METRO CERAMIC PVT LTD, RAJKOT V. DCIT, CIRCLE-1(2), RAJKOT, RAJKOT

ITA 219/RJT/2023

• Counselvise Citation: [2024] 101 COUNSELVISE.COM (IT) 5839 (ITAT-RAJKOT)
• Duration Of Justice: 1 year(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-07-2024
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 10-06-2024
• Assessment Year: 2013-2014
• Appeal Filed On: 02-07-2023
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ASHISH KUMAR PANDE
• Keywords: Earning of tax free income; Rule 8D
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, RAJKOT BENCH, RAJKOT BEFORE DR. ARJUN LAL SAINI, ACCOUNTANT MEMBER AND SHRI DINESH MOHAN SINHA, JUDICIAL MEMBER आयकर अपील सं./ITA No.219/RJT/2023 (Assessment Year: 2013-14) (Hybrid Hearing) M /s M e t ro Ce ram ic Pv t . L td ., Ko m al C h am be rs , Kas tu rb a R o ad , Op p . C h aud h ary Hi gh Sc ho o l, R aj ko t -3 6 0001 . Vs. T h e DC IT, C i rc le -1 (2 ) R aj ko t, M o rb i. थायीलेखासं./जीआइआरसं./ P AN/ G IR No .: AADCM1663R (अपीलाथ /Assessee) ( यथ /Respondent) नधा रतीक ओरसे / Assessee by : Shri Mehul Ranpura, AR राज वक ओरसे/Revenue by : Shri Ashish Kumar Pande, Sr. DR स ु नवाईक तार ख/ Date of Hearing : 11/06/2024 घोषणाक तार ख/Date of Pronouncement : 09/07/2024 आदेश/ORDER PER ARJUN LAL SAINI, AM: The captioned appeal filed by the assessee, pertaining to Assessment Year 2013-14, is directed against the order passed by the Learned Commissioner of Income Tax (Appeals),(NFAC), which in turn arises out of an assessment order passed by the Assessing Officer u/s 143(3) of the Income Tax Act, 1961 (in short, ‘the Act’), vide order dated 29/03/2016. 2. The grounds of appeal raised by the assessee are as follows: I.T.A No. 219/Rjt/2023 A.Y. 2013-14 M/s.Metro Ceramic Pvt. Ltd. vs. DCIT 2 “1.The grounds of appeal mentioned hereunder are without prejudice to one another. 2.The Ld.Commissioner of Income-Tax (Appeals), National Faceless Appeal Centre, Delhi (hereinafter referred to as the “CIT(A)”] erred on facts as also in law in retaining disallowance of interest expense of Rs.11,59,661/- u/s 14A r.w.s 8D of the Act. The disallowance is totally unjustified on facts as also in law and may kindly be deleted. 3.Your Honour’s assessee craves leave to add, to amend, alter, or withdraw any or more grounds of appeal on or before the hearing of appeal.” 3. Succinctly, the factual panorama of the case is that assessee before us, is a Private Limited Company, and during the assessment proceedings, the assessing officer, on perusal of Profit and Loss account and balance sheet, observed that the assessee has made investments in shares. The only income likely to arise from this investment is ‘dividend’, which is exempted and do not form part of the gross total income. However, no expenses were attributed by the assessee, towards earning of this income. The assessee should have computed the disallowance, as required by section 14A read with rule 8D of the Rules. The assessing officer, also referred Circular No.5/2014 dated11/02/2014 of CBDT, which has clarified that disallowance of expenses u/s 14A is required even when no exempt income has been earned during the financial year. Since no such disallowance was computed by the assessee, therefore, the assessing officer computed the disallowance, as follows: (A) Amount of interest paid = 65,94,872 (Interest amount is taken after reducing the amount of interest on unsecured loans, which is already added above) (B) Average value of investment (30000000 + 3000000) = 300000000 2 (C) Average value of Assets (177721533 + 214184389) = 195952961 (i) A X B = 6594872 x 30000000 = 1009661 C 195952961 I.T.A No. 219/Rjt/2023 A.Y. 2013-14 M/s.Metro Ceramic Pvt. Ltd. vs. DCIT 3 (ii) 0.5% of average value of investment = 150000 Disallowance u/s.14A(i) + (ii) = 10,09,661 + 1,50,000) = 11,59,661/- 4. As per the above computation, the assessing officer, made the disallowance under section 14A of the Income Tax Act, 1961, to the tune of Rs. 11,59,661/-. 5. Aggrieved by the order of the assessing officer (AO), the assessee, carried the matter, in appeal, before Ld.CIT(A), who has confirmed the action of the assessing officer. The ld CIT(A) observed that disallowance u/s 14A read with Rule 8D of the Rules, made by the assessing officer (AO), after recording satisfaction and in view of the failure of the assessee, to justify its claim that no expenses were incurred towards exempted income. The ld CIT(A) noted that disallowance u/s 14A can be made, where no exempted income has been earned during the year and for that the ld. CIT(A) relied on the CBDT Circular No 5/2014, dated 11. 