ACIT,CENTRAL CIRCLE-1(1), CHENNAI vs. M/S. RKM POWERGEN PVT. LTD., CHENNAI

Both the appeals filed by the Revenue are directed against different but identical orders of the ld. Commissioner of Income Tax (Appeals) 18, Chennai, both dated 30.05.2022 relevant to the assessment years 2011- 12 and 2012-13. The only effective common ground raised in the both the appeals of the Revenue is that the ld. CIT(A) has erred in restricting the disallowance made under section 14A r.w. Rule 8D of the IT Rules, 1962.

Brief facts of the case are that the assessee is engaged in setting up and operation of thermal power plants and filed its return of income for the assessment year 2011-12 admitting NIL income. The case was selected for scrutiny under CASS and notice under section 143(2) of the Income Tax Act, 1961 [“Act” in short] was issued and served on the assessee. After following due procedures, while passing the assessment order under section 143(3) r.w.s. 92CA(3) of the Act dated 27.03.2015, the Assessing Officer has added the interest income of ₹.2,18,34,580/- earned by the assessee under “Income from Other Sources” and made disallowance under section 14A of the Act of ₹.9,71,30,943/- and also disallowed a sum of ₹.45,00,000/- towards fees paid to Registrar of Companies. The Assessing Officer has further noted that the disallowances of ₹.9,71,30,943/- and ₹.45,00,000/- were to be deducted from the cost of expenditure incurred in the pre-operative stage and accordingly arrived at the assessed income of the assessee at ₹.2,18,34,580/-.

Similarly, in the assessment year 2012-13, against the loss of ₹.5,89,47,420/- returned by the assessee, while passing the assessment order under section 143(3) r.w.s. 92CA of the Act dated 10.03.2016, the Assessing Officer added the interest income of ₹.3,09,15,322/- earned by the assessee under “Income from Other Sources” and made disallowance under section 14A of the Act of ₹.21,90,94,574/-. The Assessing Officer has further noted that since the said sum of ₹.21,90,94,574/- was deducted from the cost of expenditure incurred in the pre-operative stage, the assessee was not allowed to claim business loss of ₹.5,89,47,420/- and accordingly arrived at the assessed income of the assessee at ₹.3,09,15,322/-.

The assessee carried the matter in appeal before the ld. CIT(A) for both the assessment years 2011-12 and 2012-13. After considering the submissions of the assessee and remand report furnished by the Assessing Officer, the ld. CIT(A) has directed the Assessing Officer to restrict the disallowance to the extent of dividend income earned by the assessee for both the assessment years under consideration.

Aggrieved, the Revenue is in appeal before the Tribunal for both the assessment years 2011-12 and 2012-13. The ld. DR has submitted that the Assessing Officer has determined the disallowance as per the provisions of section 14A r.w. Rule 8D. It was further submission that the ld. CIT(A) has erred in restricting the disallowance made under section 14A of the Act to the extent of exempt income earned, when there was no express provisions available in section 14A of the Income Tax Act and Rule 8D of the IT Rules and pleaded that the appellate orders on this issue may be reversed.

On the other hand, the ld. Counsel for the assessee has strongly supported the order passed by the ld. CIT(A) and also placed reliance on the decisions of the Hon’ble Jurisdictional High /Court in the case of PCIT v. Envestor Ventures Ltd. 431 ITR 221, Hon’ble Supreme Court in the case of PCIT v. State Bank of Patiala [2018] 99 taxmann.com 286 (SC), Hon’ble High Court of Delhi in the case of PCIT v. Era Infrastructure (India) Ltd. 448 ITR 674 and also relied on the decision of the Tribunal in assessee’s own case for the assessment year 2017-18 in dated 02.11.2022.

We have heard both the sides, perused the materials available on record and gone through the orders of authorities below including case law relied upon. In this case, in the assessment year 2011-12, the assessee has earned dividend income of ₹.6,98,32,780/- and disallowed a sum of ₹.72,29,148/- towards expenses relating to exempt income. However, the Assessing Officer has computed the disallowance as per Rule 8D at ₹.9,71,30,943/-. On appeal, by following the decisions of the Hon’ble Jurisdictional High Court in the case of Chettinad Logistics Ltd. and M/s. Redington India Ltd., the ld. CIT(A) directed the Assessing Officer to restrict the disallowance to the dividend income earned by the assessee.

The contention of the ld. DR that there is no express provisions in section 14A and Rule 8D towards restriction of the disallowance to the extent of exempt income earned by the assessee is not acceptable in view of the law laid down in the case of PCIT v. State Bank of Patiala (supra), wherein, the Hon’ble Supreme Court has held that where, the Hon’ble High Court took a view that amount of disallowance under section 14A of the Act could be restricted to amount of exempt income only and accordingly, the SLP filed by the Department against the said order of the Hon’ble High Court has been dismissed.

Further, in the case of the PCIT v. Envestor Ventures Ltd. (supra), the Hon’ble Jurisdictional High Court has held that the disallowance under Rule 8D, read with section 14A of the Act can never exceed exempted income earned by the assessee during particular assessment year.

Moreover, in the case of PCIT v. Era Infrastructure (India) Ltd. (supra), the Hon’ble Delhi High Court has held that the amendment made by the Finance Act, 2022 to section 14A by inserting a non-obstante clause and Explanation will take effect from 01.04.2022 and cannot be presumed to have retrospective effects. Therefore, the amendment made by the Finance Act, 2022 to section 14A by inserting a non-obstante clause and Explanation are not applicable in the present case, as the assessment years under consideration are 2011-12 and 2012-13.

Under the above facts and circumstances and judicial precedents, we are of the considered opinion that the ld. CIT(A) has rightly restricted the disallowance to the extent of exempt income earned by the assessee and thus, we find no infirmity in the order passed by the ld. CIT(A) on this issue for both the assessment years 2011-12 and 2012-13. Accordingly, the ground raised by the Revenue is dismissed.

In the result, both the appeals filed by the Revenue are dismissed.