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Facts
The revenue appealed against the order of the CIT(A) who deleted a disallowance of Rs. 2,91,15,967/- made under Section 14A. The assessee had made substantial investments but earned no exempt income during the assessment year.
Held
The Tribunal held that Section 14A of the Income Tax Act can only be invoked when there is an actual earning of exempt income. Relying on various High Court and Supreme Court judgments, it was decided that disallowance cannot be made in the absence of exempt income.
Key Issues
Whether disallowance under Section 14A can be made when the assessee has not earned any exempt income during the relevant assessment year.
Sections Cited
14A, 143(3), 250, 115JB, 8D
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Income Tax Appellate Tribunal, MUMBAIBENCH “C”, MUMBAI
Per Shri Anikesh Banerjee (JM): The instant appeal of the revenueand cross objection was filed against the order of the National Faceless Appeal Centre (NFAC), Delhi*for brevity, ‘Ld.CIT(A)’+ passed under section 250 of the Income-tax Act, 1961 (in short, ‘the Act’) for assessment year 2017-18, date of order 14/07/2025. The impugned order was emanated from the order of the Ld. Assistant Commissioner of Income-TaxCircle- 14(1)(2), Mumbai (for brevity, the “Ld.AO”) passed u/s. 143(3)of the Act, date of order 30/11/2019.
Centrum Retail Services Limited 2. The revenue has taken the following grounds .
1. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs. 2,91,15,967 made by the Assessing Officer under Section 14A of the Income Tax Act, 1961 read with Rule BD of the Income Tax Rules, 1962.
2. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that expenses are necessarily incurred to manage and hold investments, and such expenses are disallowable under Section 14A even if no exempt income is actually earned during the year, whereas the appellant held substantial investments of Rs. 281,39,85,058 which are capable of yielding exempt income.
3. Whether, on the facts and in the circumstances of the case and in law, the LA. CIT(A) erred in not correctly interpreting and applying the binding precedent of the Hon'ble Supreme Court in the case of Maxopp Investment Ltd. vs. CIT, wherein it was categorically held that the applicability of Section 14A does not hinge on the actual earning of tax-exempt income.
4. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) failed to consider the binding nature of CBDT Circular No. 5/2014 dated February 11, 2014, which explicitly clarifies that disallowance under Section 14A must be made even in a year where no exempt income has been earned by the assessee.”
Brief facts of the case are that the assessee is engaged in the business of providing outsourcing and consultancy services to clients. During the assessment proceeding Ld.AO found that the assessee declared total income of Rs. 12,08,82,200/- under normal provision of the Act and book profit at Rs.14,45,37,112 under 115JB of the Act. In assessment proceeding Ld.AO assessee the income amount to Rs. 14,99,98,167 under normal provision and book profit Centrum Retail Services Limited amount to Rs. 17,36,53,079/- in U/s 115JB of the Act. Ld.AO added back amount to Rs. 2,91,15,967/- u/s 14A r.w.r. 8D of the Income Tax Rule, 1962 (in short ‘the Rule’). Aggrieved assessee filed an appeal before the Ld. CIT(A) and Ld. CIT(A) find that assessee has not earned any exempted income during the impugned financial year. So, the addition u/s 14A is uncalled for. Accordingly, Ld. CIT(A) allowed the appeal of the assessee and deleted the addition of amount to Rs. 2,91,15,967/-. Being aggrieved the revenue filed an appeal before us.
The Ld. DR argued and stated that the total investment of the assessee during the impugned financial year amount to Rs. 281,39,85,058/- which is reflected as non-current investment. But in factual consideration, Ld. Ld.DR conceded that the Ld. AO had not reported any exempted income during the impugned assessmentyear.
