SAPPHIRE FOODS INDIA LIMITED,MUMBAI vs. DCIT, CIRCLE 3(3)(1), MUMBAI

Per: Smt. Beena Pillai, J.M.:
Present appeal is filed by the assessee is against order dated
29/06/2024 passed by NFAC, Delhi, for assessment year 2022-23
on following grounds of appeal:

I.T.A. No.3579/Mum/2024
Assessment Year: 2022-23

“Being aggrieved by the CIT(A) order u/s. 250 dated
29.06.2024 passed by the learned National Faceless Appeal
Centre (NFAC), Delhi, this appeal petition is submitted on the following grounds which it is prayed may be considered without prejudice to one another.
1.0 In the facts and circumstances of the case and in law, the learned CIT(A) erred both in facts and in law in disallowing
Rs. 1,63,826/- under the provisions of section 14A of the Income Tax Act, 1961. 2.0 Your appellant craves leave to add amend, alter, delete and/or modify any of above grounds of appeal on or before the final date of hearing of this appeal petition.”
Brief Facts of the case are as under:
The assessee is a private limited company, and filed its revised return of income for the year under consideration on 28/12/2022
declaring total income of rupees nil. The case was selected for scrutiny for the following reasons:
i) large any other amount allowable as deduction claimed in schedule BP of return ii) addition of assets during the year in the of assets where rate of depreciation claimed as 40% or higher iii) introduction/addition of high value intangible asset during the year and claim of depreciation at full rate iv) non-compliance to income computation and disclosure standards v) last difference in the opening stock of current year (in trading and manufacturing account) and closing stock of previous year shown in P&L account as per return of income vi) claim of large value refund vii) high liabilities as compared to low income/receipts

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Assessment Year: 2022-23

vii) expenditure debited to P&L for earning exempt income is very less in comparison to the investments made to earn exempt income.

purposes of investment, and no part of the borrowing can be attributed towards the investment. It was also contended that, most importantly no dividend income was earned during the year under consideration and therefore no disallowance under section 14A r.w.
Rule 8D could be made. The assessee placed reliance on following decision to support its contention that no expenditure could be attributable since assessee had sufficient own funds that is more than the borrowed funds, and therefore it cannot presumed that, the assessee made any investments from the borrowed funds:
• decision of Hon’ble Bombay High Court in case of Reliance Utilities and Power Ltd., reported in 313 ITR 340. • The assessee also took cue from the decision of Hon’ble Supreme Court in case of East India Pharmaceutical Works Ltd reported in 224 ITR 667 and decision of Hon’ble Calcutta High Court in case of Woolcombers of India
Ltd reported in 134 ITR 219. • Decision of Hon’ble Delhi High Court in case of the Tin Box Co. reported in 260 ITR 637
• decision of Hon’ble Gujarat High Court in case of Gujarat Power Corp Ltd., vide order dated 28/03/2011
• decision of Hon’ble Punjab and Haryana High Court in case of Hero Cycles
Ltd reported in 323 ITR 518;
• The assessee had also relied on decision of this Tribunal in assessee’s own case for assessment A 2006-07 and 2007-08 wherein the disallowance under section 14A was deleted relying on the decision of Hon’ble Bombay High Court in case of Reliance Utilities and Power Ltd
(supra).
2.4 The Ld.AO after considering the submissions filed by the assessee found it to be not acceptable, as the investments made by the assessee was capable of generating exempt income. It was noted