12. 2014, wherein it has been categorically stated and clarified that Rule 8D read with section 14A of the Act, provides for disallowance of expenditure, even when taxpayer has not earned any exempt income in a previous year. Further, Ld CIT(A) referred the recent amendment made to Section 14A, by the Finance Act, 2022, wherein a new clarificatory explanation has been inserted, which reads as follows: "[Explanation. For the removal of doubts, it is hereby clarified that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not forming part of the total income.]" I.T.A No. 219/Rjt/2023 A.Y. 2013-14 M/s.Metro Ceramic Pvt. Ltd. vs. DCIT 4 Therefore, ld. CIT observed that above said explanation is applicable for all the proceedings and the same is clarificatory in nature and it reiterates and further strengthens the stand of CBDT vide Circular No 5/2014 (supra). Based on the above facts, ld.CIT(A) confirmed the addition made by the assessing officer. 6. Aggrieved by the order of the Ld.CIT(A), the assessee is in further appeal before us. 7. Shri Mehul Ranpura, Learned Counsel for the assessee, pleaded that assessee-company has own interest free funds, by way share capital and reserve and surplus, which are more than the investment made by the assessee-company. Since own funds of the assessee are more than the investments made by the assessee, therefore, it will be presumed that the investment was made by the assessee, out of the interest free own fund. Hence, the disallowance should not be attracted, under section 14A of the Income Tax Act, 1961, for that Ld.Counsel for the assessee, relied on the judgment of Jurisdictional High Court of Gujarat in the case of Shreno Ltd, 102 taxmann.com 129 (Guj). 8. Learned Counsel for the assessee, also argued that during the assessment year, under consideration, the assessee has not earned any exempt income, since no exempt income was earned by the assessee, during the assessment year under consideration, therefore, no disallowance is attracted, for that Ld.Counsel for the assessee, relied upon the judgement of the Hon’be Madras High Court in the case of CIT v/s. Chettinad Logistics (P.) Ltd.[2017]80 taxmann.com 221 (Mad) wherein it was held that “ Section 14A I.T.A No. 219/Rjt/2023 A.Y. 2013-14 M/s.Metro Ceramic Pvt. Ltd. vs. DCIT 5 cannot be invoked where no exempt income was earned by the assessee in relevant assessment year.” Therefore, the ld. Counsel for the assessee, contended that addition made by the assessing officer may be deleted. 9. On the other hand, the Ld. DR for the Revenue, submitted that even if there is no exempt income, the disallowance u/s 14A of the Act, should be attracted. The Ld.DR also stated that the explanation inserted by the Finance Act, 2022 in section 14A, with effect from 1-4-2022, which provides that provisions shall apply whether or not exempt income has accrued, arisen or received. This amendment is clarificatory in nature and thus applicable retrospectively. Therefore, the Ld.DR stated that whether the assessee has earned the exempt income or not, it is immaterial and the disallowance should be made in the hands of the assessee, as per the CBDT Circular No.5/2014, dated 11.12. 2014. 10. The Ld. DR for the Revenue also stated that SLP filed by the revenue has been admitted by the Hon’ble Supreme Court in the case of PCIT vs. Delhi International Airport (P.) Ltd.[2022] 143 taxmann.com 209, wherein the notice issued in SLP filed against impugned order of High Court that where assessee did not have exempt income, no disallowance could be made under section 14A read with rule 8D of the Rules. 11. In rejoinder, the ld Counsel stated that only SLP is admitted by the Hon’ble Supreme Court, and there are no findings of the Hon’ble Supreme Court on this issue yet. Thus, admission of SLP does not mean that it has become the ratio of the Hon’ble Supreme Court. Therefore, the judgment of I.T.A No. 219/Rjt/2023 A.Y. 2013-14 M/s.Metro Ceramic Pvt. Ltd. vs. DCIT 6 the respective High Courts will prevail till the Hon’ble Supreme Court adjudicates the issue on merit. 