RELIANCE INDUSTRIAL INVESTMENTS AND HOLDINGS LIMITED (SUCCESSOR OF RELIANCE PETRO INVESTMENT LIMITED),MUMBAI vs. DY COMMISSIONER OF INCOME TAX, CIRCLE 3(3)(1), MUMBAI

This appeal in preferred by the assessee arises out of order passed by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre [hereinafter referred to as ld. CIT(A) NFAC] in Appeal No. ITBA/NFAC/S/250/2022-23/1044299130(1) dated 2 ITA NO.2515/MUM/2022 RELIANCE INDUSTRIAL INVESTMENT & HOLDINGS LTD 29/07/2022 against the order passed by the learned Deputy Commissioner of Income Tax, Circle -3(3)(1), Mumbai [ hereinafter referred to as ld. AO] under section (u/s) 143(3) of the Income Tax Act [hereinafter referred to as the ‘Act’] on 29/11/2022 for the Assessment Year (A.Y.) 2017-18.

Though the assessee has raised several grounds before us, we find that the effective issue to be issued with regard to disallowance made u/s 14A of the Act read with Rule 8D of the Income Tax Rules (hereinafter referred to as the Rules) both under normal provisions of the Act as well as in the computation of book profits u/s 115JB of the Act.

We have heard the rival submissions and perused the materials available on record. The assessee is a limited company engaged in the business of wholesale trading of fabric goods and investment in shares and securities. The assessee filed its return of income for the A.Y. 2017-18 on 28/10/2017 declaring loss of Rs 73,37,839/- under normal provisions of the Act and book loss of Rs 71,69,319/- u/s 115JB of the Act. The assessee filed revised return of income on 07/03/2018 declaring loss of Rs 57,20,734/- under normal provisions of the Act and book loss of Rs 55,71,341/- u/s 115JB of the Act. In the return, the assessee claimed exemption u/s 10 of the Act in respect of long term capital gain on sale of shares of Reliance Industries Ltd in the sum of Rs 1,69,494/- under normal provisions of the Act. The assessee made suo moto disallowance of expenses u/s 14A of the Act in the sum of Rs 20,101/- in the return of income. The basis of this suo moto disallowance is available in page 9 of the factual paper book filed before us. The same is as under:- Direct expenses Demat / custodian charges - 974 Securities Transaction Tax (STT) - 413 1/4th of other administrative expenses Audit fees 69,000 3 RELIANCE INDUSTRIAL INVESTMENT & HOLDINGS LTD Filing fees 1,800 Profession Tax 2,500 General Expenses 1,555 ------------ 18,714 Total 20,101 4. This sum of Rs 20,101/- was voluntarily disallowed by the assessee u/s 14A of the Act in the return of income while computing income under normal provisions of the Act. However, while computing the book loss u/s 115JB of the Act, since the long term capital gain is taxable u/s 115JB of the Act, no suo moto disallowance of expenses was made in the return of income. The ld. AO directly applied the computation mechanism provided in amended Rule 8D(2) of the Rules with effect from 02/06/2016 and worked out the disallowance of indirect expenses at the rate of 1% of annual average of monthly averages of investments and arrived at the figure of Rs 1,84,43,000/- . Since the total expenses claimed by the assessee in the profit and loss account itself was only Rs 57,41,477/-, the ld. AO restricted the disallowance of expenses u/s 14A of the Act to Rs 57,22,763/- (5741477 minus suo moto disallowance made of Rs 18714). This disallowance was made by the ld. AO both under normal provisions of the Act as well as in the computation of book profits u/s 115JB of the Act.

We find that the ld. CIT(A) upheld the action of the ld. AO. The ld. CIT(A) further held that the disallowance of expenses need to be made both under normal provisions of the Act as well as in the computation of book profits u/s 115JB irrespective of the fact as to whether there is any exempt income or not.

At the outset, we find that there is no exempt income claimed by the assessee while computing book profits u/s 115JB of the Act as admittedly the long term capital gain on sale of shares of Reliance Industries Ltd would be taxable u/s 115JB of the Act. Hence there is no question of application of 4 RELIANCE INDUSTRIAL INVESTMENT & HOLDINGS LTD clause ‘f’ of Explanation 1 to section 115JB(2) of the Act. Accordingly, there cannot be disallowance of any expenses thereon. We direct the ld. AO to delete the same.

What is now left is only applicability of provisions of section 14A of the Act read with Rule 8D of the Rules while computing income under normal provisions of the Act. The law is now very well settled that only those investments which had actually yielded exempt income should be considered for this purpose. Reliance in this regarded is placed on the decision of Hon’ble Supreme Court in the case of Maxopp Investments reported in 402 ITR 640 (SC). We find that the assessee had given in page 10 of the paper book filed before us the workings under Rule 8D(2) of the Rules by considering only those investments which had yielded exempt income. The ld. AO is hereby directed to verify the said workings and recompute the disallowance u/s 14A of the Act read with Rule 8D(2) of the Rules accordingly. By this process, even if the assessed income goes below the returned income, still the recomputed amount should be disallowed. We are also conscious of the amendment brought in section 14A of the Act by the Finance Act 2022. We find that the Hon’ble Delhi High Court in the case of PCIT vs Era Infrastructure (India) Ltd in ITA No. 204/2022 & CM APPL. 31445/2022 dated 20/07/2022 wherein the Explanatory Memorandum to the Finance Bill 2022 were duly considered and had held that the said amendment is only effective from 1st April 2022 only and not retrospective in operation.

Accordingly, the grounds raised by the assessee are allowed for statistical purposes.

In the result, the appeal of the assessee is allowed for statistical purposes.