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Income Tax Appellate Tribunal, DELHI BENCH, ‘H’: NEW DELHI
Before: SHRI SHAMIM YAHYA & SHRI ANUBHAV SHARMA
ORDER PER SHAMIM YAHYA, AM, This appeal by the Revenue is directed against the order of the Ld. CIT(A)-4, Delhi, dated 22.09.2020 pertaining to Assessment Year 2017-
Grounds of appeal read as under “1. Whether on the facts and in the circumstances of the case, Ld. CIT(A) has erred in deleting the addition of Rs. 7,38,121/- made by the AO u/s 37(1) of the Act.
1. a) Whether on the facts and circumstances of the case and in law, Ld. CIT(A) has erred in not upholding the addition u/s 37(1) when assessee failed to substantiate its claim of business promotion expenses.
2. Whether on the facts and in the circumstances of the case, Ld. CIT(A) has erred in deleting the addition of Rs. 47,07,377/- made by the AO u/s 37(1) of the Act.
2. a) Whether on the facts and circumstances of the case and in law, the CIT(A) has erred in not upholding the addition u/s 37(1) when assessee failed to substantiate its claim of club fee.
3. Whether on the facts and in the circumstances of the case the Ld. CIT(A) has erred in deleting the addition of Rs. 5,36,1 1,889/- made by the AO on account of disallowance u/s 14A of the IT Act, 1961.
3. a) Whether the Ld. CIT(A) while deleting the addition on account of disallowance made u/s 14A, has failed to appreciate the fact that the AO was justified in making the addition since the CBDT Circular No. 5/2014 dated 1.1th February 2014 clearly states that disallowance under section 14A r.w.r. 8D shall be made even in cases where no exempt income was earned during the year by the assessee.”
3. As regards the issue of disallowance u/s 14A, the assessee’s plea was that the assessee has not earned any exempt income, so no disallowance u/s 14A is called for, was disregarded by the Assessing Officer. However, the Ld. CIT(A) found the issue to be in favour of the assessee by referring the case laws from Hon’ble Delhi High Court. The order of the Ld. CIT may gainfully read as under:-
“7.1. The crux of the appellant’s submission is that during the year under consideration the appellant company has not earned any exempt income on investment made in earlier years in group companies and therefore following the judicial decision of jurisdictional High Court and various other decisions, no disallowance u/s 14A is called for. In this regard, the appellant has placed reliance on decision of jurisdictional High Court and Hon’ble Apex Court as reproduced above.
7.2. I have examined the issue with reference to extant judicial decisions on the issue. This is not the case of the Assessing Officer that during the relevant Assessment year, certain exempt income was earned by the appellant from the amount invested in the shares of group companies. Though the Assessing Officer has empathically pointed out and debated the issue that disallowance u/s 14A is attracted irrespective of actual earning of tax-exempt income, I find that there are decisions of Hon’ble jurisdictional High Court on the same issue which favour the case of the appellant and is binding on me.
7.3. It is noticed that the jurisdictional Hon’ble Delhi High Court in the case of Cheminvest Ltd. vs CIT-IV, [378 ITR 33] (2015), while placing reliance on its earlier judgement in the case of Holcim India Pvt. Ltd. 57 Taxmann.com 28 (2015) has held that Sec.14A will not apply if no exempt income is received or receivable during the relevant previous year. In this case, it was held that-
"the expression ‘does not form part of the total income’ in section 14A envisages that there should be an actual receipt 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”
7.4. In the recent Judgement dt. 19/08/2017 in the case of PCIT Vs IL&FS Energy Development Company Ltd. [2017] 84 taxmann.com 186 (Delhi), the Hon’ble High Court of Delhi has held that if there is no exempt income earned in the assessment year in question, question of disallowance of the expenditure incurred to earn exempt income in terms of Section 14A read with Rule 8D would not arise. It has further been held that the words “in relation to income which does not form part of the total income under the Act for such previous year” in the Rule 8D(1) indicate a correlation between the exempt income earned in the AY and the expenditure incurred to earn it. In other words, the expenditure as claimed by the Assessee has to be in relation to the income earned in ‘in such previous year’.
