THE INCOME TAX APPELATE TRIBUNAL
DELHI BENCH “SMC-2”: NEW DELHI

ITA No. 4603/Del/2014
AY: 2010-11

M/s Nitishree International Pvt. Ltd (Appellant0 vs ITO (Respondent)
Date of Order : 11-09-2015

ORDER

This is an appeal filed by assessee against the order of Ld. CIT(A) dated 09.6.2014. The assessee has raised the following grounds:

“1. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. A.O. in making disallowing a sum of Rs.2,21,204/- u/s 14A of the Act r.w.s. 8D of Income Tax Rules.

2. That in any case and in any view of the matter, action of Ld. CIT(A) in confirming the action of AO in making disallowance of Rs. 2,21,204/- u/s. 14A r.w.s. 8D is bad in law and against the facts and circumstances of the case.

3. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in not reversing the action of AO in charging the interest u/s./ 234B of the I.T. Act, 1961.

4. That the appellant craves to leave to add, modify, amend or delete any of the grounds of appeal at the time of hearing and all the above grounds are without prejudice to each other.”

2. At the outset, Ld. Counsel for the assessee submitted that the assessee had not earned any exempt income and AO has made disallowance in dispute which is contrary to the decision of the Hon'ble Delhi High Court in the case of CIT Vs Holcim India Pvt. Ltd. in I.T.A. No. 486/2014 and 299/2014 (90CCH081 Del. High Court), the case of assessee is fully covered in its favour. It was submitted that Hon'ble High Court has held that where there was no exempt income, no disallowance u/s 14A can be made. Ld. A.R. further submitted that the A.O. without pinpointing any expenditure relatable to exempt income, has calculated disallowance u/s 14A as per Rule 8D and Ld. CIT(A) has also confirmed the same, which was also against the law. Ld. Counsel for the assessee further submitted that the present case is also squarely covered by the decision of the ITAT, Delhi ‘E’ Bench, decided in the case of M/s Mayank Auto Engineers P Ltd. vs. DCIT wherein the Tribunal vide order dated 25.3.2015 has followed the decision of the Hon’ble Delhi High Court in the case of CIT vs. Holcim India Pvt. Ltd. (Supra).

3. Ld. D.R. on the other hand relied upon the orders of authorities below.

4. I have heard rival parties and have gone through the material placed on record. I find that A.O. as well as Ld. CIT(A) has not pointed out any income earned by assessee which was exempt income. I find that there was no exempt income pointed out by the Revenue Authorities and A.O. had made addition holding that assessee had source of exempt income. Section 14A of the Income Tax Act cannot be invoked when no exempt income was earned. I find that the case of assessee is fully covered in its favour by the order of the ITAT, Delhi ‘E’ Bench, decided in the case of M/s Mayank Auto Engineers P Ltd. vs. DCIT (Supra) as well as the decision of the Hon'ble Delhi High Court in the case of CIT Vs Holcim India Pvt. Ltd. (Supra) wherein, the Hon’ble High Court under similar circumstances has held as under:

“13. We are confused about the stand taken by the appellant-Revenue. Thus, we had asked Sr. Standing Counsel for the Revenue, to state in his submission raised was that the shares would have yielded dividend, which would be exempt income and therefore, the CIT(A) had invoked Section 14A to disallow the entire expenditure. The aforesaid submission does not find any specific and clear narration in the reasons or the grounds given by the CIT(A) to, make the said addition. Possibly, the CIT(A), though it is not argued before us, had taken the stand that the respondent- assessee had made investment and expenditure was incurred to protect those investments and this expenditure cannot be allowed under Section 14A.

14. On the issue whether the respondent-assessee could have earned dividend income and even if no dividend income was earned, yet Section 14A 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. Mis. Lakhani Marketing Incl., ITA No. 970/2008, 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.2,03Js2/- made by the Assessing Officer was in order" .

15. Income exempt under Section 10 in a particular assessment year, may not have been exempt earlier and can become taxable in future years. Further, whether income earned in a subsequent year would or would not be taxable, may depend upon the nature of transaction entered into in the subsequent assessment year. For example, long term capital gain on sale of shares is presently not taxable where security transaction tax has been paid, but a private sale of shares in an off market transaction attracts capital gains tax. It is an undisputed position that respondent assessee is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to management. Possibility of sale of shares by private placement etc. cannot be ruled out and is not an improbability. Dividend mayor may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend. When declared, it is subjected to dividend distribution tax.

16. What is also noticeable is that the entire or whole expenditure has been disallowed as if there was no expenditure incurred by the respondent assessee for conducting business. The CIT(A) has positively held that the business was set up and had commenced. The said finding is accepted. The respondent-assessee, therefore, had to incur expenditure for the business in the form of investment in shares of cement companies and to further expand and consolidate their business. Expenditure had to be also incurred to protect the investment made. The genuineness of the said expenditure and the fact that it was incurred for business activities was not doubted by the Assessing Officer and has also not been doubted by the CIT(A).

17. In these circumstances, we do not find any merit in the present appeals. The same are' dismissed in limine.”

5. I have already noted that assessee had not earned any exempt income during the year and therefore, following the above orders of Hon'ble Delhi High Court as well as the Coordinate Bench of ITAT, New Delhi, disallowance u/s 14A was not warranted. In view of the above, grounds 1 & 2 are allowed.

Ground No.3 is consequential and does not require adjudication.

6. In the result, the appeal of assessee stands allowed.

Order pronounced in the open court on 11th September, 2015.

Sd/-
[H.S. SIDHU]
JUDICIAL MEMBER
Date:11/9/2015