Ld.AR argued and stated that the asssesse’s case is squarely covered by the judgment of Hon’ble High Court of Delhi in the case of Cheminvest Ltd. v/s CIT, (215) 378 ITR 33Delhi. The Ld.AR heavily relied on the relevant para of impugned appellate order. The appellate order para 5.2 to 5.2.1arereproduced as below:- “5.2. Ground 2 Vide this ground, the Appellant has objected to the addition of Rs. 2,91,15,967/-u/s 14A r.w. Rule 8D. In this regard, the Appellant has submitted that since it has not earned any exempt income during the year, no disallowance can be made u/s14A of the Act. In this regard, the Appellant has placed reliance on various case laws. 5.2.1. I have considered the submission of the Appellant. I have also perused the assessment order. I find that submissions made by the Appellant in the present proceedings were also submitted during assessment proceedings. The AO, however, Centrum Retail Services Limited did not accept the contention of the Appellant that section 14A cannot be invoked in absence of any exempt income. In this regard, the AO has placed reliance on CBDT Circular No 5/2014dated 11.02.2014 and the judgment of Hon'ble Supreme Court in the case of Maxopp Investments Ltd. Thus, the issue to be decided is whether provisions of section 14A can be invoked in absence of any exempt income. I find that this issue has reached a finality in view of Hon'ble Supreme Court dismissing SLPs filed by the Department against the orders of Hon'ble Madras High Court and Hon'ble Delhi High Court. Both the SLPs have been dismissed on merits. Hon'ble Madras High Court in the case of Commissioner of Income Tax vs M/s. Chettinad Logistics Pvt. Ltd on 13 March, 2017 held as under: "2. The only issue, which arose for consideration, before the Tribunal, was, whether an addition made in the sum of Rs.86,62,748/- qua, the Assessee, by invoking the provisions of Section 14 A of the Act, read with, Rule 8 D of theIncome Tax Rules, 1962 (in short, the Rules) was valid. ………..
9. In our opinion Section 14 A of the Act, can only be triggered, if, the Assessee seeks to square off expenditure against income which does not form part of the total income under the Act. 9.1. The legislature, in order to do away with the pernicious practice adopted by the Assessees', to claim expenditure, against income exempt from tax, introduced the said provision.
In the instant case, there is no dispute that no income i.e., dividend, which did not form part of total income of the Assessee was earned in the relevant assessment year. 10.1. Therefore, to our minds, the addition made by the Assessing Officer by relying upon Section 14 A of the Act, was completely contrary to the provisions of the said Section. ………..
Centrum Retail Services Limited ……….. 11.2. As a matter of fact, a perusal of the judgment would show that the Revenue had sought to argue that because exempt income could be earned in future years, therefore, recourse could be taken to the provisions of Section 14A of the Act, to disallow expenditure. In other words the stand taken by the Revenue was irrespective of the fact whether or not income was earned in the concerned assessment year expenditure under Section 14A could be disallowed against anticipated income. 11.3. Pertinently, the Division Bench in M/s. Redington (India) Limited case has repelled this precise argument.
The Division Bench, in our view, quiet correctly held that, the computation of total income, in terms of Section 5 of the Act, is made qua real income and not, vis-a-vis, notional income. 12.1. The Division Bench went on to hold that Section 4 of the Act brings to tax, that income, which is relatable to the assessment year in issue. The Division Bench, thus, held that where no exempt income is earned in the previous year, relevant to the assessment year in issue, provisions of Section 14 A of the Act, read with Rule 8 D could not be invoked. 12.2. While coming to this conclusion, the Division Bench also took note of the aforementioned Circular, issued by the Board. 12.3. The reasoning of the Division Bench is contained in the following part of the judgment: 4. The admitted position is that no exempt income has been earned by the assessee in the financial year relevant to the assessment year in issue. The order of assessment records a finding of fact to that effect. The issue to be decided thus lies within the short compass of whether a disallowance in terms of s. 14A of the Act read with Rule 8D of the Rules can be contemplated even in a situation where no exempt income has admittedly been earned by the assessee in the relevant financial year.
Centrum Retail Services Limited 7. Per contra, Sri. T. Ravikumar appearing on behalf of the revenue drew our attention to the marginal notes of s. 14 A pointing out that the provision would apply not only where exempted income is 'included in the total income, but also where exempt income is 'includable' in total income.
He relied upon a Circular issued by the Central Board of Direct taxes in Circular No.5 of 2014 dated 11.2.2014 to the effect that s.14A was intended to cover even those situations whether there is a possibility of exempt income being earned in future. The Circular, at paragraph 4, states that it is not necessary for exempt income to have been included in the income of a particular year for the disallowance to be triggered. According to the Learned Standing Counsel, the provisions of s.14A are made applicable, in terms of sub section (1) thereof to income 'under the act' and not of the year and a disallowance under s. 14A r.w. Rule 8D can thus be effected even in a situation where a tax payer has not earned any taxable income in a particular year.
We are unable to subscribe to the aforesaid view. The provisions of section 14A were inserted as a response to the judgments of the Supreme Court in Commissioner of Income Tax Vs. Maharashtra Sugar Mills Limited (1971) (82 ITR 452) and Rajasthan State Ware Housing Corporation Vs. Commissioner of Income Tax ((2002) 242 ITR 450) in terms of which, expenditure incurred by an assessee carrying on a composite business giving rise to both taxable as well as non-taxable income, was allowable in entirety without apportionment. It was thus that s.14A was inserted providing that no deduction shall be allowable in respect of expenditure incurred in relation to the earning of Income exempt from taxation. As observed by the Supreme Court in the judgment in the case of Commissioner of Income Tax vs. Walfort Share and Stock Brokers (P) Ltd (2010) 326 ITR 1.... The mandate of s. 14A is clear. Itdesires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by way of an exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income."
