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Income Tax Appellate Tribunal, MUMBAI BENCH “H”, MUMBAI
Before: SHRI M. BALAGANESH & SHRI KULDIP SINGH
Per : Kuldip Singh, Judicial Member: The appellant, DCIT- 3(2)(1), Mumbai (hereinafter referred to as ‘the Revenue) by filing the present appeal, sought to set aside the impugned order dated 13.09.2021 passed by Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC) [hereinafter referred to as the CIT(A)] qua the assessment year 2017-18 on the grounds inter alia that :- “(i) Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was right in deleting the disallowance u/s 14A ofRs.2,16,56,017/- which was computed as per Rule 8D of IT Rules
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1962 on the basis ofCBDT Circular No.5/2014 dated 11.02.2014 which clearly states that it is not necessary to earn exempt income in a particular year in which the disallowance is made? (ii) Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was right in deleting the disallowance u/s 14A holding that no disallowance is to be made when the assessee not earned any exempt income which is contrary to CBDT Circular No.5/2014 which clarifies that the Rule 8D r.w.s. 14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income? (iii) Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was right in holding that only the actual expenses incurred for earning exempt income debited to the P&L account needs to be added back in computing book profit u/s. 115JB disregarding the clause (f) to Explanation II of Section 115JB of the Act ? (iv) The appellant prays that the order of CIT(A) on the above grounds be set aside and that of Assessing Officer be restored. (v) The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.”
Briefly stated the facts necessary for adjudication of the controversy at hand are : the assessee filed its return declaring total income of Rs.1,99,21,620/- under normal provisions of Income Tax Act, 1961 (hereinafter referred to as the ‘Act’) and at Rs.Nil as book profit under section 115JB of the Act. Subsequently, the assessee revised the return of income on 30.01.2018 declaring income at Nil under normal provisions as per scheme of arrangement and amalgamation wherein assessee has sold its Alloy Steels Rolling and Finishing Business on slump sale basis to Mukand Vijaynagar Steels Ltd. in a scheme arrangement and amalgamation and computed Long Term Capital Gain (LTCG). Thereafter, assessee again filed revised return of income on 29.03.2019 declaring income under normal provisions and under section 115JB of the Act at nil. During scrutiny proceedings the
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Assessing Officer (AO) noticed from the profit & loss account and computation income filed by the assessee that assessee company has made investment of Rs.250.21 crore which are liable to generate exempt income. Assessee has not made any disallowance under section 14A of the Act but has claimed interest expenses of Rs.266.64 crore for the year under consideration. So the AO after invoking the provisions contained under section 14A read with rule 8D of the Act recomputed the disallowance and thereby made disallowance at Rs.2,16,56,017/- under section 14A read with rule 8D of the Act.
Assessee carried the matter before the Ld. CIT(A) by way of filing appeal who has deleted the addition by partly allowing the appeal. Feeling aggrieved with the impugned deletion made by the Ld. CIT(A) Revenue has come up before the Tribunal by way of filing present appeal.
We have heard the Ld. Authorised Representatives of the parties to the appeal, perused the orders passed by the Ld. Lower Revenue Authorities and documents available on record in the light of the facts and circumstances of the case and law applicable thereto.
The Ld. D.R. for the Revenue challenging the impugned order passed by the Ld. CIT(A) contended that when assessee has claimed interest expense of Rs.266.60 crore in the year under consideration the AO has rightly made disallowance under section 14A of the Act and relied upon the order passed by the AO.
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However, on the other hand, the Ld. A.R. for the assessee to repel the arguments addressed by the Ld. D.R. for the Revenue relied upon the order passed by the Ld. CIT(A) and further contended that when there is no exempt income no disallowance can be made under section 14A of the Act.
We have perused the order passed by the Ld. CIT(A) who has duly thrashed the facts and brought on record that during the year under consideration the assessee has not earned or claimed any exempt income and deleted the disallowance made under section 14A as well as under section 115JB of the Act by the AO by returning following findings: “4.1 The facts of the case and the submission of the appellant -have duly been considered.
4.2. Ground no 1 is general in nature and do not require any specific adjudication. 4.3 Ground no 2- Disallowance u/s 14A
4.3.1 Ground No. 2 relates to disallowance of Rs.2,16,56,017/-- made by the AO u/s 14A read with Rule 8D: On perusal of details, it is noted that there was no exempt income earned or claimed by the appellant during the relevant assessment year. The appellant has taken the plea that disallowance u/s 14A cannot be made when ther is no exempt income during the year . In this regard, reliance has been made on various decisions in the written submission of the appellant, which have duly been considered.
4.3.2 A controversy has arisen in certain cases as to whether disallowance can be made by invoking section 14A of the Act even in those cases where no income has been earned by an assessee which has been claimed as exempt during the financial-year.
