, . . , IN THE INCOME TAX APPELLATE TRIBUNAL SMC , BENCH MUMBAI . . , BEFORE SHRI R.C.SHARMA , ACCOUNTANT MEMBER ./ ITA NO. 55 3 6 / MUM/20 1 4 ( / ASSESSMENT YEAR : 2010 - 11 ) M/S MAGNA PUBLISHING CO. LTD., 1244, MAGNA HOUSE, 100/E, OLD PRABHADEVI ROAD, PRABHADEVI, MUMBAI - 400020 VS. ITO - 6(3)(3), MUMBAI ./ ./ PAN/GIR NO. : A A A C M 7506 N ( / APPELLANT ) .. ( / RES PONDENT ) /ASSESSEE BY : SHRI SHEKHAR GUPTA /REVENUE BY : SHRI JAVED AKHTAR / DATE OF HEARING : 29 /0 7 / 2015 / DATE OF PRONOUNCEMENT 29 /0 7 /2015 / O R D E R TH IS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF CIT(A) FOR THE A.Y. 2010 - 11 IN THE MATTER OF ORDER PASSED U/S.143(3) OF THE I.T.ACT, 1961. 2. THE ONLY GRIEVANCE OF THE ASSESSEE RELATES TO UPHOLDING DISALLOWANCE OF RS. 5,22,832/ - U/S.14A BY APPLYING RULE 8D. 3. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED. FACTS IN BRIEF ARE THAT THE ASSESSEES MAIN BUSINESS IS PUBLISHING OF MAGAZINES, TRADING IN BOOKS, NUTRITION PRODUCTS AND PRODUCING FILM. DURING THE COURSE OF SCRUTINY ASSESSMENT, THE AO DISALL OWED RS. 5,22,832/ - U/S.14A BY APPLYING RULE 8D. ITA NO. 55 3 6 /1 4 2 4. BY THE IMPUGNED ORDER, THE CIT(A) CONFIRMED THE DISALLOWANCE MADE BY THE AO, AGAINST WHICH THE ASSESSEE IS IN FURTHER APPEAL BEFORE THE TRIBUNAL. 5. LD. AR MR. SHEKHAR GUPTA, APPEARING ON BEHALF OF THE AS SESSEE CONTENDED THAT ASSESSEE HAS NOT EARNED ANY EXEMPT INCOME IN THE FORM OF DIVIDEND DURING THE YEAR AND AS SUCH NO DISALLOWANCE U/S. 14A SHOULD BE MADE. HE PLACED ON RECORD DECISION OF HON BLE ALLAHABAD HIGH COURT IN THE CASE OF SHIVAM MOTORS (P) LTD., 27 2 CTR (ALL) 277 AND OF GUJARAT HIGH COURT IN THE CASE OF CORRTECH ENERGY (P) LTD., 272 CTR (GUJ) 262 AND ALSO DECISION OF THE ITAT CHENNAI BENCH IN THE CASE OF MR. M..BASKARAN , ITA NO. 1717/MDS/2013 , WHEREIN IT WAS HELD THAT NO DISALLOWANCE U/S.14A R.W.R.8D IS TO BE MADE IN CASE THERE IS NO EX EMPT INCOME. 6. ON THE OTHER HAND, LD. DR MR. JAVED AKHTAR, APPEARING ON BEHALF OF THE REVENUE CONTENDED THAT RULE 8D IS APPLICABLE FOR THE RELEVANT ASSESSMENT YEAR 2010 - 11 UNDER CONSIDERATION, THEREFORE, REASONABLE DISALLOWANCE WAS WARRANTED AND THE AO H AS CORRECTLY COMPUTED THE DISALLOWANCE TAKING INTO ACCOUNT EXPENSES DEBITED IN THE PROFIT AND LOSS ACCOUNT. 