AKSHATA MERCANTILE P.LTD,MUMBAI vs. DCIT 3(1), MUMBAI

In both the appeals, the dispute pertains to disallowance made by the Assessing Officer under section 14A of the Act by applying the provisions of Rule 8D of the Income Tax Rules, 1962.

Briefly put, the relevant facts are as follows. The assessee is a company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in the business of trading and importers of iron & steel and allied products. For the year under consideration, it filed a return of income declaring a total income of Rs.4,98,07,510/-, which was subject to a scrutiny assessment, whereby the total income has been assessed at Rs.5,39,71,400/-. One of the additions made to the returned income was on account of application of section 14A of the Act amounting to Rs.38,55,744/-. The Assessing Officer noted that the assessee had made investments in shares and Mutual funds, which give rise to exempt income and, therefore, he show caused the 3.1 In response, the assessee company made a preliminary contention, which was to the effect, that since there was no exempt income, the provisions of section 14A of the Act would not be applicable. Without prejudice to the aforesaid, assessee also contended that no disallowance was required to be made by applying provisions of section 14A of the Act. The Assessing Officer disagreed with the assessee and observed that even if there is no dividend income during a particular year, the expenditure relatable to the investment in shares/Mutual funds, which would give rise to exempt dividend income in future, is disallowable under section 14A of the Act. Accordingly, the Assessing Officer applied the formula laid down in rule 8D(2) of the Rules and computed the disallowance of Rs.38,55,744/- 3.2 In appeal before the CIT(A), assessee company reiterated its plea that in the absence of any exempt income, disallowance under section 14A of the Act was not merited at all. Apart therefrom, assessee also assailed the computation of disallowance under section 14A of the Act at Rs.38,55,744/-. The CIT(A) allowed partial relief and scaled down the disallowance to Rs.29,32,955/- thereby resulting in a relief of Rs.9,22,789/- to the assessee. Against the aforesaid, the assessees as well as the Revenue are in cross-appeals.

Before us, the Ld. Representative for the assessee has reiterated the preliminary plea raised before the lower authorities, which is to the effect that in the absence of actual receipt of exempt income during the year under consideration, no disallowance under section 14A of the Act (i) Hon’ble Delhi High Court decision in the case of Cheminvest Limited vs. CIT, ITA 749/2014 order dated 02.09.2015; (ii) Hon’ble Gujarat High Court decision in the case of CIT vs. Corrtech Energy P. Ltd., 372 ITR 97 (Guj); and, (iii) Hon’ble Bombay High Court decision CIT vs. Delite Enterprises, of 2009 dated 26/02/2009

On this preliminary aspect, Ld. Departmental Representative appearing for the Revenue has merely reiterated the stand of the lower authorities without controverting the legal position sought to be canvassed by the assessee on the basis of the aforestated judgments.

We have carefully considered the rival submissions. Section 14A of the Act permits the Assessing Officer to disallow an expenditure incurred in relation to income which does not form part of the total income under this Act for the purposes of computing the total income. In the present case, a pertinent point raised by the assessee is that during the year under consideration no exempt income has been earned or received by the assessee and, therefore, the provisions of section 14A of the Act are inapplicable for the year under consideration. We find that the aforesaid plea of the assessee is directly supported by the judgment of the Hon’ble Delhi High Court in the case of Cheminvest Limited (supra). As per the Hon’ble Delhi High Court, section 14A of the Act envisages that there should be an actual receipt of exempt income before any expenditure in relation to such income can be disallowed by 5 (Assessment Year : 2009-10) invoking section 14A of the Act. In the absence of any decision to the contrary brought out by the Ld. Departmental Representative, we uphold the plea of the assessee, which is supported by the judgment of the Hon’ble Delhi High Court in the case of Cheminvest Limited (supra) as well as by the judgment of Hon’ble Gujarat High Court in the case of Corrtech Energy P. Ltd., (supra). Accordingly, we set aside the order of the CIT(A) and direct the Assessing Officer to delete the entire disallowance of Rs.38,55,744/- made by the Assessing Officer by invoking section 14A of the Act.

Resultantly, whereas the appeal of the assessee is allowed, and that of the Revenue is dismissed.