4.3.3 In this regard, Central Board of Direct Taxes, in exercise of its powers under section 119 of the Act clarified vide Circular No. 5/2014 on 11th February 2014 that Rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income. The clarification is based on the following:-
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• legislative intent is to allow only that expenditure which is relatable to earning of income and it therefore follows that the expenses which are relatable to earning of exempt income have to be considered for disallowance, irrespective of the fact whether any such income has been earned during the financial year or not. • The above position is further clarified by the usage of term 'inciudible' in the Heading to section 14A of the Act and also the Heading to Rule 8D of t.T. Rules, 1962 which indicates that it is not necessary that exempt income should necessarily be included in a particular year's income, for disallowance to be triggered, • Also, section 14A of the Act does not use the word "income of the year" but "income under the Act". This also indicates that for invoking disallowance under section 14A, it is not material that assessee should have earned such exempt income during the financial year under consideration. • The above position is further substantiated by the language used in Rule 8D(2)(ii) & 8D(2)(iii) of I.T. Rules.
4.3.4 However, Hon'ble Delhi High Court in the case of Cheminvest Ltd. vs CIT (2015) 61 taxmann.com 118 (Del) dated 02.09.2015 held that section 14A envisages that there should be an actual receipt of income which is not includible in total income; hence, section 14A will not apply where no exempt income is received or receivable during relevant previous year.lt has been noted by the Hon'ble High Court that decision of Hon'ble Supreme Court in the case of Rajendra Prasad Moody (115 ITR 519 (SC)) was rendered in the context of allowability of deduction under section 57(iii) of the Act, where the expression used is 'for the purpose of making or earning such income1. Section 14A of the Act on other hand contains the expression 'in relation to income which does not form part of the total income.' The Court held that the decision in Rajendra Prasad Moody cannot be used in reverse to contend that even if no income has been received, the expenditure incurred can be disallowed under section 14A of the Act. In Cheminvest case, SLP before Supreme Court was not approved due to low tax effect.
4.3.5 Further, Hon'ble Delhi High Court in the case of CIT v. Holcim India (P.) Ltd. (2014) 272 CTR 282 (Delhi) also held that there can be no disallowance under section 14A in the absence of exempt income. This position has been followed by other Courts as well by following the aforesaid decisions of Delhi High Court.
4.3.6 In PCIT Vs IL&FS Energy Development Company Ltd [2017] 54 taxmann.com 186 (Delhi) dated 16.08.2017, the Delhi High Court held that CBDT Circular No. 5/2014 dated 11-2-2014 cannot override express provisions of section 14A, read with Rule 8D and where no exempt income was earned in relevant assessment year, merely
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because tax auditor had suggested in tax audit report that there ought to be such disallowance, it could not be a ground to make disallowance in terms of section 14A, read with rule 8D. In Redington (India) Ltd. v. Addl. ClT [2017] 392 ITR 633/77 taxmann.com 257 (Mad.), a similar contention of the Revenue was negated. The Court there declined to apply the CBDT Circular by explaining that Section 14A is "clearly relatable to the earning of the actual income and not notional income or anticipated income."
4.3.7 Courts have decided the issue against the Revenue so far in other cases as below, mainly by following Delhi High Court decision in case of Cheminvest Ltd etc.;
• PCIT vs. Rattan India Infrastructure Ltd. (ITA no. 312 of 2018} dated 19.03.2018 Delhi High Court held that "having regard to the statutory mandate that (here ought to be exempt income, as a pre-condition for disallowance, this Court is in agreement and follows the principles declared in Cheminvest Ltd. (supra) etc. and no question of law arises." The Supreme Court dismissed the revenue's SLP PCIT 7 vs. Rattan India Infrastructure Ltd. [SLP no. 44853/2018] (SCJ dated 04.01.2019 on the ground of low tax effect, leaving the question of law open.
. CIT (Central-1), Chennai vs Chett/nad Logistics Pvt, Lid. [2017] 80 taxrnann.com 221 (Madras) dated 13.03.2017 where it is held that section 14A can only be triggered, if assessee seeks to square off expenditure against income which does not form part of total income under Act; Rule 8D only provides for a method to determine amount of expenditure incurred in relation to income, which does not form part of total income of assessee and it cannot go beyond what is provided in section 14A. Thus, where no exempt income i.e., dividend, was earned in relevant assessment year by assessee, section 14A cannot be invoked. Supreme Court dismissed Department's SLP CIT (Central) 1 v. Chettinad Logistics (P.) Ltd. [2018] 95 taxmann.com 250 (SC) dated 02.07.2018 through a summary order, on delay as well as merits.