I.T.A. No.3579/Mum/2024
Assessment Year: 2022-23

that, such investment decisions are very complex and need day-to- day management/monitoring. The Ld.AO thus rejected the contention of the assessee that, by observing as under:
“4.6 Conclusion drawn
The submission of the assessee has been considered carefully, but the same is found not acceptable because, the investments made by the assessee are capable of generating exempt income. Besides, such investment decisions are complex and need day to day management/monitoring. Hence, the assessee cannot say that no expenses have been incurred by it for the same.
Concerned with the risk and time factor of the investment, it cannot be denied that it would be certain other administrative expenses like, salary, wages, staff welfare, general expenses, printing stationery, motor vehicle, telephone bills, bank charges, bank commission, brokerage, service charges on share
'transactions and commission etc. incurring during the year and part of which could also be attributable to earning of exempt income, particularly, when no separate accounts are maintained by the assessee for the investment activities.
Besides, investment decisions are generally taken m the meetings of the Board of Directors for which administrative expenses are incurred. It is therefore, not correct to say that no expenditure was incurred in making the investments which in turn are capable of earning exempt income in the future period.
The term expenditure occurring in section 14A would take in its sweep no! only direct expenditure but also all forms of expenditure regardless of whether they are fixed, variable, direct, indirect, administrative, managerial or financial. The phraseology used in section 14A prohibiting the deduction in I.T.A. No.3579/Mum/2024
Assessment Year: 2022-23

respect of expenditure incurred by the assessee in relation to exempt income is thus wide enough to cover all forms of expenses provided they have some connection with the earning of or potential for earning of exempt income. This is based on the principle that expenses must be allocated to that income to which they are connected to avoid distortions in the computation of both taxable as well as exempt income.”
Assessee in its submission also stated that it had sufficient non-interest-bearing funds available for the purpose of investment and no part of the borrowing can be attributed towards investments in shares. As no expenses can be said to have incurred in relation to investment in shares, most important no dividend income earned during the year under consideration. Therefore no disallowance U/s 14A r.w.r. 8D is called for. The contention of the assessee in this respect is not acceptable. The Hon'ble CBDT Circular No.5/2014 dated
11.02.2014 which clearly states that the legislative intent is to allow 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. It is pertinent to mention here that the Hon'ble Apex Court in the case of Maxopp Investment Ltd. 91 Taxmann.com. 154. held that the appellant (or) main object would not be a relevant consideration for disallowance u/s. 14A of the Act. If the expense is incurred for earning the dividend income, then such expenses which is attributable to the dividend income has to be disallowed. It is further held in para 40 of the order of the above said case, the Hon'ble Supreme Court has held that;

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Assessment Year: 2022-23

"Therefore, even at the time of investing into those shares, the assessee knows that it may generate dividend income as well and when such dividend income is generated that would be earned by the assessee.' In view of the same, the contention of the assessee that provisions of section 14A are not applicable in its case is not acceptable.
Once it is decided that the provisions of Sec.14A are applicable, the disallowance should be worked out as per Rule 3D which prescribes the method for computation of amount to be disallowed U/s 14A of the Income Tax Act. It is to mention that as per the IT(Fourteenth Amendment) Rules. 2016 applicable w.e.f. 02.06.2016, the expenditure in relation to income which does not form part of the total income shall be the aggregate of the following amounts, namely, provided such expenditure should not exceeded the total expenditure claimed by the assessee,
(i) The amount of expenditure directly relating to income which does not form part of total income and (ii) an amount equal to one percent of the annual average of the monthly averages of the opening and closing balances of the value of investment, income from which does not or shall not form part of the total income.”

Aggrieved by the order of the Ld.AO, assessee preferred an appeal before the Ld.CIT(A).
3. The Ld. CIT(A) considering the submissions filed by the assessee observed and held as under:
“5.4 I have perused the assessment order, submission of the appellant and judicial pronouncements on this issue. It is observed that the AO has duly recorded his satisfaction in the I.T.A. No.3579/Mum/2024
Assessment Year: 2022-23

