ASSISSTANT COMMISSIONER OF INCOME TAX-14(1)(2), MUMBAI vs. SCHOOLNET INDIA LTD.,, MUMBAI

Schoolnet India Ltd., Vs 3rd Floor, Plot No. C-22, G Block The IL & FS Financial Centre, Bandra-Kurla Complex, Bandra (E), Mumbai - 400051 ……………. Respondent Appearances For the Appellant/Department : Shri Sanyam Suresh Joshi For the Respondent/Assessee : None Date of conclusion of hearing : 11.10.2022 Date of pronouncement of order : 28.10.2022 O R D E R Per Rahul Chaudhary, Judicial Member: 1. By way of the present appeals the Revenue has challenged the order, dated 16.06.2022, passed by the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, [hereinafter referred to as „the CIT(A)‟] for the Assessment Years 2014-15, whereby the Ld. CIT(A) had partly allowed the appeal against the Assessment Order, dated 30.12.2016 passed under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as „the Act‟).

Assessment Year: 2014-15 2. The Revenue has raised the following grounds of appeals: “1. Whether on the facts and under the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the disallowance u/s 14A r.w.r. 8D?

2. Whether on the facts and the circumstances of the case and in law, the Ld. CIT(A) was justified in deletion of disallowance made u/s 14A of the Act while computing book profit u/s 115JB of the Act.?”

3. The relevant facts, in brief, are that the Assessee filed return of income on 30.11.2014 declaring total income of INR 39,68,95,116/- for the Assessment Year 2014-15. Assessment was framed on the Assessee vide order dated, 30.12.2016, under Section 143(3) of the Act. The Assessing Officer made disallowance of INR 4,16,94,664/- invoking provisions of Section 14A read with Rule 8D of the Income Tax Rules, 1962 (hereinafter referred to as „the Rules‟) in addition to the suo- motu disallowance of INR 42,44,155/- made by the Assessee while computing total income under normal provisions of the Act. Further, the Assessing Officer also added aggregate disallowance of INR 4,59,38,819/- computed under Section 14A read with Rule 8D of the Rules while computing Book Profits under Section 115JB of the Act.

4. In the appeal preferred by the Assessee against the assessment order dated 30.12.2016, the CIT(A) granted relief to the Assessee by deleting the addition/disallowance made by the Assessing Officer under Section 14A of the Act under the normal provisions of the Act as well as for the purpose of Book Profits under Section 115JB of the Act.

Assessment Year: 2014-15 5. The revenue is now in appeal before us. We have considered the submission advanced by the Ld. Departmental Representative and perused the material on record. We note that the CIT(A) has deleted the disallowance under Section 14A of the Act, inter alia, on the ground that (a) the Assessing Officer has failed to record his dissatisfaction regarding the disallowance/computation under Section 14A made by the Assessee by following the decision of the Hon‟ble Bombay High Court in the case of Bombay Stock Exchange Ltd vs Principal Commissioner of Income Tax-2, [2020] 113 taxmann.com 303 (Bombay), and (b) the Assessee has not earned any exempt income during the relevant previous year by following the decision of the Hon‟ble Supreme Court in the case of Principal Commissioner of Income Tax vs. State Bank of Patiala (2018) 99 Taxmann.com 286 (SC). The relevant extract of the order passed by the CIT(A) read as under:

