ACIT CIRCLE 10(1), DELHI vs. HERO WIND ENERGY PVT. LTD., DELHI

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-

4. Upon assessee’s appeal, the Ld. CIT(A) found that this issue is in favour of the assessee in as much as he referred to the decision of Hon’ble Delhi High Court in the case of Cheminvest Ltd. vs CIT (2015)

378 ITR 33 (Del.) and CIT vs Holcim India Pvt. Ltd. (2015) 57 taxmann.com 28 (Del.). Referring to these decisions, the Ld. CIT(A) directed the Assessing Officer to delete the addition. The order of the Ld. CIT(A) in this regard may gainfully read as under:-

“6.1 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 decisions of jurisdictional High Court and Hon’ble Apex Court as reproduced above.

6.2 I have examined the issue with reference to extant judicial decisions on the issue. This is not the case of the AO 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 AO has emphatically 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.

6.3 It is noticed that the jurisdictional Hon’ble Delhi High Court in the case of Chemnivest Ltd. vs. GIT-IV, [378 ITR 33] (2015), while placing reliance on its earlier judgement in the case of Holcim India Pvt. Ltd. 57 Taxmaan.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”

6.4 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’.

6.5 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."

6.6 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. ”

6.7 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. 7,55,74,602/- u/s 14A read with Rule 8D is hereby deleted.”

6.1. 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.

Order pronounced in the open court on 19th October, 2022.