Nekkanti Sea Foods Ltd Vs CIT (ITAT Hyderabad)
It is settled position of law that the provisions of section 14A can be applied to quantify the expenses in relation to exempt income.
Since the exempt income is Nil, section 14A will not apply. The Rule 8D can be applied only when there is difficulty in finding the expenditure relating to exempt income. The provisions of section 14A and Rule 8D will not apply to the present case.
FULL TEXT OF THE ITAT JUDGMENT
This appeal filed by the Revenue is directed against the order of CIT(A) – 4, Hyderabad, dated 31/08/2017 for AY 2013-14. The assessee also filed CO.
2. Brief facts of the case are, the assessee company engaged in the business of manufacturing/process of marine products. It filed its return of income for the AY 2013-14 on 21/09/2013 declaring total income at Rs. 18,09,92,500/- and book profit u/s 115JB at Rs. 19,36,26,011/-, which was processed u/s 143(3) of the I.T. Act. Subsequently, the case was selected for scrutiny and accordingly, notices u/s 143(2) and 142(1) of the Act were issued to the assessee. Assessment u/s 143(3) was completed by making disallowance of Rs. 58,92,004/- u/s 14A of the Act.
3. When the assessee preferred an appeal before the CIT(A), the CIT(A) observed that as per the statement of facts and details like P&L Account furnished by the AR of the assessee were verified and found that there is no dividend income. He further observed that in assessee’s own case for AY 2012-13, he dealt similar issue in favour of the assessee since there is no dividend income. He, therefore, deleted the disallowance made by the AO u/s 14A of the Act.
4. Aggrieved by the order of CIT(A), the revenue is in appeal before us raising the following grounds:
“1. The CIT(A) erred in deleting the disallowance u/s 14A of Rs. 58,92,004/-.
2. The CIT(A) erred in ignoring CBDT’s Circular No.5 of 2014 dated 11.02.2014.
3. The CIT(A) erred in ignoring the Hon’ble Supreme Court decision in the case of CIT Vs Walfort Share of Stock Brokers P Ltd [326 ITR 1], wherein it was held that the mandate of section 14A was to curb the practice of claiming deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by the way of exempt income without making any apportionment of expenses incurred in relation to exempt income.
4. Any other ground that may be urged at the time of hearing.”
5. Brief facts relating to the issue are, the AO observed that during the year under consideration, the assessee company has shown an amount of Rs.21,24,78,808/- towards investment in unquoted equity shares of associates & others and mutual funds as against Rs.15,42,78,808/- of last year. The dividend income earned from these investments is exempt. Further, it is seen that the assessee company debited an amount of Rs.2,04,32,375/- towards finance costs. During the course of assessment proceedings, the AO asked the assessee company to furnish the details of expenditure incurred in relation to the above investments and show cause as to why the provisions of section 14A r.w. Rule 8D may not be invoked. In response, the assessee company stated that section 14A of the Income Tax Act, 1961 is not applicable in their case as it had not invested said amount from any borrowed funds.
5.1 After considering the submissions of the assessee, the AO observed that as per the provisions of section 14A, expenditure incurred in relation to income which does not form part of total income shall be disallowed. Further, the provisions of the section also apply to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income as per sub-section (3) of section 14A. He observed that the CBDT vide its Circular No.5/2014 dated 11.02.2014 clarified that the Rule 8D read with section 14A of the Income Tax Act, 1961 also provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income. Accordingly, the AO computed the disallowance u/s 14A r.w. Rule 8D as under:
