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TMI Blog2017 (1) TMI 1758X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee. Aggrieved by the order of ld. CIT(A), assessee is now in appeal before us and has raised the following grounds : "1. AO and CIT Appeal erred in law and fact while disallowing interest paid on borrowed funds by assessee to the extent interest free loan given to "Sentosa Resort Pvt Ltd" For the purpose of business. 2. A.O. and CIT Appeals erred in law while disallowing expenditure u/s 14A & Rule 8D when there is no tax free income claimed in the return filed to appreciate various case laws brought to their notice during the assessment proceedings. 3. Assessee reserve right to add, alter, amend, delete the grounds appeal before or during the course of hearing." 3. First ground is with respect to disallowance of interest. 4. During the course of assessment proceedings, AO noticed that assessee had given advances to M/s. Sentosa Resort Pvt. Ltd, a sister concern, and had not charged any interest on the amounts advanced even though assessee had borrowed fund of about Rs. 3.74 crores and had incurred interest cost of Rs. 50,31,483/-. Assessee was therefore asked to explain as to why interest expense at 12% be not disallowed to which assessee inter-alia submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld.A.R. reiterated the submissions made before AO and ld. CIT(A) and further submitted that assessee undertook a strategic business decision to form a company alongwith other experienced persons as assessee wanted to do the business of hotel, restaurant and amusing and accordingly Sentosa Resort Pvt Ltd was formed wherein Assessee held majority shares (49.72%). Sentosa Resort Pvt Ltd required huge capital expenditure and for which the management of the assessee decided to finance partly as interest free advance and partly in the form of fully paid shares. The other share-holders of Sentosa Resort Pvt Ltd also had agreed to lend interest free loans to Sentosa Resort Pvt Ltd. He further submitted that the Assessee had advanced the amount for diversification and the benefit of which would accrued to the assessee in future. With respect to the A.O's and ld. CIT(A) observation that assessee was not a major share-holder at the time of advancing the amount, he submitted that the aforesaid observation is incorrect and in support of which he pointed to the certificates of the Company Secretary which were placed at Pages 66 to 73, wherein it is certified that the assessee is a major sharehol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st was deductible. The relevant observations of Hon'ble Apex Court are as under : "The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency." The Hon'ble Apex Court further held that : "We agree with the view taken by the Delhi High Court in CIT vs. Dalmia Cement (Bhart) Ltd. (2002) 254 ITR 377 that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efully considered the facts of the case as well as reply of the appellant. As regards the claim of the appellant that Sec. 14A r.w.r 8D will not apply in case no exempt income is shown, it is seen that CBDT in it's circular No. 5/2014 dated 11.02.2014 has clarified the issue and has said that disallowance u/s. 14A r/w Rule 8D will not apply even if exempt income has not been shown in a particular year. The same is reproduced as under : Section 14A of the Income-tax Act, 1961('Act') provides for disallowance of expenditure in relation to income not "'includible" in total income. 2. A controversy has arisen in certain cases as to whether disallowance can be made by invoking section 14A of the Act even in those cases where no income has been earned by an assessee which has been claimed as exempt during the financial year. 3. The matter has been examined in the Board. It is pertinent to mention that section 14A of the Act was introduced by the Finance Act, 2001 with retrospective effect from 01.04.1962. The purpose for introduction of section 14A with retrospective effect since inception of the Act was clarified vide Circular No. 14 of 2001 "Certain incomes are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... average of the value of investment, income from which does not or shall not form part of the total Income. as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year." (Emphasis added) 6. Thus, in light of above, Central Board of Direct Taxes, in exercise of its powers under section 119 of the Act hereby clarifies that Rule 80 read with section 14A of the Act provides for disallowance of the expenditure even taxpayer in a particular year has not earned any exempt income. 7. This may be brought to the notice of al/ concerned. " 13. Further, Hon'ble Chennai 'A' Bench in the case of M/s. Lakshmi Ring Travellers vs. ACIT in ITA No. 2083(Mds)/2011 for A.Y. 2008-09 has held that Rule 8D applies even when the appellant claims that no expenditure has been incurred. For the sake of clarity the relevant portion of the order is reproduced: We considered the arguments of both the sides in detail. Sec.14A(1) declares the law that the expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act shall not be allowed as a deduction in computing the taxable income of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds in the form of Share Capital and Reserves of more than Rs. 90 lacs and therefore it is to be presumed that investments are out of own interest free funds and therefore no disallowance of interest is called for and for this proposition he relied on the decision of Hon'ble Bombay High Court in the case of CIT Vs. HDFC Bank Limited. He therefore submitted that in any case, no disallowance u/s 14A was called for in the present case. Ld. D.R. on the other hand supported the order of AO and ld. CIT(A) and further submitted that the provisions of Rule 8D are mandatory. He further submitted that CBDT also vide Circular No.5/2014 dated 11.02.2014 has clarified that for invoking disallowance u/s 14A, it is not necessary that assessee should have earned exempt income and therefore even when no exempt income is earned, disallowance u/s 14A has to be made. He therefore submitted that the AO was fully justified in disallowing the expenditure u/s 14A read with Rule 8D. He thus, supported the order of AO and ld. CIT(A). 11. We have heard the rival submissions and perused the material on record. The issue in the present case is with respect to disallowance u/s 14A. Before us, it is ld.A.R. subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, section 14A will not apply if no exempt income is received or receivable during the relevant previous year." 12. Apart from Hon'ble Delhi High Court, we find that the Hon'ble Gujarat High Court in the case of CIT Vs. Corrtech Energy Pvt. Ltd (2015) 372 ITR 97 (Guj) and Hon'ble Punjab and Haryana High Court in the case of CIT Vs. Winsome Textile Industries Ltd. (2009) 319 ITR 204 have concluded that Sec.14A has no application when there is no exempt income. In such a situation, considering the hierarchical Judicial System that we have, once an authority higher than this Tribunal has expressed an opinion on an issue, we have to respectfully follow the same even though the High Court be of a different state and for this proposition we rely on the decision of Hon'ble Bombay High Court in the case of CIT Vs. Godavari Devi Saraf (1978) 113 ITR 589 (Bom). As far as the binding nature of CBDT Circular is concerned, it is a settled law that an assessee is entitled to ignore a Circular if its ter ..... X X X X Extracts X X X X X X X X Extracts X X X X
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