Order pronounced in the open court on 8th February, 2016. आदेश क� घोषणा खुले �यायालय म� �दनांकः 08-02-2016 को क� गई ।