7. I HAVE CONSIDERED RIVAL CONTENTIONS, CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND FOUND THAT ASSESSEE HAS NOT EARNED ANY EXE MPT INCOME IN THE FORM OF DIVIDEND DURING THE YEAR UNDER CONSIDERATION, HOWEVER, THE AO HAS DISALLOWED ASSESSEES CLAIM BY RELYING ON THE ITAT SPECIAL BENCH DECISION IN THE CASE OF CHEMINVEST ITA NO. 55 3 6 /1 4 3 LTD.121 ITD 318 AND STATED THAT EVEN IF THE ASSESSEE HAS NOT EAR NED ANY EXEMPT INCOME, STILL DISALLOWANCE U/S.14A R.W.R.8D IS TO BE MADE AND IT IS MANDATORY. I FOUND THAT ITAT COORDINATE (CHENNAI) BENCH IN THE CASE OF MR. M. BASKARAN (SUPRA), VIDE ORDER DATED 31 - 7 - 2014 HAS CONSIDERED THE DECISION OF ITAT SPECIAL BENCH IN THE CASE OF CHEMINVEST LTD.(SUPRA) AND AFTER RELYING ON THE DECISIONS OF HON BLE ALLAHABAD HIGH COURT, GUJARAT HIGH COURT AND BOMBAY HIGH COURT, DELETED THE DISALLOWANCE OF EXPENSES MADE U/S.14A R.W.R.8D, WHERE THE ASSESSEE HAS NO EXEMPT INCOME. THE PRE CISE OBSERVATION OF THE BENCH WAS AS UNDER : - 5. HEARD BOTH SIDES. PERUSED ORDERS OF LOWER AUTHORITIES AND SUBMISSIONS MADE BY THE ASSESSEE AND THE DECISIONS IN RELIED ON. NO DOUBT IN THE DECISION OF THE SPECIAL BENCH OF DELHI TRIBUNAL IN THE CASE OF CHEMI NVEST LTD. VS. ITO (SUPRA), THE SPECIAL BENCH HELD THAT DISALLOWANCE UNDER SECTION 14A CAN BE MADE EVEN IN THE YEAR IN WHICH NO EXEMPT INCOME HAS BEEN EARNED OR RECEIVED BY THE ASSESSEE. THIS DECISION OF SPECIAL BENCH OF THE TRIBUNAL HAS BEEN IMPLIEDLY OVE RRULED BY THE DECISIONS OF HIGH COURTS IN THE FOLLOWING CASES: 6. IN THE CASE OF M/S. SHIVAM MOTORS P.LTD. (SUPRA), BEFORE THE HONBLE ALLAHABAD HIGH COURT, THE REVENUE RAISED THE FOLLOWING QUESTION OF LAW: - WHETHER ON THE FACTS AND IN THE CIRCUMSTANC ES OF THE CASE AND IN LAW, THE INCOME TAX APPELLATE TRIBUNAL WAS JUSTIFIED IN UPHOLDING THE DECISION OF CIT(A) IN DELETING THE DISALLOWANCE OF ` 2,03,752/ - U/S.14A IGNORING THE FACT THAT THERE IS DIFFERENCE OF OPINION OF VARIOUS COURTS ON THE VIEW TAKEN BY THE ITAT THAT IN THE ABSENCE OF TAX FREE INCOME, NO DISALLOWANCE U/S.14A IS PERMISSIBLE. 7. THE HIGH COURT WHILE ANSWERING THE SAID QUESTION HELD AS UNDER: - AS REGARDS THE SECOND QUESTION, SECTION 14A OF THE ACT PROVIDES THAT FOR THE PURPOSES OF COM PUTING 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 ITA NO. 55 3 6 /1 4 4 TAX FREE INCOM E. 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, TH E DELETION OF THE DISALLOWANCE OF RS.2,03,752/ - MADE BY THE ASSESSING OFFICER WAS IN ORDER. 8. THE GUJARAT HIGH COURT IN THE CASE OF CIT VS. CORRTECH ENERGY PVT.LTD.(SUPRA) HELD AS UNDER: - WE HAVE GIVEN OUR THOUGHTFUL CONSIDERATION TO THE FACTS AND T HE DECISION RELIED UPON BY THE ID AR. THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. WINSOME TEXTILE INDUSTRIES LTD. REPORTED AT (2009) 3191TR 204(P&H) HAS HELD THAT IN THE PRESENT CASE, ADMITTEDLY, THE ASSESSEE DID NOT MAKE ANY CLAIM FOR E XEMPTION. IN SUCH A SITUATION, SECTION 14A COULD HAVE NO APPLICATION. IN