ACIT, CIRCLE- 11(2), NEW DELHI vs. HINDUSTAN EPC COMPANY LTD., NEW DELHI
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Income Tax Appellate Tribunal, DELHI BENCH “C” DELHI
Before: SHRI KUL BHARAT & SHRI PRADIP KUMAR KEDIA
PER PRADIP KUMAR KEDIA, A.M.: The captioned appeal has been at the instance of the Assessee against the order of the Commissioner of Income Tax (Appeals)-IV, New Delhi [‘CIT(A)’ in short], dated 04.12.2018 arising from the assessment order dated 21.12.2017 passed by the Assessing Officer (AO) under Section 143(3) of the Income Tax Act, 1961 (the Act) concerning AY 2015-16.
As per its grounds of appeal, the Revenue has challenged the action of the CIT(A) in reversing the disallowances made by the Assessing Officer under Section 14A amounting to Rs.1,65,16,139/-.
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The CIT(A) has dealt with the issue hereunder:
“6 I have carefully considered the AO's viewpoint contained in the Assessment Order and the submission made by the appellant including relevant judicial decisions in the matter. The appellant, during the year under consideration has made investment amounting to Rs.5,02,00,95,000/- in the optionally convertible preference shares of M/s Hindustan Clean Energy Ltd. but has not received any exempt income from such investment. The AO's view is that Section 14A is attracted in this case inspite of the fact that no exempt income has been earned during the year under consideration. The basis for making addition by AO is his interpretation of Sec. 14A and CBDT's circular on the applicability of Sec. 14A. The disallowance made by AO has been challenged on various grounds but written submission is confined mainly to the ground that this is a case where no exempt income has been received during the year under consideration and hence no disallowance is called for u/s 14A. Merely on this ground, I find that appellant deserves relief from disallowance u/s 14A in view of binding decisions of jurisdictional High Court as discussed below leaving other grounds of appeal as otiose.
6.1 The jurisdictional Hon'ble Delhi High Court in the case of Chemnivest Ltd. vs. CIT-IV [378 ITR 33] (2015) (supra) 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"
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6.2 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'.
6.3 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
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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."
Also the Hon'ble jurisdictional High Court in Joint Investment Pvt. Ltd. vs. CIT (2015) 372 ITR 694 (Del.) has held that disallowance u/s 14A cannot exceed the exempt income. Further, recently SLP filed against the order of High Court in the case of CIT vs. Chettinad Logistics (P) Ltd. [2017] 80 taxmann.com 221/248 Taxman 55 (Mad.) in which it was held that where no exempt income was earned in relevant assessment year by assessee, section 14A could not be invoked, was dismissed by Hon'ble Supreme Court in favour of assessee in its decision dated 02.07.2018 [95 taxmann.com 250(SC)].
6.4 In view of the fact that appellant did not earn any exempt income during the year, taking cognizance of the above 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 1,65,16,139/- u/s 14A r.w. Rule 8D is hereby deleted. The ground of appeal is allowed.”
We have heard the rival submission on the issue. It was pointed out on behalf of the assessee that the assessee has not earned any exempt income during the year under review. It is the case of the assessee that in the absence of any exempt income the provisions of Section 14A of the Act could not be invoked. We find merit in the aforesaid plea of the assessee. Various Courts have held that Section 14A of the Act disallowance cannot be
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kicked when there was no exempt income earned by the assessee as is the case in the present appeals. Hon’ble Delhi High Court in PCIT vs IL&FS Energy Development Company Ltd. (2017) 84 Taxman.com 186(Delhi) and the Hon’ble Madras High Court in CIT v. Chettinad Logistics (P.) Limited (2017) 80 taxmann.com 221(Madras) have expressed a clear disagreement with CBDT Circular and held that where there is no exempt income in relevant year there cannot be a disallowance of expenditure under S.14A of the Act. Similar proposition has been laid down by the Hon’ble Gujarat High Court in the case of Corrtech Energy (P.) Ltd (2014) 45 taxmann.com. 116 (Guj) and Pr.CIT vs. India Gelatine and Chemicals Ltd. (2016) 66 taxmann.com 356 (Guj). The aforesaid judicial fiat was reiterated by the Hon’ble Delhi High Court in the case of Joint Investments Pvt. Ltd. vs. CIT reported in 372 ITR 692 (Delhi) wherein Hon’ble Delhi High Court has categorically ruled that disallowance under S.14A of the Act cannot exceed the amount of tax exempt income. Notably, the SLP filed against the decision of Hon’ble Madras High Court in Chettinad Logistics (supra) has been dismissed by Hon’ble Supreme Court in CIT vs. Chettinad Logistics (P.) Ltd. (2018) 95 taxmann.com 250 (SC). Hence, in conformity with the judicial precedents, we find substantial merit in the conclusion drawn by the CIT(A) which essentially holds that Section 14A of the Act can be triggered only if assessee seeks to square off expenditure against the income which does not form part of total income under the Act and Section 14A of the Act cannot be invoked where no exempt income was earned in the relevant assessment years. Thus, without going into other aspect of contentions, in consonance with the judicial precedents, we do not see any infirmity in the conclusion
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drawn by the CIT(A) for non applicability of Section 14A of the Act in the facts of the case.
The judgment rendered by the Hon’ble Delhi High Court in Joint Investment Pvt. Ltd. vs. CIT in ITA No.117/2015 order dated 25.02.2015, thus clinches the issue in favour of assessee. Thus, the CIT(A) has rightly restricted the disallowance to the extent of the exempt income. Significantly, the Hon’ble Delhi High Court in the case of PCIT vs. M/s. ERA Infrastructure (India) Ltd. in ITA No.204/2022 and CM APPL.31445/2022 judgment and order dated 20th July, 2022 had the occasion to examine the law on applicability of Section 14A having regard to the newly inserted Explanation to Section 14A as codified by Finance Act, 2022. The Hon’ble High Court held that the aforesaid Explanation cannot be presumed to be retrospective in operation. As a corollary, the law prevailing prior to the insertion of Explanation would continue to apply and shall not be guided by the Explanation being prospective. We therefore see no reason to interfere with the order of the CIT(A) which is in sync with extant law as expounded by judicial precedents.
In the result, the appeal of the Revenue is dismissed.
Order was pronounced in the open Court on 29/07/2022.
Sd/- Sd/- [KUL BHARAT] [PRADIP KUMAR KEDIA] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: /07/2022 Prabhat
