DCIT CORPORATE CIRCLE 3(2), CHENNAI vs. ZYLOG SYSTEMS LIMITED, CHENNAI

This appeal filed by the Revenue is directed against the order passed by the learned Commissioner of Income Tax (Appeals)-13, Chennai, dated 23.06.2017 and pertains to assessment year 2011-12.

The Revenue has raised the following grounds of appeal: “1. The order of the learned CIT(A) is contrary to law and facts and circumstances of the case. 2.1 The ld.CIT(A) erred in directing the Assessing Officer to restrict the disallowance uls 14A to the extent of dividend income declared relying on the decision of t© Hon'ble Madras High Court in the case of Mis. Redington India Limited Vs. Addi.CIT reported in 392 ITR 633 though the facts of the case in hand is different frorn the decision in the case of the Hon'ble Madras High Court. In the relied on the decision, the assessee has not declared any exempt income whereas the assessee has declared exempt income of Rs.13,754/- in the case in hand. 2.2 The learned CIT(A) ought to have considered the fact that in the relied on decision, M/s. Redington India Limited has reserve surplus for making investments whereas in the case in hand, the assesses has borrowed funds for which the assesses has paid an interest of Rs.23.71 Crores during the FY 2010-11. 2.3 The learned CIT(A) ought to have seen that the assessee company should have incurred administrative expenditures for administering the investment of Rs. 155.24 Crores and also assessee has made fresh investment of Rs.31,69,12,330/- during the financial year 2011-12. 2.4 The ld.CIT(A) ought to have followed the decision of Hon'ble Karnataka High Court in United Breweries Limited Vs. ACIT (Kar) 229 Taxman 113 and Hon'ble Bombay High Court in the case Godrej & Boyce Manufacturing Co. Ltd (Bom.) 328 ITR 81 wherein it was ruled that the Assessing Officer is duty bound to calculate the disallowance u/s 14A applying Rule 8D if the Assessing Officer is not satisfied with the assessee's claim that no expenditure is incurred for earning exempt income from AY 2008-09. 2.5 The learned CIT(A) ought to have dismissed the assessee's claim as there is no provision in section 14A to restrict the disallowance to the exempt income declared by the assessee.

The brief facts of the case are that, the assessee company is engaged in the business of software analysis, design and development, filed its return of income for the assessment year 2011-12 on 30.09.2011, admitting total income of Rs. 150,46,75,014/-. During the course of assessment proceedings, the AO noticed that the assessee has made huge investment in shares and securities and also earned dividend income of Rs. 13,754/- and same has been claimed as exemption u/s. 10(34) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”). However, does not made suomoto disallowance of expenditure relatable to exempt income. Therefore, invoked provisions of Rule 8D of Income Tax Rules, 1962 (hereinafter referred to as “the IT Rules, 1962”) and computed disallowance of Rs. 4,33,97,965/-. The assessee carried the matter in appeal before the ld. CIT(A) and the Ld. CIT(A) for the reasons stated in their appellant order dated 23.06.2017 and also by following the decision of Hon’ble Madras High Court in the case of M/s. Redington India Ltd vs ACIT, [2017] 77 Taxmann.com 257 (Mad), restricted disallowance computed u/s. 14A of the Act, to the extent of exempt income of Rs.

The ld. DR, referring to explanation to section 14A inserted by the Finance Act, 2022 submitted that said explanation is clarificatory in nature which is applicable retrospectively from the date of provision of section of 14A of the Act. Therefore, submitted that the Ld. CIT(A) has erred in restricting disallowance to the extent of exempt income.

The Ld. Counsel for the assessee submitted that explanation to section 14A inserted by the Finance Act, 2022, held to be perspective in nature and cannot be applied to the impugned assessment year. Further, before amendment, the law is very clear in as much as Hon’ble Jurisdictional High Court of Madras in the case of M/s. Redington India Ltd vs ACIT, (supra) has held that disallowance contemplated u/s. 14A of the Act cannot exceed exempt income.

We have heard both the parties, perused materials available on record and gone through orders of the authorities

As regards arguments of the ld. Sr. DR for the Revenue, in light of explanation to section 14A inserted by the Finance Act, 2022 and its applicability with retrospective effect, we find that Hon’ble Delhi High Court in the case of Era Infrastructure (India) Ltd., (Supra), considered the amendment and also taking into account various case laws, held that explanation to section 14A inserted by the Finance Act, 2022 is perspective in nature, and it cannot be applied prior to 01.04.2022. Therefore, we reject argument of the Ld. DR present for the Revenue.

In this view of the matter and by respectfully following the decision of Hon’ble Madras High Court in the case of M/s. Redington India Ltd vs ACIT (supra), we are of the considered view that disallowance of expenditure u/s. 14A of the Act cannot exceed exempt income and thus, we are inclined to uphold the findings of the Ld. CIT(A) and dismiss the appeal filed by the Revenue.

In the result, appeal filed by the Revenue is dismissed.