KHIVRAJ MOTORS PVT.LTD., vs. PRINCIPAL COMMISSIONER OF IN

TCA.No.453 of 2020 IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 23.12.2020 CORAM THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAM and THE HONOURABLE MRS.JUSTICE V.BHAVANI SUBBAROYAN Tax Case Appeal No.453 of 2020 Khivraj Motors Pvt. Ltd. ...Appellant Vs The Principal Commissioner of Income Tax, Chennai-34 ...Respondent APPEAL under Section 260A of the Income Tax Act, 1961 against the order dated 05.8.2016 passed by the Income Tax Appellate Tribunal, Madras 'B' Bench, Chennai made in C.O.No.80/Mds/2015 for the assessment year 2010-11 For Appellant: Mr.N.V.Balaji assisted by Mr.N.V.Narayanan

For Respondent: Mrs.Karthik Ranganathan, SC assisted by Mr.Rajesh Sivanandham, JSC Judgment was delivered by

T.S.SIVAGNANAM

This appeal has been filed by the Revenue under Section 260A of the Income Tax Act, 1961 ('the Act' for brevity) challenging the order 1/8 https://www.mhc.tn.gov.in/judis/ TCA.No.453 of 2020 dated 05.8.2016 made in C.O.No.80/Mds/2015 on the file of the Income Tax Appellate Tribunal, Chennai, 'B' Bench ('the Tribunal' for brevity) for the assessment year 2010-11. 2. The assessee has filed this appeal by raising the following substantial questions of law : “1. Whether, under the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in upholding the disallowance made under Section 14A of the Income Tax Act ? And 2. Whether, under the facts and circumstances of the case, the disallowance under Section 14A could exceed the income not includable in the total income ?” 3. We have heard Mr.N.V.Balaji, learned counsel assisted by Mr.N.V.Narayanan, learned counsel appearing for the appellant and Mr.Karthik Ranganathan, learned Standing Counsel assisted by Mr.Rajesh Sivanandham, learned Junior Standing Counsel appearing for the respondent/Revenue. 4. It is not disputed that the issue involved in this case is 2/8 https://www.mhc.tn.gov.in/judis/ TCA.No.453 of 2020 squarely covered by the decision of the Hon'ble Division Bench of this Court in the case of Marg Ltd. Vs. CIT [reported in (2020) 120 Taxmann.com 84], in which, the decision rendered by us in TCA. Nos.732 and 733 of 2018 dated 07.7.2020 [CIT Vs. Tidel Park Ltd.] was followed. The relevant portions of the judgment in the case of Marg Ltd., read as hereunder : “9. A Co-ordinate Bench of this Court, in the case of CIT v. Tidel Park Ltd. [TCA Nos.732 & 733 of 2018 decided on 7-7-2020], has relied upon the decisions of the Delhi High Court in the case of Joint Investments (P.) Ltd. v. CIT [2015] 59 taxmann.com 295/233 Taxman 117/372 ITR 694 (Delhi) and CIT v. Taikisha Engg. India Ltd. [2015] 54 taxmann. com 109/229 Taxman 143/370 ITR 338 (Delhi) and Bombay High Court decision in the case of Godrej & Boyce Mfg. Co Ltd. v. Dy. CIT [2010] 194 Taxman 203/328 ITR 81 and categorically held that the Assessing Officer was not justified in making excessive disallowance beyond the dividend income declared by the Assessee. ...... 12. Another Bench of Madras High Court in the case of CIT v. Chettinad Logistics (P.) Ltd. [2017] 80 taxmann.com 221 248 Taxman 3/8 https://www.mhc.tn.gov.in/judis/ TCA.No.453 of 2020 55 wherein the Division Bench of the Court followed another Division Bench judgment in the case of Redington (India) Ltd. v. Addl. CIT [2017] 77 taxmann.com 257 (Mad.) and held that the view of the Central Board of Direct Taxes in Circular No. 5 of 2014 dated 11-2- 2014, which has been relied by the Tribunal in the impugned order cannot be upheld and the disallowance under section 14A of the Act cannot go beyond the extent of exempted income itself. Paragraph 12.3 of the said judgment is quoted below for ready reference. "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. 7. Per contra, Sri.T.Ravikumar appearing 4/8 https://www.mhc.tn.gov.in/judis/ TCA.No.453 of 2020 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. 8. 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. 9. 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 v. Maharashtra Sugar Mills Limited 5/8 https://www.mhc.tn.gov.in/judis/ TCA.No.453 of 2020 [1971] 82 ITR 452 and Rajasthan State Ware Housing Corporation v. Commissioner of Income-tax [2000] 242 ITR 450/109 taxmann. com 145 (SC) 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 v. Walfort Share and Stock Brokers (P) Ltd. [2010] 326 ITR 1' .... The mandate of s.14A is clear. It desires 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.' 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 6/8 https://www.mhc.tn.gov.in/judis/ TCA.No.453 of 2020 '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. 11. 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 M/s.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." 7/8 https://www.mhc.tn.gov.in/judis/ TCA.No.453 of 2020 T.S.SIVAGNANAM,J AND V.BHAVANI SUBBAROYAN,J RS 5. Following the same, the appeal filed by the assessee is allowed, the impugned order passed by the Tribunal is set aside and the substantial questions of law are answered in favour of the assessee. No costs. 23.12.2020 To The Income Tax Appellate Tribunal, 'B' Bench, Chennai. TCA.No.453 of 2020 8/8 https://www.mhc.tn.gov.in/judis/