Medha Servo Drives Private Ltd., Hyd, ... vs Assessee

ITA No.260/Hyd/2015 : Assessment year 2010-11 ITA No.261/Hyd/2015 : Assessment year 2011-12

M/s. Medha Servo Drives Pvt. V/s. Dy. Commissioner of Income-tax Ltd, Hyderabad Circle 16(2), Hyderabad

(PAN - AABCM 3917 A)

(Appellant) (Respondent)

Appellant by : Shri V.Sivakumar

Respondent by : Shri R.Clement Ramesh Kumar

Date of Hearing 25.5.2015 Date of Pronouncement 05.06.2015

ORDER

Per P.M.Jagtap, Accountant Member :

These two appeals filed by the assessee are directed against two separate orders passed by the learned Commissioner of Income-tax(Appeals) IV, Hyderabad both dated 10.12.2014, whereby he partly sustained the disallowance made by the Assessing Officer under S.14A of the Act read with Rule 8D of the Income-tax Rules, 1962.

2. The assessee in the present case is a company which is engaged in the business of manufacturing, installation and servicing of electronic and electrical equipments for Railways, iles and Defence applications. The returns of income for both the years under consideration were filed by it on 31.8.2010 and 20.9.2011 declaring total income of Rs.44,56,78,595 and Rs.71,53,95,220 for assessment years 2010-11 and 2011-12 respectively. The return of income for the assessment year 2010-11 2 ITA No.260-261/Hyd/2015 M/s. Medha Servo Drives Pvt. Ltd, Hyderabad

was subsequently revised by the assessee company on 26.11.2010 declaring total income of Rs.49,06,78,595 which was inclusive of additional income of Rs.4,50,00,000 surrendered during the course of Survey carried out in its case on 12.11.2010. During the course of assessment proceedings, it was noticed by the Assessing Officer that the assessee has made substantial investments, the income from which was exempt from tax. He also noted that the assessee has incurred sizeable interest expenditure in both the years under consideration. According to the Assessing Officer, the assessee company therefore, was liable to offer disallowance on account of expenditure incurred in relation to the income which was exempt from tax, as required by the provisions of S.14A of the Act. In this regard, the explanation offered by the assessee that the tax free investments were made by it out of its own funds was not found acceptable by the Assessing Officer, and by applying Rule 8D, he worked out the disallowance which was required to be made in the case of the assessee under S.14A at Rs.6,30,027 and Rs.13,13,789 for assessment years 2010-11 and 2011-12 respectively.

3. The disallowance made by the Assessing Officer under S.14A read with Rule 8D for both the years was disputed by the assessee in the appeals filed before the learned CIT(A), and after considering the submissions made by the assessee as well as the material available on record, the learned CIT(A) upheld the action of the Assessing Officer in making the disallowance under S.14A for both the years under consideration, although certain relief was given by him to the assessee company by reducing the quantum of disallowance. Aggrieved by the orders of the learned CIT(A), assessee has preferred these appeals before the Tribunal.

3 ITA No.260-261/Hyd/2015 M/s. Medha Servo Drives Pvt. Ltd, Hyderabad

4. We have heard the arguments of both the sides and also perused the relevant material on record. The learned counsel for the assessee has submitted that there being no income actually received by the assessee company on the relevant investments, that is exempt from tax in both the years under consideration, no disallowance under S.14A can justifiably be made. In support of this contention, he has also relied on the decision of the Tribunal in the case of VBC Industries Ltd., Hyderabad in ITA No.143/Hyd/2013 and others, wherein similar issue has been decided by the Tribunal in favour of the assessee for the following reasons given in paragraph Nos.8 to 10 of its order dated 8.5.2015-

"8. We have considered the submissions of the parties and perused the orders of revenue authorities as well as other materials on record. As far as admission of additional ground raised by assessee is concerned, it is seen from the record that in the statement of facts and grounds of appeal filed before ld. CIT(A), a copy of which is also placed on record, assessee has specifically raised the issue that no disallowance u/s 14A can be made when assessee has not claimed any exempt income in the assessment year under consideration. However, as it appears, ld. CIT(A) has not at all gone into that issue. Therefore, since the issue was raised before ld. CIT(A) by assessee and as stated before us inadvertently could not be raised in grounds of appeal filed along with Memorandum of Appeal and further, since the issue raised goes to the root of the matter and can be decided on the basis of facts and materials available on record, we are inclined to admit the additional ground raised by assessee.