7.5. In this judicial pronouncement, CBDT’S Circular dt. 11/02/2014 has also been discussed to hold that said circular cannot override the expressed provisions of Section 14A read with Rule 8D. The Hon’ble Court has observed that the CBDT’s Circular does not refer to Rule 8D (1) of the Rules at all but only refers to the word “includible” occurring in the title to Rule 8D as well as in the title to Section 14A, The Circular concludes that it is not necessary that exempt income should necessarily be included in a particular year’s income for the disallowance to be triggered. In this connection, the Hon’ble Court’s views are under:
“In the considered view of the Court, this will be a truncated reading of Section 14A and Rule 8D particularly when Rule 8D(1) uses the expression 'such previous year’. Further, it does not account for the concept of real income’. It does not note that under Section 5 of the Act, the question of taxation of ‘notional income’ does not arise. As explained in Commissioner of Income Tax V. Walfort Share and Stock Brokers Pvt. Ltd [2010] 326 ITR 1(SC), the mandate of Section 14A of the Act is to curb the practice of claiming deduction of expenses incurred in relation to exempt income being taxable income and at the same time avail of the tax incentives by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. Consequently, the Court is not persuaded that in view of the Circular of the CBDT dated 11th May 2014, the decision of this Court in Cheminvest Ltd. (supra) requires reconsideration."
7.6 Further, Hon’ble Supreme Court in the case of PCIT vs. Oil Industry Development Board [2019] 103 taxmann.com 326(SC) has held that -“Where High Court upheld Tribunal's order that In absence of any exempt income, disallowance under section 14-A of any amount was not permissible, SLP filed against said decision was to be dismissed. ”
7.7 Since the appellant has not earned any exempt income during the year under consideration, following the above binding judicial decisions, it is held that no disallowance u/s 14A is called for in this case. Keeping in view of the above, the addition made by the AO amounting to Rs.5,36,11,889/- u/s 14A read with Rule 8D is hereby deleted.”
Against this order, the Revenue is in appeal before us.
We have heard both the parties and perused the records. The Revenue’s contention as raised in the grounds of appeal is that the relief granted by the Ld. CIT(A) is not in accordance with CBDT Circular No.5/2014 and that the recent amendment in the Act also makes the issue of the Revenue sustainable.
6. Per Contra, the Ld. counsel for the assessee referred the decision of Hon’ble Delhi High Court in the case of Pr. CIT vs Era Infrastructure (India) Ltd. [2022] 141 taxmann.com 289 (Del.). We find in this case, Hon’ble jurisdictional High Court has held that Explanation in section 14A which has been brought in the statute w.e.f. 01.04.2022 cannot be presumed to have retrospective effect. The Explanation was brought in statute to specifically bring those cases in the ambit of disallowance u/s 14A, where assessee had not earned any exempt income. Admittedly, the period in the present case is Assessment Year 2017-18 i.e. prior to the date on which according to Hon’ble Delhi High Court, the Explanation becomes effective. Hence, respectfully following the decision of the Hon’ble jurisdictional High Court, we do not find any infirmity in the order of the Ld. CIT(A) and uphold the same.
7. Apropos the issue of deletion u/s 37(1) of the Act of Rs.7,38,121/-.
On this issue, the Assessing Officer observed that the assessee has claimed business promotion expenses of Rs.7,38,121/-. That the assessee has not submitted any documentary evidence in the form of bills and vouchers. Hence, the Assessing Officer held that veracity of such expenditure cannot be examined and verified. Therefore, he held that the same are not allowable u/s 37(1) of the Act. However, looking to the business expediency, he disallowed the 10% of the expense and added the same to the income of the assessee. On similar reasoning, Club Fee Expenses amounting to Rs.47,07,377/- was disallowed by the Assessing Officer.
In the appellate order, the Ld. CIT(A) noted that in his opinion, all the expenses incurred by the assessee were genuine wholly and exclusively for the purpose of business of the assessee. He observed that “it is noted that as per Assessing Officer’s own admission, all vouchers/bills in respect of these expenses were produced before him but instead of finding specific deficiency or discrepancy, if any, in such bills/vouchers, the Assessing Officer has made ad hoc disallowance.”
9. We find that observation of the Ld. CIT(A) is quite contradictory to the Assessing Officer’s findings. Nowhere, the Assessing Officer has admitted that all the vouchers and bills were produced rather it is the Assessing Officer’s clear observation that he is making the disallowance primarily because the bills/vouchers were not produced. We note that even in the submission before the Ld. CIT(A), the assessee has only stated that all the ledger accounts had the detail of expenditure, nowhere it is mentioned that vouchers were produced before the Assessing Officer and the Assessing Officer has made disallowance primarily due to that.
In the interest of justice, we deem it appropriate to remit this issue to the file of the Assessing Officer with a direction to grant an opportunity of being heard to the assessee and decide the issue as per law.
In the result, the appeal of the Revenue stands partly allowed for statistical purposes.
Order pronounced in the open court on 20th October, 2022.