M/s. Varsha Corporation Ltd. Vs. Dy. CIT (ITAT Mumbai)
In the case under consideration, in the computation of income,the assessee had not claimed any exempt income. The expenditure claimed by it in the profit and loss account have not been shown to have been incurred for earning any exempt income during the year under consideration. Therefore, in our opinion,the FAA was not justified in confirming the dis allowance made by the AO, u/s.14A of the Act. In the cases relied upon by the assessee i.e. Cheminvest Limited and Ballarpur Industries Ltd.the Honorable courts have held that for making any dis allowance the existence of exempt income and incurring of expenditure to earn such income had to be proved.
FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-
Challenging the order dated 28/10/2016 of the CIT(A)-21, Mumbai the Assessee has filed the present appeal. Assessee -company,engaged in the business of import and trading in plastic raw materials, chemicals and trading in bullion, filed its return of income on, 27/09/2013, declaring income of Rs. 2,83,12,120/-The Assessing Officer (AO) completed the assessment on 24/11/ 2015, u/s.14A3(3) of the Act, determining its income at Rs. 2.84 crores.
2. Effective ground of appeal is about confirming the dis allowance of Rs. 1.62 lakhs u/s.14A of the Act read with rule 8D of the Income Tax Rules, 1962 (Rules). During the assessment proceedings the AO found that the assessee had made certain investment in shares. He held that ordinarily some expenditure would definitely have been incurred for making and maintaining such investments, that the assessee had not worked out any dis allowance u/s. 14A. He referred to the CBDT circular no. 05/2014 A and sub rule 2 of the rule 8D of the Rules. Amount equal to 1/2% of the average of the value of investment as appearing in the balance sheet of the assessee on the first day and the last day of the previous year was considered for dis allowance as per Rule 8D (2)(iii) of the Rules r.w.s.14A of the Act and a dis allowance of Rs. 1,62,479/- was made.
3. Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA) and made elaborate/ detailed submissions. It relied upon certain case laws also. After considering the available material, he held that the computation of income, filed by the assessee,showed that it had not made any dis allowance u/s. 14A, that it had claimed that no expenses was incurred/ allocable towards earning exempt income, that it had not produced any evidence to prove the claim that investments made by it were strategic investments, that investment in a subsidy entity would not make it a strategic investment, that if the investments were strategic same would have been shown under the head non-current investments, that the AO had specifically mentioned that he was not satisfied with the claim of the assessee that no expenditure was incurred for earning of exempt income, the AO had rightly applied rule 8D (2) (iii)of the Rules.He referred to the case of Bellwether Micro Finance Funds Private Ltd (108 DTR-/Hyd.Trib-389) and upheld the order of the AO.
4. During the course of hearing before us the Authorized Representative (AR) stated that the assessee had not incurred any expenditure for earning tax-free income,that it had made strategic investment only,that it had made investments relating to Rs. 3.24 crores in the equity shares of its associated group companies, that the investment in those 100% subsidiaries were shown as noncurrent investment in note number eight of its audited account, that during the year under consideration it had not earn any exempt income from the investment, that the investments were made with sole object of controlling group entities, that the administrative and interest expenses were incurred for carrying out its normal business activity,that the no part of expenses could be considered as eligible to earning of exempt income.He relied upon the cases of Cheminvest Limited (378 ITR 33), Ballarpur Industries Ltd (ITA No. 51 of 2016 of the honorable High Court, Nagpur bench) and Bharat Serums and Vaccines Ltd. (49 CCH 50). The Departmental Representative (DR) supported the order of the AO and the FAA.
5. We have heard the rival submissions and perused the material before us. We find that during the year under consideration the assessee had not claimed any exempt income from the investments made by it, that during the last assessment year it had made investment in its 100% subsidiary companies, that it had not claimed any expenditure for earning exempt income, that the AO had not mentioned the figure of the expenditure claimed to have been incurred for earning the income which was not taxable, that he had referred to the Circular of the Board to make the dis allowance, that the FAA had ignored the fact that investment in the subsidiaries was shown in the balance sheet under the head non-current assets. We are aware that the AO.s are bound to follow the circulars/instructions/directions of the Board. But, such instructions are not binding on the assessee. For making any dis allowance u/s.14A r.w. 8D of the Rules the AO has to prove two things that the assessee had earned exempt income and that it had claimed certain expenditure against such income which was not offered for taxation. The basic purpose to introduce the section was to discourage the practice of the assessees who would claim to deductions i.e. claiming exempt income and against such income claiming expenditure. If an assessee does not earn any exempt income income in a particular year then the provisions of section 14A would not be applicable. The provision were included in the Act, to prevent the misuse of certain exemptions/deductions/ rebate/ concessions allowed to the assessees, cannot be used indiscriminately. The basic facts are to be ascertained first. In the case under consideration, in the computation of income,the assessee had not claimed any exempt income. The expenditure claimed by it in the profit and loss account have not been shown to have been incurred for earning any exempt income during the year under consideration. Therefore, in our opinion,the FAA was not justified in confirming the dis allowance made by the AO, u/s.14A of the Act. In the cases relied upon by the assessee i.e. Cheminvest Limited and Ballarpur Industries Ltd.the Honorable courts have held that for making any dis allowance the existence of exempt income and incurring of expenditure to earn such income had to be proved. We would like to refer to the paragraph 23 of the judgment of Cheminvest Limited (supra) and it reads as under:
“23. In the context of the facts enumerated herein before the court answers the question framed by holding that the expression “does not form part of the total income” in section 14A of the Act 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.”
Considering the above and the particular facts and circumstances of the case,we reverse the order of the FAA and decide the effective ground of appeal in favor of the assessee.
As a result, appeal filed by the assessee stands allowed.
Order pronounced in the open court on 3rd January 2018.