THIS CASE ALSO, THE ASSESSEE HAS NOT CLAIMED ANY EXEMPT INCOME IN THIS YEAR. THEREFORE, RESPECTFULLY FOLLOWING THE JUDGEMENT OF HON'BLE HIGH COURT OF PUNJAB & HARYANA IN THE CASE OF C IT VS. WINSOME TEXTILE INDUSTRIES LTD. (SUPRA), WE HEREBY ALLOW THIS GROUND AND DIRECT THE AO TO DELETE THE ADDITION. THEREFORE, GROUND NOS 1 TO 1.2 RAISED BY THE ASSESSEE IN ITS CROSS OBJECTION ARE ALLOWED.' 4. COUNSEL FOR THE REVENUE SUBMITTED THAT THE ASSESSING OFFICER AS WELL AS CIT(APPEALS) HAD APPLIED FORMULA OF RULE 80 OF THE INCOME TAX RULES, SINCE THIS CASE AROSE AFTER THE ASSESSMENT YEAR 20092010. SINCE IN THE PRESENT CASE, WE ARE CONCERNED WITH THE ASSESSMENT YEAR 20092010, SUCH FORMULA WAS COR RECTLY APPLIED BY THE REVENUE. WE HOWEVER, NOTICE THAT SUBSECTION (1) OF SECTION 14A PROVIDES THAT FOR THE PURPOSE OF COMPUTING TOTAL INCOME UNDER CHAPTER IV OF THE ACT, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RE LATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. IN THE PRESENT CASE, THE TRIBUNAL HAS RECORDED THE FINDING OF FACT THAT THE ASSESSEE DID NOT MAKE ANY CLAIM FOR EXEMPTION OF ANY INCOME FROM PAYMENT OF TAX. IT WAS ON THIS BASIS T HAT THE TRIBUNAL HELD THAT DISALLOWANCE UNDER SECTION 14A OF THE ACT COULD NOT BE MADE. IN THE PROCESS TRIBUNAL RELIED ON THE DECISION OF DIVISION BENCH OF PUNJAB AND HARYANA HIGH COURT IN CASE OF COMMISSIONER OF INCOME TAX V WINSOME TEXTILE INDUSTRIES LTD REPORTED IN (2009) 319 ITR 204 (PUNJ & HAR) IN WHICH ALSO THE COURT HAD OBSERVED AS UNDER: '7. WE DO NOT FIND ANY MERIT IN THIS SUBMISSION. THE JUDGEMENT OF THIS COURT IN ABHISHEK INDUSTRIES LTD (2006) 286 ITR 1 WAS ON THE ISSUE OF ALLOWABILITY OF INTER EST PAID ON LOANS GIVEN TO SISTER CONCERNS, WITHOUT INTEREST. IT WAS HELD THAT DEDUCTION FOR 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. THE OBSE RVATIONS MADE THEREIN HAVE TO BE READ IN THAT CONTEXT. IN THE PRESENT CASE, ADMITTEDLY THE ASSESSE DID NOT ITA NO. 55 3 6 /1 4 5 MAKE ANY CLAIM FOR EXEMPTION. IN SUCH A SITUATION SECTION 14A COULD HAVE NO APPLICATION.' 5. WE DO NOT FIND ANY QUESTION OF LAW ARISING, TAX APPEAL IS THEREFORE DISMISSED. 9. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS.DELITE ENTERPRISES(SUPRA) HELD AS UNDER: - THE REVENUE IS IN APPEAL ON THE FOLLOWING QUESTIONS: - 'WHETHER ON THE FACTS AND IN THE CIRCUMSTANCE OF THE CASE AND IN LAW THE HO N'BLE TRIBUNAL WAS RIGHT IN DELETING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER OF INTEREST PAID BY THE ASSESSEE COMPANY ON BORROWED FUNDS AMOUNTING TO RS.241.10 LAKHS OVERLOOKING THE FACT THAT THE BORROWED FUNDS WERE USED BY THE