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TMI Blog2015 (11) TMI 1548X X X X Extracts X X X X X X X X Extracts X X X X ..... e Income Tax Act, 1961 ['Act'] is bad in law. 2. That in the facts and circumstances of the case & in law the Ld. CIT (A) grossly erred in interpreting Section 14A and Rule 8D by concluding that Rule 8D provides for allocation of expenditure relatable to exempt income and that such expenditure is to be disallowed even when there is actually no exempt income during the previous year." 3. The facts and circumstances in both the years are similar. Therefore, we are discussing the facts for assessment year 2008-09. A search and seizure action u/s 132 of the Income Tax Act, 1961 (hereinafter 'the Act') was carried out in M/s. Diamond Hut Group of cases on 27.10.2009. The case of the assessee was also covered in operation u/s 132 of the Act and accordingly, notice u/s 153A was issued on 13.04.2010. In response to the notice, the assessee had filed return of income, declaring a total Income of ₹ 23,01,940/- on 07.09.2010. The AO issued notice u/s 143(2) on 14.09.2010 and subsequently another notice u/s 143(2) was issued on 12.07.2011. Thereafter, a detailed questionnaire u/s 142(1) was issued on 12.08.2011. In response to the same, the AR for the assessee attended the procee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to exempt income as per the provision of section 14A read with Rule 8D, which is reproduced as under :- S.No. Particulars Amount (Rs.) 1 The amount of expenditure directly relating to income which does not form part total income A NIL 2 Expenditure on Interest B 81,13,085 3 The average of value of investment income from which does not or shall not form part of the total income [(Rs.Nil + ₹ 3,35,00,000) / 2] C 1,67,50,000 4 The average of total asset appearing in the balance sheet of the assessee [(Rs.2,47,24,108/- + ₹ 8,89,27,895/-) / 2] D 5,68,26,002 5 B X C/D 23,91,408 6 ½ % of the average of the value of investment, income from which does not or shall not form part of the total income. E 83,750 TOTAL (Sl.No.5 + Sl.No.6) 24,75,158 Thus, the AO completed the assessment u/s 153A read with section 143 (3) of the Act by adding the addition made on account of disallowance u/s 14A read with Rule 8D of ₹ 24,75,158/- in the income declared by the assessee of ₹ 23,01,940/-. Accordingly, the total income recomputed by the AO came to ₹ 47,77,098/- in assessment year 2008-09. (Total income as declared in ITR ₹ 23,01,940 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal income under this 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 this Act." From a bare perusal of the section it is clear that before making the disallowance the following conditions are to exist as noted by co-ordinate Bench in M/s Kee Pharma Ltd. ITA NO 5108/Del/2012: (i) There must be income taxable under the Act; (ii) The said income must not form part of the total income under the Act; (iii) There must be an expenditure incurred by the assessee; and (iv) The said expenditure must have a relation to the income which does not form part of the total income under the Act. It was further observed by the Tribunal that from the aforesaid condition it would be clear that in the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he order of the Bombay Bench of the Tribunals reproduced below:- "Regarding application of Section 14A of the Act, the contention of the learned Department Representative has to be rejected on the face of it inasmuch as the entire income of the assessee is taxable under the Act. Section 14A is applicable only when any part of the income is not to be included in the total income of the assessee and the expenditure relating to that part of income is claimed by the assessee as deduction. In such cases only, the expenditure relating to the exempted income can be disallowed and not otherwise. Since in the present case, the entire income is found to be taxable, no disallowance can be made under section 14A of 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. Observations made therein have to be read in that context. In the present case, admittedly, the assessee did not make any claim for exemption. In such a situation, section 14A could have no application." Similarly, the Hon'ble Jurisdictional High Court in the case of CIT Vs Holcim India (P) Ltd. in ITA Nos. 486 & 299/2014 vide order dated 05.09.2014 dismissed the appeal of the revenue and observed in para 14 as under: "14. On the issue whether the respondent-assessee could have earned dividend income and even if no dividend income was earned, yet Section14A 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 Li ..... X X X X Extracts X X X X X X X X Extracts X X X X
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