. CIT vs GVK Project & Technical Services Ltd. (ITA No. 646 of 2018) [2019] 106 taxmann.com 180 (Del).The Supreme Court in PCIT vs GVK Project and Technical Services Ltd [2019J 106 Iaxmann.com 181 (SC) dated 03.05,2019 dismissed SLP of Department through a summary order, on delay as well as merits.
. PCIT vs. Oil Industry Development Board (ITA No. 197 of 2018) [2019] 103 taxmann.com 325 (Delhi). SLP of Department in PCIT vs. Oil Industry Development Board
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[2019J 103 taxmann.com 326 (SC) dated 08.02.2019 was dismissed.
• Commissioner of Income-tax - I v. Corrtech Energy (P.) Lfd. [2014] 45 taxmann.com 116 (Gujarat) dated 24.03.2014 that where assessee did not make any claim for exemption of any income from payment of tax, disallowance under section 14A could not be made.
• Redington (India) Ltd. v. Additional Commissioner of Income-tax, Co. Range-V, Chennai [2017] 77 taxmann.com 257 (Madras) dated 23.12.2016 that provision of section 14A is relatable to earning of actual income and not notional or anticipated income, hence, where (here is no exempt income in a year, there cannot be a disallowance of expenditure in relation to an assumed income. In this case, SLP before Supreme Court was not approved due to low tax effect.
• CIT vs. Gujarat State Petronet Ltd. (ITA no. 543 of 2016) (Gujarat) dated 11.07.2016 holding that the sole question arising in the appeal was squarely covered by decision of that Court in case of CIT vs. Corrtech Energy (P.) Ltd. reported in [2015] 372 ITR 97. SLP filed by revenue in this case before Supreme Court, vide SLP (C) No. 5147/2017, SLP (CC) No. 2919/2017 and Civil Appeal No. 9702/2018 was dismissed on 05.09.2018 by Supreme Court on the ground of low tax effect.
• Ballarpur Industries Ltd. (ITA No. 51 of 2016) (Bombay High Court, Nagpur Bench) dated 13/10/2016 the High Court decided the issue against revenue by following the judgment of Delhi High Court in the case of M/s. Cheminvest Ltd.
• Reliance Capital Asset Management Ltd. (IT A No. 487/2015) (Bombay) Revenue had challenged the order of ITAT by taking a ground of appeal that for invoking disallowance u's 14A, it is not material that the assessee should have earned such exempt income during the financial year under consideration as per CBDT Circular no. 5/2014, The Bombay High Court however dismissed the appeal of revenue. SLP filed in this case before Supreme Court vide SLP (CC) No. 11379/2018 was dismissed on 07.09.2018 on the ground of low tax effect though question of law was kept open.
4.3.8 In this case, there is no exempt income earned or claimed during the year. In view of the above discussion and the abovementioned decisions of various High Courts, disallowance made u/s 14A read with Rule 8 D is deleted. Accordingly, ground no 2 is allowed.
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Ground No 3- Disallowance u/s 14A in the computation of book profit u/s 115 JB 5.1 In the order u/s 143(3), the A.O. computed disallowance u/s 14A Rule 8D at Rs. 2,16,56,011I-. The said amount was also added by the AO while computing the Book Profit u/s 115JB. In this regard, it has been submitted by the appellant that without appreciating the fact that as per the provisions of Sec. 115JB only the actual expenses incurred for earning'exempt income debited to the profit and loss account is to be added back in computing book profit u/s 115JB.lt is also stated that the amount actually incurred and debited to Profit & Loss Account is liable to be added in computing Book Profit and not notional amount computed as per Rule 8D. 5.2 As the disallowance of Rs. 2,16,56,017/- u/s 14 A read with Rule 8D has been deleted in respect of Ground no 2, the abovementioned addition made u/s 115JB is also deleted. Accordingly, ground no 3 is allowed.”
Bare perusal of the order passed by the Ld. CIT(A) goes to prove that when assessee has neither earned nor claimed any exempt income during the year under consideration no disallowance can be made under section 14A of the Act as has been held by Hon’ble High Court of Delhi in case of Chem Invest Ltd. (supra), CIT v. Holcim India (P.) Ltd. (supra) and PCIT Vs IL&FS Energy Development Company Ltd. (supra). So when there is no disallowance under section 14A of the Act under normal provisions, no disallowance under section 14A of the Act in the computation of book profit under section 115JB of the Act is sustainable. So finding no illegality or perversity in the impugned findings returned by the Ld. CIT(A) present appeal filed by the Revenue is dismissed. Order pronounced in the open court on 31.05.2022.
Sd/- Sd/- (M. BALAGANESH) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated: 31.05.2022. * Kishore, Sr. P.S.
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Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT (A) Concerned, Mumbai The DR Concerned Bench
//True Copy//
By Order
Dy/Asstt. Registrar, ITAT, Mumbai.