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Facts
The assessee, a non-banking financial company, declared a loss and claimed dividend income as exempt. The Assessing Officer (AO) disallowed an amount under Section 14A, applying amended Rule 8D. The assessee had suo moto disallowed a portion of expenses related to exempt income.
Held
The Tribunal held that disallowance under Section 14A cannot exceed the exempt income earned by the assessee. The AO's disallowance in excess of the assessee's suo moto disallowance was not upheld. The assessee's prayer to restrict the disallowance to the exempt income was also not allowed as the offered income in the return could not be reduced.
Key Issues
Whether disallowance under Section 14A can exceed exempt income? Whether the AO correctly applied amended Rule 8D? Can an assessee reduce the income offered in the return?
Sections Cited
14A, 143(2), 142(1), 10(34), 8D, 143(2), 142(1), 10(34), 8D
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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SMT. BEENA PILLAI & SHRI OMKARESHWAR CHIDARA
The Present cross appeal appeals filed by assessee as well as revenue arises out of order dated 24/07/2024 passed by NFAC, Delhi, for assessment year 2017-18 on following grounds of appeal: Grounds in assessee appeal:
1. Disallowance under section 14A of the Income-tax Act, 1961 ('the Act') of INR 2,73,37,449 in absence of proper satisfaction recorded
2. Disallowance under section 14A of the Act read with Rule 8D of the Income-tax Rules, 1962 ('the Rules') be restricted upto exempt income of INR 12,89,293
3. Disallowance under section 14A of the Act read with Rule 8D of the Rules on all investments” Grounds in revenue appeal: “1. Whether on the facts and circumstances of the case and in law, the Ld. CITIA) erred in holding that thedisallowance u/s 14A has to be made considering only those investments which yielded exempt income?
2. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) failed to appreciate the CBDT has issued circular No. 5 of 2014 dated 11.02.2014 clarifying that Rule BD read with section 14A of the Income Tax Act, 1961 provides for disallowance of the expenditure even where tax payer in a particular year has not earned exempt income?
3. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that the Finance Act, 2022 has inserted an Explanation to section 14A of the Act to clarify that notwithstanding anything to the contrary contained in the Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where exempt income has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such exempt income.
4. The appellant prays that the order of the CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored.
&CO.No.245/Mum/2024; A.Y. 2017-18 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. 5. The appellant craves leave to amend, or alter any grounds or add a new ground, which may be necessary.” Brief facts of the case are as under:
The assessee is a nonbanking financial company engaged in the business of lending short-term loans and trading of shares. Assessee declared interest and dividend income earned during the year and was offered to tax under the head profit and gains from business and profession. 2.1 For the year under consideration assessee filed its return of income on 30/10/2017, declaring loss of Rs.16,15,280/- under normal provisions of the act. The case was selected for scrutiny and notices under section 143(2) along with notice under section 142(1) was issued to the assessee calling upon various details in respect of the exempt income earned by the assessee. In response to statutory notices, the assessee furnished various details. 2.2 The Ld.AO, observed that, the assessee earned dividend income of Rs.12,89,293/- and claimed exempt under section 10(34) of the Act. The Ld.AO noted that, the assessee suo moto made disallowance under section 14A amounting to Rs.34,96,299/- under Rule 8D(2) of Income Tax Rules, 1962. The Ld.AO after considering various submissions of the assessee, applied the amended Rule 8D for year under consideration and disallowed interest expenditure under Rule 8D(2)(ii) and 1% of the average investment made during the year under Rule 8D(2)(iii) of the Rules.
Aggrieved by the order of the Ld.AO, the assessee preferred appeal before the Ld.CIT(A).
&CO.No.245/Mum/2024; A.Y. 2017-18 M/s. Khorakiwala Holdings and Investments Pvt. Ltd.
