DY COMMISSIONER OF INCOME TAX 6(1)(2), MUMBAI vs. M/S ASK WEALTH ADVISORS PVT LTD , MUMBAI

Fact in brief is that assessment u/s 143(3) r.w.s 254 of the Act was finalized on 09.10.2019. During the course of assessment in response to query raised by the A.O the assessee submitted that it has not earned any exempt income during the year under consideration, therefore, question of disallowance u/s 14A did not arise. However, the A.O has not agreed with the submission of the assessee and stated that assessee borrowed huge funds on which substantial interest cost has been incurred, therefore, the contention of the assessee that no disallowance can be made where there was no exempt income cannot be accepted. Therefore, the A.O has computed disallowance u/s 14A to the amount of Rs.1,55,76,174/- and added to the total income of the assessee.

Aggrieved, the assessee filed the appeal before the ld. CIT(A). The ld. CIT(A) has allowed the appeal of the assessee. The relevant part of the decision of ld. CIT(A) is as under: “The Appellant has made a detailed submissions on this issue which has been reproduced at para 4 above. The submissions can be summarised as under:-  No disallowance can be made u/s 14A of the Act since the Appellant has not earned any dividend income during the year. The Appellant has placed reliance on the decision of Hon'ble Supreme Court in the case of Chettinad Logistics Pvt. Ltd.  Disallowance u/s 14A cannot exceed exempt income earned during the year. Reliance has been placed on the decision of Hon'ble Supreme Court in the case of Maxopp Investments Ltd.  The Appellant has placed reliance on various other case laws in support of the contention that no disallowance could have been made in the case of the Appellant u/s 14A of the Act. I find from the submissions that the Appellant has not earned any dividend income/exempt income during the year. This fact was also brought to the knowledge of the AO and has been accepted by the AO in the assessment order. The issue is whether provisions of section 14A can be invoked in absence of any exempt income. This issue has reached a finality in view of Hon'ble Supreme Court dismissing SLPs led 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.

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 the Income Tax Rules, 1962 (in short, the Rules) was valid.

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.

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.

Therefore, to our minds, the addition made by the Assessing Officer by relying upon Section 14A of the Act, was completely contrary to the provisions of the said Section. …………………… ……………………

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.

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.

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 8D could not be invoked.

While coming to this conclusion, the Division Bench also took note of the aforementioned Circular, issued by the Board.

3 The reasoning of the Division Bench is contained in the following part of the judgment

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 Leamed 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 rw 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 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 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'

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 ITA No.2466/Mum/2022 A.Y. 2012-13 5 DCIT-6(1)(2) Vs. M/s Ask Wealth Advisors Pvt. Ltd. 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)

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.

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

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 clarifactory in nature and would apply retrospectively, and that, the Division Bench, therefore, discussed the impact of Rule 8D of the Rules

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

Therefore, as adverted to above, Rule 8D cannot come to the rescue of the Revenue.

2 In any event the Tribunal via, the impugned judgment has remitted the matter to the Assessing Officer.

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:

Heard both the sides and perused the material on record. It is undisputed fact during the year under consideration assessee has not earned any exempt income. In support of his contention the assessee has relied on the decision of the Hon’ble Mardas High Court in the case of CIT Vs. M/s Chettinad Logistics Pvt. Ld. as supra wherein the Hon’ble Supreme Court has also dismissed the SLP filed by the Department. We have also considered the decision of the Hon’ble Delhi High Court in the case of Cheminvest Ltd. Vs. CIT (2015) 378 ITR 33 (Del) and the SLP filed against this judgment was also dismissed by Hon’ble Supreme Court. After considering the submission of the assessee that is has not earned any exempt income during the year and taking into consideration that this issue has reached finality in view of the judicial decisions as referred supra. Therefore, we don’t find any infirmity in the decision of ld. CIT(A), accordingly, the appeal of the revenue stand dismissed.

In the result, the appeal of the revenue stand dismissed. Order pronounced in the open court on 30.11.2022 (Rahul Chaudhary) (Amarjit Singh) Judicial Member Accountant Member Place: Mumbai Date 30.11.2022 Rohit: PS