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Income Tax Appellate Tribunal, MUMBAI BENCH “B”, MUMBAI
Before: SHRI KULDIP SINGH & SHRI GAGAN GOYAL
PER GAGAN GOYAL, A.M: This appeal by assessee is directed against the order of National Faceless Appeal Centre (for short “NFAC”), Delhi dated 17.01.2023 u/s. 250 of the Income Tax Act, 1961 (in short ‘the Act’) for A.Y. 2017-18. The assessee has raised the following grounds of appeal:-
M/s. Neelkanth Mansion & Infrastructure Pvt Ltd.
In the circumstances and facts of our case, the Learned Commissioner of Income Tax (Appeals), NFAC has erred in law and on facts in confirming the action of Ld. Assessing Officer in upholding disallowance of Rs. 16,41,923/- u/s 14A read with rule 8D on conjectures and surmises which is unwarranted and unlawful.
In the circumstances and facts of our case, the Learned Commissioner of Income Tax (Appeals), NFAC has erred in law and on facts in not controverting the submission and evidence given by Assessee Company and case laws cited by Assessee Company.
3. Without prejudice to Ground No. 1 stated herein above, in the circumstances and facts of our case, the Learned Commissioner of Income Tax (Appeals), NFAC has erred in law and on facts in upholding the action of the Ld. Assessing Officer by erroneously computing the figure of average value of investments by including investments, which have not yielded exempt income and thereby erroneously upholding the disallowance u/s. 14A read with rule 8D as per the Assessment Order and not considering the written submission and working of disallowance u/s 14A r.w.r. 8D as provided by the Assessee. 4. the Appellant crave leave to add, delete or substantiate any grounds of appeal at the time of hearing
2. The brief facts of the case are that assessee company filed its return of income on 31.10.2016, declaring total income at Rs. 7,89,69,690/-. Case of the assessee was selected under CASS for complete scrutiny. Assessee Company is involved in the business of builders and developers. During the assessment proceedings AO made additions on account of section 14A and section 23(1)(a) of the Act amounting to Rs. 16,41,923/- and Rs. 95,22,574/- being notional rent chargeable to tax (@ 8% on closing stock of unsold flats/shops) respectively. Assessee being aggrieved with this order of AO preferred an appeal before the Ld. CIT (A), who in turn while passing order u/s. 250 of the Act, deleted the addition
M/s. Neelkanth Mansion & Infrastructure Pvt Ltd. made by the AO on account of section 23(1)(a) of the Act amounting to Rs. 95,22,574/- being notional rent chargeable to tax (@ 8% on closing stock of unsold flats/shops). In these terms appeal of the assessee was allowed partly.
Assessee being further aggrieved and not satisfied with the order of Ld. CIT (A), as addition u/s. 14A was sustained in appeal order passed u/s. 250 of the Act also, preferred this present appeal before us. We have gone through the order of AO, Order of Ld. CIT (A) and submissions of the assessee along with grounds raised before us. We observed that during the assessment year under consideration neither assessee made any fresh investments nor received any exempt income in the form of dividend etc. Although, assessee received its share of profit from partnership firm amounting to Rs. 1,97,00,319/- exempt u/s. 10(2A) of the Act. To analyze and understand this issue in a better way, we deem it fit to reproduce provisions of section 14A of the Act and Rule 8D of the Rules, as a lot of controversies and confusions on this issue are there:
[Expenditure incurred in relation to income not includible in total income. 14A. [(1)] [Notwithstanding anything to the contrary contained in this Act, for the purposes of] computing the total income under this 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 this Act.] [(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.
M/s. Neelkanth Mansion & Infrastructure Pvt Ltd. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act:] [Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.] [Explanation.—For the removal of doubts, it is hereby clarified that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not forming part of the total income.] Inserted by the Finance Act, 2022, w.e.f. 1-4-2022.
Rule - 8D, Income-tax Rules, 1962 [Method for determining amount of expenditure in relation to income not includible in total income. 8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with— (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred, In relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). [(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely: — (i) the amount of expenditure directly relating to income which does not form part of total income; and M/s. Neelkanth Mansion & Infrastructure Pvt Ltd. (ii) an amount equal to one per cent of the annual average of the monthly averages of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income: Provided that the amount referred to in clause (i) and clause (ii) shall not exceed the total expenditure claimed by the assessee.] (3)[***]]
Object of Sec. 14A is to disallow any expenditure claimed by the assessee if incurred in respect of exempt income. This section was introduced to nullify the effect of decisions in which the SC had held that in the case of a composite and indivisible business, which results in earning of taxable and non-taxable income, it is not permissible to apportion the expenditure between the two. As a result, the entire expenditure was held to be allowable. This law is amended w.e.f. A. Y. 2022- 23 to provide that if any expenditure is incurred in relation to exempt income (whether accrued received or not) the same would be disallowed. Upto A. Y. 2021- 22 relying upon various cases Hon’ble Apex Court and Jurisdictional High Court along with coordinate benches it can be reasonably hold that assessee is not liable for any disallowance in the absence of any exempt income.