It was submitted that, the disallowance made by the Ld.AO is without appreciating the fact that, for the year under consideration the disallowance under section 14A cannot exceed the exempt income as has been declared by various decisions of Hon’ble High Court and Tribunal. It was submitted that, the Ld.AO did not record satisfaction, as to why, the disallowance made by the assessee is not acceptable. It was submitted that, disallowance computed by the Ld.AO by applying amended provisions under Rule 8D is bad in law. The Ld.CIT(A) however upheld the disallowance made by Ld.AO. But the Ld.CIT(A) directed to restrict the disallowance by only considering those investments which yielded exempt income under Rule 8D(2)(iii).
Aggrieved by the order of the Ld.CIT(A), both revenue and assessee preferred cross appeals before the Tribunal.
The only contention raised by both assessee as well as revenue in their cross appeals pertains to the disallowance under section 14A. 4.1 In the cross appeal filed by the assessee, it is submitted that the disallowance to be restricted to exempt income. It is the submission of the Ld.AR that assessing officer did not record satisfaction before rejecting suo moto disallowance computed by the assessee. The Ld.AR submitted that assessee had suo moto disallowed Rs.34,96,299/- against the exempt income amounting to Rs.12,89,293/-. The Ld.AR reiterated identical submission made before the Ld.CIT(A) in order to support his argument.
&CO.No.245/Mum/2024; A.Y. 2017-18 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. 4.2 On the contrary, the Ld.DR relied on the orders passed by the authorities below. It was submitted that even if there is no exempt income, disallowances is required to be made. He further supported the orders based on the amendment made in Section 14A by Finance Act 2022.
We have produced the submissions advanced by both sides in the light of the records placed before us.
It is noted that the Ld.AO applied the amended provisions of section 14A inserted as per the Finance act 2022. Similar issue has been considered by Hon’ble Delhi High Court in case of PCIT vs Era Infrastructure (India) Ltd reported in (2022) 141 taxmann.com 289 and decision of coordinate bench of this Tribunal in case of DCIT vs Lodha Developers Ltd., reported in (2022) 143 taxmann.com 442. It is noted that coordinate bench of this Tribunal in case of DCIT vs Lodha Developers Ltd (supra) following the Decision of Hon’ble Delhi High Court observed and held as under:
We have carefully considered the rival contention and perused the orders of the lower authorities. Undisputed fact shows that there is no exempt income and during the year by the assessee. If there is no exempt, income naturally there cannot be any disallowance u/s 14 A of the act because no expenditure has been incurred on any exempt income during the year. Further the reliance placed by the learned departmental representative on the amendment made by the finance act 2022 applies prospectively as held by the honourable Delhi High Court in CIT v. Era Infrastructure (P.) Ltd. [2022] 141 taxmann.com 289/288 Taxman 384/448 ITR 674. In view of this we do not find any &CO.No.245/Mum/2024; A.Y. 2017-18 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. infirmity in the order of the learned CIT - A in deleting the disallowance u/s 14 A of the act. Accordingly, ground number 3 of the appeal of the learned AO is dismissed.
Based on the above observations we do not find any merit in the ground raised by the revenue and the same results to be dismissed.
6. Coming to the plea of assessee in the cross appeal regarding quantification of the disallowance, Hon'ble Bombay High Court in the case of M/s. Nirved Traders Pvt. Ltd. Vs. DCIT in IT Appeal No. 149 of 2017, dated 23-4-2019 framed following question of law, which reads as under: -
"Whether ITAT was right in law in confirming the disallowance under Section 14A of the Income Tax Act, 1961 in excess of exempt income earned by the Assessee during the assessment year in question?"