ASSESSEE COMPANY TO IN VEST IN THE CAPITAL OF ANOTHER PARTNERSHIP FIRM AND SINCE PROFITS DERIVED BY THE ASSESSEE COMPANY FROM A PARTNERSHIP FIRM WERE EXEMPT FROM TAX U/S.10(2A) OF THE INCOME - TAX ACT, THE INTEREST EXPENSE RELATED TO SUCH TAX FREE PROFITS IS TO BE DISALLOWED U/S.1 4A OF THE INCOME TAX ACT? (B) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCE OF THE CASE AND IN LAW THE HON'BLE TRIBUNAL WAS RIGHT IN HOLDING THAT THE ASSESSING OFFICER CANNOT CONSIDER NOTIONAL INTEREST ON DEPOSIT RECEIVED BY THE ASSESSEE COMPANY WHILE ARRIV ING AT THE FAIR MARKET VALUE U/S.23(1) (A) OF THE INCOME - TAX ACT?' 2. IN SO FAR AS QUESTION (A) IS CONCERNED, ON FACTS WE FIND THAT THERE IS NO PROFIT FOR THE RELEVANT ASSESSMENT YEAR. HENCE THE QUESTION AS FRAMED WOULD NOT ARISE. 10. SIMILAR VIEW HAS B EEN TAKEN BY THE HONBE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. M/S. LAKHANI MARKETING INCL. IN ITA NO.970 OF 2008 DATED 2.4.2014. THE HONBLE HIGH COURT WHILE AFFIRMING THE DECISIONS OF CIT(A) AS WELL AS THE TRIBUNAL IN DELETING THE DISALLOWANC E MADE UNDER SECTION 14A OBSERVED AS UNDER: - 7. AFTER HEARING LEARNED COUNSEL FOR THE PARTIES, WE DO NOT FIND ANY MERIT IN THE APPEALS. 8. THE PRIMARY ISSUE THAT ARISES FOR CONSIDERATION IN THESE APEPALS IS WHETHER THE CIT(A) AS WELL AS THE TRIBUNAL WER E RIGHT IN ALLOWING DEDUCTION OF INTEREST LIABILITY OUT OF OTHER INCOME AND THE CLAIM OF THE REVENUE TO DISALLOW THE SAME UNDER SECTION 14A OF THE ACT WAS JUSTIFIED. 9. THE CIT(A) VIDE ORDER DATED 24.6.2004 ANNEXURE A.II RECORDED AS UNDER: - '7.2 KEEPIN G 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 INCURRED AND THE INCOME WHICH WAS EXEMPT UNDER THE ACT. FACTS CLEARLY DO NOT SUPPORT THE ACTION OF THE AO. DISALLOWANCE IS ACCORDINGLY DELETED. THE AO IS DIRECTED TO RECOMPUTE THE INCOME ACCORDINGLY.' ITA NO. 55 3 6 /1 4 6 10. VIDE ORDER DATED 1 6.5.2008, ANNEXURE A.III, THE TRIBUNAL ON APPEAL BY THE REVENUE WHILE UPHOLDING THE FINDING RECORDED BY THE CIT(A) NOTICED AS UNDER: - 'WE HAVE HEARD RIVAL SUBMISSIONS AND HAVE PERUSED THE MATERIAL ON RECORD. FROM THE READING OF SECTION 14A OF THE ACT, IT IS CLEAR THAT BEFORE MAKING ANY DISALLOWANCE THE FOLLOWING CONDITIONS ARE TO EXIST: - A) THAT THERE MUST BE INCOME TAXABLE UNDER THE ACT, AND B) THAT THIS INCOME MUST NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, AND C) THAT THERE MUST BE AN EXPEND ITURE INCURRED BY THE ASSESSEE, AND D) THAT THE EXPENDITURE MUST HAVE A RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. 