IN INCOME TAX APPELLATE TRIBUNAL BENCH : CHENNAI, BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G.PAVAN KUMAR, JUDICIAL MEMBER . I.T.A.Nos.1914 & 1915 Mds. 2016 Assessment years : 2011-12 & 2012-13 Deputy Commissioner of Vs. Smt.T.R.V.Venkatalakshmi, Income Tax, No.1,Sathu T.Ramasamy Naicker Corporate Circle-2, street, Vadugarkottai, Madurai. Aruppukottai 626 101. [PAN ABPPV 0449 N] ( Appellant) ( Respondent) Appellant by : Mr.Shiva Srinivas, JCIT D.R Respondent by : None Date of Hearing : 07-09-2016 Date of Pronouncement : 21-09-2016 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER These two appeals are filed by Revenue in ITA No.1914 Mds. 16 for assessment year 2011-12 & in ITA No.1915 Mds 16 for assessment year 2012-13 are directed against different orders of Learned Commissioner of Income Tax(A)-1, :- 2 -: ITA No. 1914 & 1915 Mds. 2016 Madurai, both orders passed under section 143(3) of Act dated 16.03.2016. Since issues involved in these Revenue s appeals are common in nature, these appeals are clubbed together, heard together, disposed off by this common order for sake of convenience. 2. common ground in these two appeals of Revenue is that Ld.CIT(A) had erred in directing AO to restrict disallowance made u s.14A to extent of dividend income earned, when AO has computed disallowance as per law in accordance with sec.14A r.w.Rule 8D as per mandate of statute. 3. facts of case are that assessee is engaged in transport business running of buses and lorry transports, also getting income from other sources. During course of assessment proceedings, AO found that assessee did not receive any dividend income. When AO proposed to apply Rule-8D of Income Tax rules, assessee objected that all loans were taken and utilized by company for business purposes and therefore, no borrowals were taken by company for purpose of investment in shares. It was further contended that assessee had adequate own share capital, reserves and surplus whereas investment in shares was only less than share capital and reserves and surplus, and, therefore, it could not be said that borrowed funds were utilized :- 3 -: ITA No. 1914 & 1915 Mds. 2016 for earning exempt income. Further, it was contended that there is no direct expenditure involved in earning exempt income. Since dividend income was Nil, no disallowance can be made u s.14A of Act. AO did not accept reply and held that Rule 8D has been notified in March,2008 which is applicable for this assessment year and worked out disallowance under Rule-8D at `36,94,810 -. Aggrieved with order of ld. Assessing Officer, assessee carried appeal before Ld.CIT(A). 3.1 On appeal, Ld.CIT(A) placed reliance on decision of Special Bench in case of Cheminvest Ltd.v. ITO New Delhi reported in in [2009] 121 ITD 318 (Delhi) wherein held that when expenditure is incurred in relation to exempt income, it has to suffer disallowance irrespective of fact whether any exempt income is earned by assessee or not. same view was reiterated by Board in circular No. 5 2014 dated 11-02-2014. However, subsequently various High Courts have taken view that unless there is exempt income, no disallowance can be made. Jurisdictional Chennai Tribunal also in case of JCIT Vs M.Baskaran (152 lTD 844) held that in absence of dividend income, no disallowance could be made u s.14A and held that Hon ble Delhi Special Bench decision ,in case of M s.Cheminvest Ltd and CBDT circular were no longer applicable. Ld.CIT(A) following decision of Jurisdictional Tribunal, had restricted disallowance to dividend income earned by assessee during :- 4 -: ITA No. 1914 & 1915 Mds. 2016 year under consideration. As there is no dividend income, entire disallowance is deleted. 4. When appeal was taken up for hearing, nobody appeared on behalf of assessee. Therefore, we are of opinion that assessee is not interested in prosecuting his case. 5. We have considered submissions of Departmental Representative and perused orders of authorities below. In this case, loan was borrowed by assessee for purpose of business at `3 - crores from City Union Bank Ltd., Madurai (Loan No.517467). said fund was diverted for investment in equity shares in M s.Jeyajothi Cements (P) Ltd. assessee claimed interest paid on said loan from income of assessee under head business . assessee has not earned dividend income from shares where assessee has invested borrowed funds. assessing authority observed that judgement of jurisdictional High Court in case of CIT Vs. M. ETHURAJAN reported in [2005] 273 ITR 95 (Mad) cannot be applied to facts of case. As this judgement was delivered before insertion of Sec.14A of Act. Hon ble Madras High Court in case of M. ETHURAJAN (supra) followed judgement of Supreme Court in case of CIT v. RAJENDRA PRASAD MOODY [1978] 115 ITR 519 (SC) wherein held that:- :- 5 -: ITA No. 1914 & 1915 Mds. 2016 5. assessing authority considered decision in Rajendra Prasad Moody' s case [1978] 115 ITR 519 (SC) relied upon by learned counsel and held that it is not applicable to fact situation. reasons assigned for such conclusion in assessment order are extracted hereunder : " decision is with reference to deduction allowable under section 57(iii) of Income-tax Act. decision relates to assess ment year where dividend income was taxable in hands of assessee. With introduction of section 10(33) of Income-tax Act from assessment year 1998-99 position of law in regard to taxability of dividends has been changed since such income becomes part of income which do not form part of total income of assessee. provisions of section 14A introduced by Finance Act, 2001, with effect from April 1, 1962, retrospectively bars allowing any expenditure in respect of income which is not includible in total income. Considering this change in position of law deci sion of Supreme Court relied upon by assessee does not apply to assessee' s case." 6. Therefore, dividend income is exempted from tax liability under section 10(33) of Act. Under section 14A of Act, expenditure relating to exempted income is not allowable. assessing authority has considered above relevant factor and disallowed claim of assessee. However, first appellate authority decided issue in view of order of Special Bench in case of Cheminvest Ltd.v. ITO New Delhi (supra). But, however in this case undisputed facts are that assessee borrowed funds for business purpose and later it was :- 6 -: ITA No. 1914 & 1915 Mds. 2016 diverted into investment in shares, which has not yielded any interest or dividend income, even if assessee earned dividend income, it is exempted u s.10(33) of Act from tax liability and same cannot be computed under head income from other sources . exempted income is not liable for deduction in view of Sec.14A of Act. In view of this, claim of assessee is only untenable and decision relied upon by ld.A.R before Ld.CIT(A) have no application to facts of case. Further, jurisdictional High Court in case of CIT Vs. Seshasayee Paper And Boards Ltd. reported in [1985] 156 ITR 542 (Mad) wherein held that borrowing has not been made exclusively and wholly for purpose of earning interest, in which case alone it should be taken as income, which should be deducted from interest receipts. Further, Hon ble Karnataka High Court in case of Pradeep Kar Vs. ACIT reported in (2009) 319 ITR 0416(Kar HC) wherein held that dividend income being exempt u s.10(33) and not assessable to tax, assessee was not entitled to deduction for interest in view of Sec.14A of Act. 6. In view of above discussion, we do not find any infirmity in orders of AO. same is confirmed. order of Ld.CIT(A) is reversed. :- 7 -: ITA No. 1914 & 1915 Mds. 2016 7. In result, both appeals of Revenue are allowed. Order pronounced on 21st September, 2016, at Chennai. Sd - Sd - (G.PAVAN KUMAR) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER Chennai Dated: 21st September, 2016 K S Sundaram Copy to: 1. Appellant 3. ( ) CIT(A) 5. DR 2. Respondent 4. CIT 6. GF Deputy Commissioner of Income-tax, Corporate Circle-2, Madurai v. T.R.V.Venkatalakshmi