5. Plain reading of the Sec. 14A clearly suggests that there has to be some exempt income not forming part of Total Income. Thus, in the absence of any exempt income question of applying this section could not arise. Recently in Pr. CIT v. Oil Industry Development Board [2019] 103 taxmann.com 326/262, Taxman 102 (SC), the Hon'ble SC confirmed the decision of the Delhi High Court in Oil Industry Development Board's case (supra) wherein it was held that no M/s. Neelkanth Mansion & Infrastructure Pvt Ltd. disallowance u/s. 14A of the Act could be made in the absence of any exempt income.CBDT vide its circular No. 5/2014 dt. 11-2-2014 had taken a contrary view viz 14A of the Act is applicable even in the absence of any exempt income. Circular though binding upon the assessing authorities, cannot bind the assessee/appellate authorities. Later the Delhi High Court has in IL &FS Energy Development Co. Ltd.'s case (supra); has held that the said circular cannot override the express provision of Sec. 14A/Rule 8D and concluded that if no exempt income is earned during the relevant year, no disallowance could be made u/s. 14A/Rule 8D.Further as stated earlier, the Hon'ble SC has also confirmed similar view and as such the said circular must be held to be held contrary to law. So, in our considered view the CBDT circular on which AO and Ld. CIT (A) relied upon can’t be enforced against the assessee, as the same is not binding on them.
Now coming to the specifics of the case in terms of figures involved. Assessee has total Rs. 117, 83, 13,928/- as its own capital including reserves and surplus with interest free advances received from customers against sale of flats (vide Page No. 97 of the Paper book). Whereas investments as per balance-sheet as taken by AO is Rs. 16, 41, 92,322/-, which far away from interest free funds available with the assessee. On this issue we respectfully relied upon the decision of Hon’ble Jurisdictional High Court in the case of CIT vs. Reliance Utilities and Power Ltd. 313 ITR 340 (Bom.) and HDFC Bank Ltd. vs. CIT 67 Taxmann.com 42 (Bom.). Now as far income received as share of profit from partnership firm, which is exempt u/s. 10(2A) of the Act is concerned, revenue is relied upon the M/s. Neelkanth Mansion & Infrastructure Pvt Ltd. decision of coordinate bench in the case of Vishnu Anant Mahajan vs. ACIT, ITA No. 3002/Ahd. /2009, which in our opinion is misplaced in the given circumstances. As in this case an Individual assessee was claiming certain expenditure as partner against his share of profit, interest and remuneration from partner-ship firm. Facts of the case before us are altogether different.
7. In the instant appeal it is observed that the Commissioner (Appeals) confirming addition made by the Assessing Officer under section 14A of the Act without appreciating the fact that the Assessing Officer had not recorded his satisfaction having regard to the books of account of the assessee that the assessee had incurred any expenditure in relation to exempt income; but, failed to make Suo- moto disallowance on such expenses. In the absence of any satisfaction in the assessment order, invoking Rule 8D (2) To determine the disallowance was incorrect. It is further observed that the assessee had its own interest free funds in the form of share capital and reserves which was more than the value of investments in partnership firm which yielded exempt income. Therefore, once there were mixed funds including interest bearing funds, a general presumption was drawn that the interest free funds were utilized for making investments in securities yielding exempt income CIT vs. Reliance Utilities and Power Ltd. (supra). The assessee had proved with evidence that interest free funds were more than its investments and hence, the Assessing Officer was completely erred in determining disallowance. Without, any specific finding on correctness or otherwise of accounts, AO can’t apply provisions of Rule 8D (ii) of the Rules. Unless claim of deduction is in respect of expenditure covered by section 14A of M/s. Neelkanth Mansion & Infrastructure Pvt Ltd. the Act, by debiting profit and loss account or otherwise section 14A of the Act will not be triggered. What is to be disallowed u/s. 14A of the Act is an expenditure which is actually incurred and is related to income which does not form part of total income. The AO can proceed to compute disallowable expenditure in accordance with the method prescribed only after recording his dissatisfaction, i.e., specific defect in the claim of the assessee has to be on record.
The expression "in relation to" does not mean that there should be direct and proximate connection. It cannot be ascribed as narrow or constricted meaning. It simply means in connection with or pertaining to. Thus, if no expenditure incurred in relation to exempt income, no disallowance needs to be made or where even though expenditure is incurred but is not claimed in the profit and loss account, no disallowance needs to be made.
Effect of Explanation inserted in section 14A of the Act by the Finance Act 2022: The Notes on clauses explaining the intention behind insertion of Explanation to Section 14A of the Act states as under-
“It is also proposed to insert an Explanation to the said section to clarify that notwithstanding anything to the contrary contained in this Act, the provisions of the said section shall apply and shall be deemed to have been always applied in a case where the income, not forming part of the total income, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not form part of the total income. This amendment will take effect from 1st April, 2022.”
M/s. Neelkanth Mansion & Infrastructure Pvt Ltd. Clauses 4, 5, 6 & 7 of the Memorandum of Finance Bill, 2022 reproduced herein below provide following guidelines:
"4. In order to make the intention of the legislation clear and to make it free from any misinterpretation, it is proposed to insert an Explanation to section 14A of the Act to clarify that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where exempt income has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such exempt income.
This amendment will take effect from 1st April, 2022.
6. It is also proposed to amend sub-section (1) of the said section, so as to include a non-obstante clause in respect of other provisions of the Income-tax Act and provide that no deduction shall be allowed in relation to exempt income, notwithstanding anything to the contrary contained in this Act.
this amendment will take effect from 1st April, 2022 and will accordingly apply in relation to the assessment year 2022-23 and subsequent assessment years."
Thus, Memorandum of the Finance Bill, 2022 reveals that it explicitly stipulates that the amendment made to Section 14A of the Act will take effect from 1st
M/s. Neelkanth Mansion & Infrastructure Pvt Ltd. April, 2022 and will apply in relation to the assessment year 2022-23 and subsequent assessment years.
In view of this, we are of the considered opinion that disallowance made by AO and further confirmed by Ld. CIT (A) u/s. 14A of the Act is not sustainable in law and AO is directed to delete the same. Grounds raised by the assessee are allowed.
In the result, appeal of the assessee is allowed.