9. THEREFORE, UNLESS AND UNTIL, THERE IS RECEIPT OF EXEMPTED INCOME FOR THE CONCERNED ASSESSMENT YEARS (DIVIDEND FROM SHARES), WE ARE OF THE VIEW, SECTION 14A OF THE ACT CANNOT BE INVOKED. IN THIS APPEAL, THE REVENUE HAS NOT DISPELLED THE FINDINGS OF THE CIT(A), NOR THE STATEMENT OF THE ASSESSEE BEFORE AO THAT ASSESSEE IS NOT IN RECEIPT OF ANY DIVIDEN D INCOME AND HENCE ACCORDING TO US, THE ASSESSING OFFICER HAS ERRED IN INVOKING SECTION 14A OF THE ACT, TO DISALLOW VARIOUS INTEREST PAYMENTS ON CAPITAL ACCOUNT, SECURITY DEPOSITS AND UNSECURED LOANS. THIS CONCLUSION OF OURS FINDS SUPPORT IN THE DECISION O F BOMBAY BENCH OF THE TRIBUNAL IN THE CASE OF JOINT COMMISSIONER OF INCOME TAX V. HOLLAND EQUIPMENT CO. B.V. REPORTED IN (2005) 3 SOT 810 (MUMBAI) AND THE RELEVANT PORTION OF THE ORDER OF THE BOMBAY BENCH OF THE TRIBUNAL IS 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 OTHE RWISE. 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 INVE STMENTS 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 ITA NO. 55 3 6 /1 4 7 BALANCE SHEET FOR THE YEAR ENDING 31.3.1995, 31.3.1998 AND 31.3.1999, IT IS CLE AR 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 CLT(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. 11. IN THE CASE OF CIT VS. WINSOME TEXTILES INDUSTRIES LTD. (319 ITR 204) THE HONBLE PUNJAB & HARYANA HIGH COURT HELD THAT WHEN THERE IS NO CLAIM FOR EXEMPTION OF INCOME IN SUCH SITUATION SECTION 14A HAS NO APPLICATION. RESPECTFULLY FOLLOWING THE ABOVE DECISIONS , WE DELETE THE DISALLOWANCE MADE UNDER SECTION 14A AS THE ASSESSEE HAS NOT EARNED / RECEIVED FOR EXEMPT INCOME DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER APPEAL. THUS, WE SUSTAIN THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) ON THIS ISSUE. 8. IN VIEW OF THE ABOVE DISCUSSION, RESPECTFULLY FOLLOWING THE DECISION OF THE COORDINATE BENCH, WHO HAS REACHED TO THE CONCLUSION THAT NO DISALLOWANCE IS TO BE MADE WHEN THERE IS NO EXEMPT INCOME AFTER RELYING ON THE VARIOUS DECISIONS OF THE HON BLE HIGH COURTS INCLUDING THE HON BLE BOMBAY HIGH COURT, I DO NOT FIND ANY MERIT IN THE ORDER OF LOWER AUTHORITIES FOR MAKING DISALLOWA N CE U/S.14A R.W.R.8D, WHEN THERE IS NO EXEMPT INCOME EARNED BY THE ASSESSEE. 9 . IN THE RESULT, APPEAL OF THE ASSESSE E IS ALLOWED . O RDER PRONOUNCED IN THE OPEN COURT ON THIS 29 /07 / 201 5 . SD/ - ( . . ) ( R.C.SHARMA ) / ACCOUNTANT MEMBER MUMBAI ; DATED 29 /07 /201 5 . . /PKM , . / PS ITA NO. 55 3 6 /1 4 8 / COPY OF THE ORDER FORWARDED TO : / BY ORDER, / ( ASSTT. REGISTRAR) , / ITAT, MUMBAI 1. / THE APPELLAN T 2. / THE RESPONDENT. 3. ( ) / THE CIT(A), MUMBAI. 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE. //TRUE COPY/