12. We have heard both sides in detail and also perused the records of the case including the paper book filed by the assesses-company. We note that assessee has own surplus fund by way of share capital and reserves, vide assessee`s paper book page no.12 wherein we find that in the balance-sheet of the assessee, interest free funds exist, during the previous year at Rs.3.79 crores and investment were made out of own interest free funds. Since the said investment was made by the assessee in the previous year, therefore interest free funds of previous year has to be examined. We find that interest free funds of the assessee are more than investment made by the assessee in shares, hence, disallowance under section 14A of the Act, should not be attracted. We note that the Hon’ble Jurisdictional High Court in the case of PCIT v/s. Shreno Ltd [2019] 102 taxmann.com 129(Gujarat) has held that mere fact that assessee availed of mixed funds i.e. interest free as well as interest bearing funds, and utilised them for making investments in securities and is earning tax free income, then applicability of section 14A, read with rule 8D of the Rules would not be automatic and hence no disallowance should be made. 13. We also note that during the year under consideration the assessee has not earned any exempt income therefore no disallowance is attracted in the hands of the assessee. The Hon`ble High Court of Madras in the case of Chettinad Logistics (P.) Ltd, [2017] 80 taxmann.com 221 (Madras), held that section 14A of the Act, cannot be invoked where no exempt income was earned by assessee in relevant assessment year. We find that assassee under I.T.A No. 219/Rjt/2023 A.Y. 2013-14 M/s.Metro Ceramic Pvt. Ltd. vs. DCIT 7 consideration did not earn any exempt income, during the assessment year under consideration, hence, no disallowance should be made in the hands of the assessee. We also note that assessee`s case under consideration, pertains to assessment year 2013-14, hence the amended provisions of the Act does not apply to the assessee. Therefore the arguments advanced by the Ld.DR for the revenue, to the effect that “whether the assessee has earned the exempt income or not, the disallowance should be made in the hands of the assessee, as per the CBDT Circular No.5/2014 (supra)” is not acceptable as the assessee did not earn exempt income. Therefore, based on the above facts and circumstances, we delete the addition made by the assessing officer to the tune of Rs. 11,59,661/-, and allow the appeal of the assessee. 14. Before parting, we may also refer to an argument put-forth by the learned DR for the revenue, to the effect that SLP filed by the Revenue has been admitted by the Hon’ble Supreme Court, in the case of PCIT vs. Delhi International Airport (P.) Ltd (supra), therefore, judgement of the Hon`ble Supreme Court, favours the Revenue. We note that admission of an SLP signifies that the Hon`ble Supreme Court has decided to hear the case on its merits. While it may not involve a detailed reasoned judgement immediately, the act of admission of SLP, is a significant step in the legal process, indicating that the Supreme Court acknowledges the case and will proceed to examine it further and deliver the judgement in future, thus, till that time, the judgement of the respective high courts will prevail. Therefore, we note that admission of a special leave petition (SLP) by the Hon`ble Supreme Court, does not mean and does not constitute a final judgement on the merits of the case by the Hon`ble Supreme Court. The actual final judgement will be I.T.A No. 219/Rjt/2023 A.Y. 2013-14 M/s.Metro Ceramic Pvt. Ltd. vs. DCIT 8 rendered, after the Supreme Court has heard arguments from both sides and thoroughly considered the legal issues involved. Therefore, mere admission of an SLP does not mean that it is a final judgement of the Hon`ble Supreme Court. Thus, we find no merit in the submissions put forth by the learned DR, which is hereby rejected. 14. In the result, the appeal filed by the assessee, is allowed. Order pronounced in the open court on 09-07-2024 Sd/- Sd/- (DINESH MOHAN SINHA) (A. L. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER Rajkot Dated: 09/07/2024 आदेश क त ल प अ े षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Rajkot 6. Guard file. By order/आदेश से, // TRUE COPY // Assistant Registrar/Sr. P.S./P.S. ITAT, Rajkot