Hero Exports, Ludhiana vs Department Of Income Tax

Appellant By : S.K. Mittal Respondent By : Shri Subhash Aggarwal

Date of hearing : 24.03.2015 Date of Pronouncement : 26.03.2015

ORDER

PER H.L.KARWA, VP

This appeal filed by the Revenue is directed against the order of CIT(A)-

II, Ludhiana dated 6.9.2013 relating to assessment year 2009-10.

2. The onl y effective ground raised by the Revenue in this appeal reads as

under:-

"That the Ld. CIT(A)-II has erred in law and on facts in deleting the disallowance of Rs. 13,74,078/- made u/s 14A of the Income-tax Act, 1961 read with rule 8-D of the I.T. Rules, 1962."

3. Briefl y stated, the facts of the case are that the assessee is engaged in

export of bi-cycle, bi-cylce parts, mineral ore, agro commodities, engg. goods

etc. During the year under consideration the assessee had shown investment of

Rs. 2,96,84,309/- and Rs. 2,52,92,620/- as on 31.3.2008 and 31.3.2009

respectivel y. Income from this investment does not form part of total income.

The assessee had incurred interest expenditure of Rs. 5,35,62,596/-. During the

course of assessment proceedings the Assessing Officer asked the assessee to 2

explain as to why expenditure incurred in relation to the investment should not

be disallowed u/s 14A of the Income-tax Act, 1961 (in short 'the Act'). In

response to the said query, the assessee submitted that during the year there was

no transaction in the investment. The assessee further submitted that no

dividend on investment in shares have been received during the year and,

therefore, no disallowance was required to be made. The assessee referred to the

decision of this Bench of the Tribunal in the case of Patiala Flour Mills vs ACIT

in ITA No. 346/Chd/2011, wherein it has been held that when no dividend had

been received during the year, there cannot be any disallowance of expenditure

u/s 14A of the Act. The Assessing Officer did not find any merit in the above

submissions of the assessee and consequentl y he computed the disallowance

under Rule 8-D of the Income Tax Rules, 1962 and made disallowance of Rs.

13,74,078/-.

4. Aggrieved by the order of Assessing Officer the assessee carried the

matter in appeal before C IT(A). The main contention of the assessee before the

CIT(A) was that no dividend has been received during the year and as such no

disallowance can be made in this case under the provisions of Section 14A of

the Act.

5. The Ld. C IT(A) deleted the disallowance made under section 14A read

with Rule 8-D holding that no dividend has been received during the year as

such no disallowance can be made in this case. While holding so, the CIT(A)

has followed the decision of this Bench of the Tribunal dated 20.09.2012

rendered in the case of Gurdas Mann v DCIT (2013) 21 ITR 57(Chd.)(Tribunal)

wherein it has been held that in the absence of any income earned by the

assessee which is exempt under the provisions of section1 14A of the Act, there

is no merit in disallowance of any part of expenditure being relatable to such

exempt income which in the case of assessee is nil. The Tribunal directed the

Assessing Officer to delete the disallowance of Rs. 3,85,172/- made u/s 14A

read with Rule 8-D of the I.T. Rules.

3

6. Against the aforesaid order of the C IT(A), the Revenue is in appeal

before this Bench of the Tribunal.

7. We have heard the authorised representatives of both the parties at length.

Shri S.K. Mittal, Ld. DR relied on Circular No. 5 of 2014 dated 11.2.2014

wherein the Central Board of Direct Taxes (CBDT) clarified that Rule 8-D read

with section 14A provides for disallowance of expenditure even where tax payer

in a particular year has not earned any exempt income. He therefore, submitted

that in view of the above Circular, the CIT(A) was not justified in deleting the

disallowance made by the Assessing Officer. He vehementl y argued that

Circular issued by the CBDT u/s 119 of the Act is binding upon the Income-tax

authorities including the CIT(A) and, therefore, in view of the above Circular

the CIT(A) was not justified in deleting the disallowance made u/s 14A of the

Act. In our opinion, there is no merit in the above submissions of the Ld. DR in

view of the decision of Hon'ble Calcutta High Court in the case of Bhartia

Industries Ltd. Vs CIT (2013) 353 ITR 486(Cal) wherein the Hon'ble High

Court has observed as under:-

"The circular issued by the Central Board of Direct Taxes under section 119 of the Income-tax Act, 1961is meant for guiding the officers of the Revenue for administrative purpose of enforcing the provisions of the Act. But when an authority under the Act is required to perform quasi-judicial functions, such authorities should be guided by the law of the land as enunciated on the questions involved by various judicial authorities which have binding effect. If an existing circular is in conflict with the law of the land laid down by the High Courts or the Supreme Court, the Revenue authorities while acting quasi-judicially, should ignore such circulars in discharge of their quasi-judicial functions."

In view of the above, we are of the considered view that Circular No 5 of 2014

relied on by the Ld. DR is in conflict with the law laid down by the High Courts

and, therefore, the CIT(A) was justified in ignoring the aforesaid circular while

discharging his quasi-judicial function. Therefore, the arguments advanced by

Ld. DR is irrelevant because there are three decisions of different High Courts

directl y on the issue in hand and against the Revenue. The Hon'ble Punjab &

Haryana High Court in the case of CIT, Faridabad vs M/s Lakhani Marketing

Incl., Faridabad in ITA No. 970 of 2008 (O&M) decided on 2.4.2014 held that 4 section 14A cannot be invoked when no exempt income was earned. The

decision of jurisdictional High Court in the case of CIT, Fridabad vs M/s

Lakhani Marketing Incl. (supra) is binding on the Tribunal and, therefore, in

view of the above decision, the C IT(A) was justified in deleting the

disallowance made u/s 14A read with Rule 8-D of the I.T. Rules.

8. The next decision on this issue is that of the Gujarat High Court in the

case of C IT V Corrtech Engg Pvt Ltd (2014) 223 Taxman 130(Guj). The third

decision on this issue is of the Allahabad High Court in ITA No. 88 of 2014 in

the case of C IT vs Shivam Motors P. Ltd decided on 5.5.2014. All the above

High Courts have categoricall y held that in the absence of any tax free income

the corresponding expenditure could not be worked out for disallowance. In the

above cases, the finding of fact was that assessee had not earned any tax free

income. In the instant case also, the admitted fact is that assessee had not

earned any tax free income, therefore, Circular No. 5 of 2014 dated 11.2.2014

issued by CBDT is contrary to the law laid down by the different High Courts

directl y on the issue in hand.

9. In view of the above discussion, we hold that disallowance made u/s 14A

has correctl y been deleted by the C IT(A), as the assessee has not earned /

received exempt income during the previous year relevant to the assessment year

under appeal. Accordingl y, the order of CIT(A) deserves to be confirmed.

10. In the result, the appeal is dismissed.

Order Pronounced in the Open Court on 26.03.2015

Sd/- Sd/-

(T. R. SOOD) (H.L.KARWA) ACCOUNTANT MEMBER VICE PRESIDENT Dated : 26 t h March, 2015 Rkk Copy to: 1. The Appellant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR 5