VISHVARAJ INFRASTRUCTURE PRIVATE LIMITED ,MUMBAI vs. DCIT, CIRCLE 3(3)(1), MUMBAI

The solitary ground raised by the assessee relates to challenging the order of the Ld. CIT(A) in upholding the action of the AO in making disallowance under Section 14A of the Act amounting to Rs. 1,96,17,028.

We have heard the counsel for both the parties, perused the material placed on record, the judgments cited before us, and the orders passed by the Revenue Authorities. From the records, we notice that during the course of assessment proceedings, the AO was of the view that since the assessee had made investments in equity shares, preference shares, cooperative banks, and National Saving Certificates as reflected in the balance sheet as on 31.03.2017, AO proceeded to apply Rule 8D and computed a disallowance of Rs. 1,96,17,028/- under the normal provisions as well as while computing book profit under Section 115JB of the Act, on the premise that the investments made by the assessee were “capable of yielding exempt income”.

Whereas, on the contrary, the assessee had categorically stated that no dividend or any other income exempt under

Aggrieved by the order of the AO, the assessee preferred an appeal before the Ld. CIT(A), but the Ld. CIT(A) confirmed the disallowance made by the AO under Section 14A read with Rule 8D on the ground that the object of Section 14A of the Act is to disallow the expenditure incurred in relation to exempt income. It was further held that actual earning of exempt income is not a pre-condition for invoking Section 14A of the Act. Thus, while relying upon CBDT Circular No. 5/2014, the disallowance was justified even in the absence of exempt income.

After having meticulously gone through the facts of the present case and the documents placed on record, we find that it is an undisputed fact that the assessee, during the year under consideration, had not earned any income exempt from tax. In this regard, reliance has been placed on the following decisions:

Wherein it has been conclusively settled that in the absence of exempt income, no disallowance under Section 14A of the Act can be made. Since in the present case the foundational requirement of earning exempt income for invoking Section 14A of the Act itself fails, no disallowance could have been made by the AO while invoking the provisions of Section 14A of the Act. Moreover, we have also considered CBDT Circular No. 5/2014 dated 11.02.2014, which has been relied upon by the Revenue. In this regard, we are of the view that reliance on this Circular is wholly misconceived, as it is settled law that a circular cannot override the plain language of the statute and cannot prevail over judgments of the Hon’ble Supreme Court or Hon’ble High Courts. This position has already been reaffirmed by the Hon’ble Supreme Court in the case of Oil Industry Development Board (103 taxmann.com 326 (SC)).

Even Rule 8D, as invoked by the Revenue, is a machinery provision and cannot operate independently, as Rule 8D is only a method of computation and cannot be triggered unless Section 14A itself applies. In the absence of exempt income, application of Rule 8D becomes otiose. Moreover, in the present case, the AO has also failed to record mandatory dissatisfaction as required

Having considered the facts, we are of the view that the addition of the same disallowance while computing book profit under Section 115JB is also untenable in the absence of exempt income, as no such adjustment is permissible under Explanation 1 to Section 115JB. This has already been held by the Coordinate Bench of the ITAT in the following cases:

Even otherwise, the Explanation inserted to Section 14A of the Act by the Finance Act, 2022 is prospective in nature, as it has been expressly stated to apply from AY 2022–23 onwards. Thus, the said amendment has no application whatsoever for the year under consideration, which is AY 2017–18.

Thus, considering the totality of facts and circumstances discussed above, we are of the view that the order passed by the Ld. CIT(A) suffers from serious legal infirmities and is not sustainable in the eyes of law. Accordingly, the same is set aside, and the disallowance made under Section 14A read with Rule 8D is held to be unsustainable. Therefore, the additions made both

Since we have already deleted the entire additions, the cross-objection filed by the Revenue also stands rejected.