Centrum Retail Services Limited 10. The provision this is clearly relatable to the earning of actual income and not notional or anticipated income. The submission of the Department to the effect that s. 14A would be attracted even to exempt income 'Includable' in total income would entail the assessment of notional income, assumed to be exempt in the future, in the present assessment year. The computation of total income in terms of s.5 of the Act is on real income and there is no sanction in law for the assessment of admittedly notional income, particularly in the context of effecting a disallowance in connection therewith.
The computation of disallowance in terms of Rule 8D is by way of a determination involving direct as well as indirect attribution. Thus, accepting the submission of the Revenue would result in the imposition of an artificial method of computation on notional and assumed income. We believe this would be carrying the artifice too far. (emphasis is ours) 13. Mr.Senthil Kumar, seeks to distinguish the judgment in Mis. Redington (India) Limited case based on the fact that Rule 8D had not kicked-in by AY 2007-08, which was the AY being considered in the said case.
According to us, this was not the argument, put forth, before the Division Bench. As a matter of fact, the Revenue relied heavily on Rule 8D. 14.1.Mr.Ravikumar, who appeared for the Revenue, in that matter and who is present in this Court, informs us that he had in fact argued that the Rule was clarificatory in nature and would apply retrospectively, and that, the Division Bench, therefore, discussed the impact of Rule 8D of the Rules. 15.However, it is, our view, as indicated above, independent of the reasoning given in M/s. Redington (India) Limited case that Rule 8D cannot be read in a manner, which takes it beyond the scope and content of the main provision, which is, Section 14 A of the Act. 15.1. Therefore, as adverted to above, Rule 8D, cannot come to the rescue of the Revenue.
Centrum Retail Services Limited 15.2. In any event, the Tribunal, via, the impugned judgment has remitted the matter to the Assessing Officer. 15.3. Therefore, for the foregoing reasons, we are of the view, that no interference is called for qua the impugned judgment.
To our minds, questions of law, which could have arisen are already covered by the judgment of a Co-ordinate Bench of this Court rendered in M/s. Redington (India) Limited case.
The appeal is accordingly, dismissed. However, there shall be no order as to costs." SLP filed by the Department against the above judgement of Hon'ble Madras Court was dismissed on merits by Hon'ble Supreme Court vide order dated 02.07.2018 wherein Hon'ble Supreme Court observed that: "The Special Leave Petition is dismissed on the ground of delay as well as on merits." Hon'ble Delhi Court in the case Cheminvest Ltd. v/s CIT, [215] 378 ITR 33 (Del.) has held as under: "23. In the context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression "does not form part of the total income" in Section 14A of the 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. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year." Again, SLP filed by the Department against the above judgement of Hon'ble Delhi Court was dismissed on merits by Hon'ble Supreme Court in April 2019. In view of the discussions made hereinabove above and respectfully following the case laws cited supra, I hold that no disallowance could have been made by the AO Centrum Retail Services Limited in absence of any exempt income. The disallowance Rs. 2,91,15,967/- u/s 14A is directed to be deleted. Accordingly, this ground is allowed. As regards the reliance placed by the AO on the judgement of Hon'ble Supreme Court in the case of Maxopp Investment Ltd, the same is misplaced. Nowhere in the said judgement, the Hon'ble Court has laid down the law that disallowances can be made u/s 14A even in absence of dividend income.”
We have heard the rival submissions and perused the material available on record. It is noted that the assessee has made investments amounting to Rs.281,39,85,058/- in various companies, and such investments are reflected under the head “Non-Current Investments.” It is, however, an admitted factual position that the assessee has not earned any exempt income during the relevant assessment year.The precondition for invoking the provisions of section 14A read with Rule 8D is that there must be an expenditure incurred in relation to income which does not form part of the total income under the Act. In the present case, no such exempt income has been earned by the assessee which would justify the application of section 14A.We respectfully rely upon the judgment of the Hon’ble Delhi High Court in Cheminvest Ltd. (supra), wherein it has been held that in the absence of exempt income, no disallowance under section 14A can be made. Accordingly, we find no infirmity in the order of the Ld. CIT(A), and therefore no interference is warranted. So, the appeal filed by the revenue stands dismissed.