6.1 The Hon'ble Court while answering the above question took note of the decisions of Hon'ble Delhi High Court in case of Cheminvest Ltd. v. CIT reported in (2015) 61 taxmann.com 118 and Hon’ble Karnataka High Court in case of Pragathi Krishna Gramin Bank v. Jt. CIT reported in (2018) 95 taxmann.com 41. Hon’ble Court referred to the decision of its coordinate bench of in case of PCIT vs. HSBC Invest Direct (India) Ltd., in of 2016 vide order dated 14/2/2019 and held that, disallowance u/s.14A cannot exceed the exempt income earned by the assessee during the year. The relevant findings of the Hon'ble High Court are as follows:-
"5. Having heard the learned Counsel for the parties and having perused the documents on record, consistently different High Courts in the country have taken a view that the disallowance under Section 14A of the Act read with Rule 8D of the Rules cannot exceed the Assessee's exempt income. The Delhi High Court, in the case of Cheminvest Ltd. v. Commissioner of Income Tax 1, has held that when the Assessee has not earned any income which was exempt from tax, disallowance of the expenditure under Section 14A read with 8D of the Rules would not be permissible.
Karnataka High Court, in the case of Pragati Krishna Gramin Bank v. Joint Commissioner of Income-tax 2, has held that expenditure in relation to income not includable in the total income cannot exceed such income. It was observed as under.
"14. We make it clear that the expenditure for earning exempted income has to have a reasonable proportion to the income, so earned, going by the common financial prudence. Therefore, even if the Assessing Authority has to make an estimate of such an expenditure incurred to earn exempted income, it has to have a rational nexus with the amount of income earned itself. Disallowance under Section 14A of Rs.2,48,85,000/- as expenses to earn exempted Dividend income of Rs.1,80,30,965/- is per se absurd and 1 [2015] 61 taxmann.com 118/234 Taxman 761/378 ITR 33 (Delhi) 2 [2018] [2018] 95 taxmann.com 41/256 Taxman 349 (Karnataka) (Karnatama) URS 3 of 7 4 3-ITXA 149-17.odt hypothetical. The disallowance under Section 8D cannot exceed the expenses claimed by assessee under the Proviso to Rule 8D. Therefore, where the assessee claimed that assessee did not incur any such expenditure during the year in question to earn Dividends of Rs.1,80,30,965/-, the burden was upon the assessing authority to compute the interest on such borrowed funds which were dedicatedly used for investment in securities to &CO.No.245/Mum/2024; A.Y. 2017-18 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. earn such exempted Dividend income. The disallowance under Section 14A cannot be wild guesswork bereft of ground realities. It has to have a reasonable and close nexus with the factually incurred expenses. It is not deemed disallowance under Section 14A of the act but an enabling provision for assessing authority to compute the same on the given facts and figures in the regularly maintained Books of Accounts. The assessing authority also could not have called upon the Assessee himself to undertake the exercise of computing the disallowance under Section 8D of the Rules. Such abdication of duty is not permissible in law. Since no such exercise has been undertaken by the assessing authority, the case calls for a remand."
6.2 From the above discussion it is clear that, disallowance u/s. 14A cannot exceed the exempt income earned by the assessee. However in the present facts of the case assessee suo moto disallowed Rs. 34.96 lakhs. It is noted that the Ld.AR could not point out any error or mistake in computation of the disallowance made by the assessee. We refer to the observation of Hon’ble Karnataka High Court reproduced herein above in this context. We note that the assessee suo moto disallowed the expenditure having regard to the facts and figure in the Books of Account regularly maintained by it. During the relevant year the decisions of Hon’ble Court referred herein above were there in the Public domain. The suo moto disallowance thus computed by the assessee cannot be further reduced as assessee in a bonafide belief considered certain expenses to compute the suo moto disallowance. Under such circumstances, the disallowance made &CO.No.245/Mum/2024; A.Y. 2017-18 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. by the Ld.AO in excess of the suo moto disallowance made by the assessee cannot be upheld. 6.3 The assessee has raised a ground of restricting the disallowance to the extent of exempt income earned. In our considered view this prayer cannot be allowed as what has been offered by the assessee in the return of income subjected to the assessment cannot be reduced. Assessee has consciously made disallowance even though at the relevant time the decision of Hon’ble Delhi High Court in case of Cheminvest(supra) was available to take assistance of.
Accordingly the ground raised by the assessee on this aspect results to dismissed.
In the result the appeals filed by assessee as well as revenue stands dismissed.
Order pronounced in the open court on 25/02/2025