“4.4 From perusal of the order passed by Assessing Officer, it is evident that Assessing Officer has not recorded any reasons with regard to correctness of the claim made by the assessee. AO has just assumed that some expenditure out of borrowed fund must have been made in respect of the investments made by the appellant. Assessing Officer before embarking upon determination of the amount of expenditure incurred in the light of the exempted income, has to record a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. The aforesaid mandatory requirement has not been fulfilled by the Assessing Officer before making the disallowance under section 14A of the Act Reliance is drawn in the case of Essilor India (P) Ltd v. Deputy Commissioner of Income-tax [2022] 137 taxmann.com 60 (Karnataka), wherein it has been held that where Assessing Officer failed to record its satisfaction with regard to claim of assessee that it had not incurred any expenses in earning exempt income impugned disallowance under section 14A by invoking rule 8D made by Assessing Officer was unjustified. Further in the case of Bombay Stock Exchange Ltd vs Principal 3 Assessment Year: 2014-15 Commissioner of Income Tax-2, [2020] 113 taxmann.com 303 (Bombay), Hon'ble Bombay High Court has held that Prior to working out disallowance under section 14A by applying Rule 8D. Assessing Officer must record a conclusion that he is not satisfied with suo motu disallowance offered by assesse. 4.6 Further, it has been held by various courts that in absence of exempt income, disallowance of expenditure u/s 14A is not permissible. In the case of State Bank of Patiala (99 taxmann.com 286) Hon'ble Supreme Court held that that amount of disallowance under section 14A could be restricted to amount of exempt income only and not a higher figure. Hon'ble Supreme O Court in the case of Chettinad Logistics (P) Ltd [2018] 95 taxmann.com 250 and in the case of GVK Project and Technical Services Ltd (2019) 106 taxmann.com 181, has held when no exempt income was earned, the section 14A could not be triggered/invoked. 4.7 Hon'ble Delhi High Court in the case of Cheminvest Ltd (61 taxmann.com 118) has held that in absence of any exempt income. disallowance u/s 14A is not permissible. Further, in the case of IL&FS Energy Development Company Itd (84 taxmann.com 186), Hon'ble Delhi High Court has held that CBDT Circular No 5/2014 dated 11-2-2014 cannot override express provisions of section 14A, read with rule 8D and in the case of Caraf Builders & Constructions (P) Ltd (101 taxmann.com 167), Hon'ble Delhi High Court has held that disallowance under section 14A cannot exceed exempt income of relevant year. 4.8 When the assessee has sufficient interest-free fund in excess of interest-bearing fund, disallowance u/s 14A cannot be made. The same is been supported by the Hon'ble Bombay High Court in the case of Reliance Utilites & Power Ltd (313 ITR 340). Hon'ble Bombay High Court in the case of (Ashok Apparels (P) Ltd) 106 taxamnn.com 63, has held that where revenue failed to establish that interest bearing funds were utilized for making exempt investment, no disallowance under section 14A could have been made. 4.9 In the present case the appellant has made investment during the year under consideration and has accordingly disallowed interest expenses and administrative expenses AO Assessment Year: 2014-15 has not pointed out any defect in the same. Moreover, net worth of the appellant is much more than the investments as on 31.03.2014 In view of the above various judicial pronouncements, AO is directed to delete the disallowance of Rs 4,16,94,664/ made under section 14A of the IT Act. Disallowance of expenditure incurred for earning exempt income is restricted to the disallowance made by the appellant suo moto in the computation of Income filed by the appellant with its return of income. The ground of appeal no 1 to 6 of appellant are hereby allowed.

5. In grounds of appeal numbers 7 to 10 appellant challenged that on the facts and circumstances of the case AO has erred in making addition of Rs. 4,59,38,819 to the book profit computed u/s 115JB of Income Tax Act, 1961. The appellant prays that the addition made to the book profit may be deleted. 5.1 xx xx 5.2 I have considered the facts and circumstances of the case, submissions of the appellant and material available on record and various case laws referred on the above matter. In present ground of appeal, appellant has challenged the addition of amount of disallowance u/s 14A, while computing the Book profit u/s 115JB. Grounds of appeal 1 to 6 of the appellant regarding addition made u/s 14A of the I.T. Act has already been deleted. In view of the above, ground of appeal No 7 to 10 does not require adjudication. Hence the ground of appeal No 7 to 10 are allowed for statistical purpose.” (Emphasis Supplied)

6. On perusal of above it is clear that the CIT(A) has deleted addition/disallowance made by the Assessing Officer under Section 14A of the Act under the normal provisions of the Act by following the judgments of the Hon‟ble Supreme Court and the Hon‟ble Bombay High Court. We concur with the order passed by the CIT(A). Ground No. 1 raised by the Revenue is, therefore, dismissed.

Assessment Year: 2014-15 7. Ground No. 2 relates to the addition of the amount disallowed under Section 14A read with Rule 8D while computing Book Profits under Section 115JB of the Act. While adjudicating Ground No. 1, we have confirmed the order of CIT(A) deleting the addition/disallowance made by the Assessing Officer under Section 14A of the Act read with Rule 8D of the Rules and therefore, the question of adding the amount added/disallowed under Section 14A of the Act while computing Book Profits under Section 115JB of the Act does not arise. Further, the Special Bench of the Tribunal in the case of CIT vs. Vireet Investment Pvt. Ltd. : 2017 82 taxmann.com 415 (Delhi ITAT) has held that the provisions of Rule 8D of the Rules are not applicable for the purpose of computing addition/disallowance to be made under Section 14A of the Act while computing Book Profits. Accordingly, in view of the aforesaid Ground No. 2 raised by the Revenue is also dismissed.