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TMI Blog2015 (1) TMI 1103X X X X Extracts X X X X X X X X Extracts X X X X ..... s the Act). 2. Facts of the case in brief are that the assessee was engaged in the business of manufacturing and trading of pharmaceuticals and filed its return of income on 27.9.2009 declaring an income of ₹ 55,35,110/- which was processed u/s 143(1) of the IT Act, 1961 (hereinafter referred to as the Act) on 8.3.2011. Later on the case was selected for scrutiny. During the course of assessment proceedings the AO noticed that the assessee had been investing in quoted and unquoted equity shares. He required the assessee to explain as to why disallowance in terms of provisions of Rule 8D may not be made for addition u/s 14A of the Act. The assessee vide letter dated 4.10.2011 submitted to the AO as under: The company has made investments in the unquoted shares of its subsidiaries companies which are wholly owned subsidiaries. Hence there is no expenditure required to be incurred to invest in wholly owned subsidiaries. The company had also invested a small sum of ₹ 20,000/- in purchase of shares of a quoted company but that investment was made long back and has been written off in the books as its market value is nil. Hence no income on such investment would accrue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isallowance of interest which is not directly attributable to any particular income or receipt, and; iii) Thirdly, an amount equal to one-half percent of the average of the value of the investment, income from which does not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. 6. The ld. CIT(A) further observed that the disallowance as envisaged above is aggregate of all the three, therefore, in assessee s case as per the provisions of Rule 8D aggregate of all the three disallowance have to be made. He also observed that the contention of the assessee that no disallowance can be made since no exempt income had been earned does not hold good in view of the decision of the ITAT Special Bench Delhi in the case of M/s Chem Invest Ltd. in ITA No. 87/Del/2008 which clearly held that disallowance u/s 14A of the Act has to be made even if no exempt income has been earned by the assessee. He, therefore, confirmed the disallowance made by the AO. 7. Now the assessee is in appeal. The ld. Counsel for the assessee reiterated the submissions made before the authorities below and further submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the Act. 11. From the aforesaid condition it would be clear that concerned assessment year as there is no income which does not form part of the taxable income under the Act i.e. dividend from the shares, in our opinion the provisions of section 14A of the Act cannot be invoked. In the present case it is an admitted fact that the assessee was not in receipt of any dividend income as such there was no income from the investment in question which was taxable under the I.T Act, therefore, the AO wrongly invoked the provisions of section 14A of the Act to disallow various interest payments. On a similar issue their lordships of the Hon ble Punjab High Court in the case of CIT Vs M/s Lakhani Marketing Incl. in ITA No. 970/2008 vide order dated 02.04.2014 observed at paras 9 to 11 as under: 9. The CIT(A) vide order dated 24.6.2004, Annexure A.II recorded as under:- 7.2 Keeping in view the above facts and circumstances of the case it is held that the AO was not correct in applying section 14A of the IT Act in disallowing the expenditure on account of interest amounting to ₹ 46,91,684/-. It was incumbent on the AO to establish a nexus between the expenditure incurre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. 10. Moreover, the AO has not established the nexus between invested funds and the interest bearing funds, since the investments in shares are in the years 1995-96, 1998-99 and 1999-2000 and the interest disallowance is for the assessment years 2000-01 and 2001-02. On the contrary perusal of the balance sheet for the year ending 31.3.1995, 31.3.1998 and 31.3.1999, it is clear that interest bearing funds have not been utilized for investment for purchase of shares. 11. For the aforesaid reasons, we see no reason to interfere with the order of CIT(A) concerning assessment year 2000-01 and 2001-02 and hence the decision of CIT (A) in deleting the disallowance of interest by invoking section 14A of the Act is correct and in accordance with law. 11. In view of the aforesaid findings, which could not be shown to be erroneous, the plea of the revenue cannot be accepted. Further, this Court in Hero Cycles Limited s case (supra) recorded as under:- 5. In view of finding reproduced above, it is clear that the expenditure on interest was set off against the income from interest and the investments in the share and funds were out of the dividend proceeds. In view of thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. M/s. 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 res ..... X X X X Extracts X X X X X X X X Extracts X X X X
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