9. As is evident from the said additional ground, the specific contention of assessee is during the relevant AYs assessee 4 ITA No.260-261/Hyd/2015 M/s. Medha Servo Drives Pvt. Ltd, Hyderabad

has not claimed/earned any income, which is exempt u/s 10(34), hence, no disallowance can be made by invoking section 14A of the Act. In support of such contention, ld. AR has placed reliance on two judicial precedents. On careful reading of the decision of the Hon'ble Gujarat High Court in case of CIT Vs. Corrtech Engergy Pvt. Ltd. (supra), it is seen that the Hon'ble Gujarat High Court following a decision of the Hon'ble P&H High court in case of CIT Vs. Winsome Textile Industries Ltd. 319 ITR 204 held that section 14A will have no application in a case where assessee has not claimed any exempt income in the concerned AY. Following the aforesaid decision of the Hon'ble Gujarat High Court and a decision of the Hon'ble Allahabad High Court in case of CIT Vs. Shivam Motors (P) Ltd. in ITTA No. 88 of 2014 dated 05/05/2014, ITAT Bangalore Bench "C" in case of Quality Engineering and Software Technologies (P.) Ltd. Vs. DCIT (supra) held as under:

"5.5.4 There are many other decisions of other Hon'ble High Courts as well, wherein it has been held that where the assessee has not earned any income exempt u/s 10(38) of the Act, disallowance of expenditure u/s 14A of the Act is not tenable. Respectfully following the above decisions (cited supra), we also hold that the disallowance of expenditure u/s 14A of the Act is not tenable and therefore delete the disallowance of Rs. 7,34,975 made by the AO."

10. Though ld. DR has relied upon a decision of Mumbai Special Bench in case of Cheminvest Ltd. (supra), but, as held by ITAT Bangalore Bench in the decision referred to above, the Special Bench decision of Mumbai Tribunal cannot be said 5 ITA No.260-261/Hyd/2015 M/s. Medha Servo Drives Pvt. Ltd, Hyderabad

to be having any precedentiary value in view of the decisions of the Hon'ble High Courts referred to in the said order. Therefore, the principle which emerges from the decisions of the Hon'ble High Courts referred to above, if in a particular assessment year, assessee has not earned any exempt income no disallowance u/s 14A can be made. In the facts of the present case, assessee has taken a specific plea that it has not claimed/earned any income which is exempt under the Act. On perusal of the relevant assessment orders is noticed that AO has only referred to investments made y assessee and not to any exempt income earned by assessee while working out disallowance u/s 14A. Even though, assessee has raised specific ground on the issue before ld. CIT(A), she has also not given any finding on this issue. In the aforesaid facts and circumstances for the limited purpose of verifying assessee's claim that it has not earned/claimed any exempt income in the concerned assessment years an deciding the issue in terms with the ratio laid down by Hon'ble Gujarat High court and Hon'ble Allahabad High court as well as ITAT Bangalore Bench referred to above, we remit the matters back to the file of AO. Assessee must be given reasonable opportunity of being heard in the matter. In view of our aforesaid direction, the grounds raised by the department challenging the relief granted by ld. CIT(A) in restricting the disallowance u/s 14A have become infructuous, hence, they are dismissed."

5. The Learned Departmental Representative has not raised any contention to dispute the proposition propounded by the Tribunal in its order passed in the case of VBC Industries Ltd. (supra) in principle. He however, has contended that the claim of the learned counsel for the assessee that no income which is 6 ITA No.260-261/Hyd/2015 M/s. Medha Servo Drives Pvt. Ltd, Hyderabad

exempt from tax, was actually earned by the assessee company in both the years under consideration requires verification, as there is no finding recorded either by the Assessing Officer or by the CIT(A) on this aspect. We find merit in this contention of the Learned Departmental Representative and since the learned counsel for the assessee has also not raised any objection in this regard, we restore the matter to the file of the Assessing Officer for the limited purpose of verifying as to whether there was any exempt income that was actually earned by the assessee company during both the years under consideration and to decide the issue following the decision of the Tribunal in the case of VBC Industries Ltd. Hyderabad (supra). He shall, of course, give sufficient opportunity of hearing to the assessee and redecide the issue in accordance with law.

6. In the result, both the appeals of the assessee are allowed for statistical purposes.

Pronounced in the court on 5th June, 2015

Sd/- Sd/- (Saktijit Dey) (P.M.Jagtap) Judicial Member Accountant Member

Dt/- 5th June, 2015

Copy forwarded to:

1. M/s. Medha Servo Drives Pvt. Ltd, P-4/58, IDA Nacharam, Hyderabad 500 076

2. Dy. Commissioner of Income-tax Circle 16(2), Hyderabad

3. Commissioner of Income-tax(Appeals) IV, Hyderabad

4. Commissioner of Income-tax III Hyderabad

5. Departmental Representative, ITAT, Hyderabad.

B.V.S