assessment order as to why the appellant's claim of making no disallowance u/s 14A is incorrect. The AO has in detail discussed CBDT circular no. 05/2014 dated 11.02.2014 in order to arrive at a conclusion that provisions of section 14A are attracted in the case of the appellant. The AO has further relied on the decision of the Hon'ble Apex Court in the case of Maxopp
Investment Ltd. 91 Taxmann.com.154. The claim of the appellant is that it had invested its own funds for making investments in shares of Gamma Pizzakraft (Overseas) Pvt Ltd., hence, no disallowance u/s 14A is called for on such investments. However, on perusal of the ITR of the appellant, it is noticed that the appellant has claimed substantial interest expenses and expenses on salary and wages. Hence, it cannot be denied that had the appellant not invested in shares of Gamma Pizzakraft (Overseas) Pvt Ltd., the interest expense incurred by the appellant would have been substantially less.
Besides, it cannot be denied that indirect expense in form of salary, administrative expenses etc. have also been incurred for earning exempt income.
5.5 In this context, attention is drawn to the amendment made to section 14A by way of the Finance Act, 2022. The legislature has amended Section 14A to give effect to the Circular No.
05/2014 dated 11.02.2014 issued by the CBDT to overturn the observations made by various High Courts and Hon'ble
Supreme Court towards impermissibility of disallowance of any expenditure in the absence of exempt incomes reported by the taxpayers. The Legislature has made two changes to Section 14A through the Finance Act, which are as follows:
a Insertion of Non-obstante clause by way of substitution; and, Insertion of an Explanation- to re-enforce by way of clarification, the contents of the CBDT circular.

I.T.A. No.3579/Mum/2024
Assessment Year: 2022-23

4 Non-obstante clause:
The main objective to substitute a non-obstante clause in sub- section 1 appended to section 14A which reads as follows
"Notwithstanding anything to the contrary contained in this Act, for the purposes of is to overcome the observations made by the Hon'ble Madras High Court in Redington (India) Ltd. wherein, it was observed that an assessment in terms of the Act is specific to an assessment year and related previous year as per section 4 read with section 5 of the Act. And if any contrary intention would have been there it would have been expressly stated therein (Section 14A) therefore, the language of Section 14A should be read in that context such that it advances the scheme of the Act rather than distort it. This is done to dodge the principles laid down inter-alia under Section 4, 5, 10 etc.
Explanation:
The Explanation so inserted is as follows:
"Explanation.—For the removal of doubts, it is hereby clarified that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, 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 income not forming part of the total income."
5.6 In the explanation, there also exists a non-obstante clause to overcome the earlier judicial observations to the contrary.
And to clarify the intention of the legislature that it shall always be deemed under Section 14A to have disallowed deductions against expenditures incurred to earn an exempted income

I.T.A. No.3579/Mum/2024
Assessment Year: 2022-23

irrespective of the fact whether or not it was earned in the same financial year.
5.7 It is worthwhile to mention that this amendment has taken effect from 1st April, 2022 and is accordingly applicable in relation to the assessment year 2022-23 and subsequent assessment years. Thus, any expenditure incurred in a previous year which earns probable/ notional exempt income in any succeeding financial years would also be disallowed.
Accordingly, the disallowance made by the AO under section 14A of the Act read with Rule 8D of the Income Tax Rules is upheld. The grounds of appeal are dismissed.”

Aggrieved by the order of Ld. CIT(A), assessee is in appeal before this Tribunal.
4. The Ld.AR submitted that assessee is engaged in the franchise business of KFC and Pizza Hut restaurants in India. The Ld.AR submitted that assessee has been making year-on-year investments in Gamma Pizzakraft (Overseas) Pvt. Ltd and has filed a chart showing the amount of investments that has been made from 2016-
17 to 2023-24. For the sake of convenience the same is reproduced as under:
Year on Year Investments in Gamma Pizzakraft (Overseas) Pvt Ltd (GPOPL)
Assessment
Year

Investments in Gamma Pizzakraft
(Overseas) Pvt Ltd
Rs.

Year to date Investments in GPOPL Rs.

AY 2016-1 7

88,92,24,951

88,92,24,951

AY 201 7-1 8

73,13,842

89,65,38,793

AY 201 8-1 9

73,52,209

90,38,91,002

AY 201 9-20

8,84,38,034

99,23,29,036

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Assessment Year: 2022-23

AY 2020-21

57,10,83,109

1,56,34,12,145

AY 202 1-22

4,25,35,023

1,60,59,47,168

AY 2022-23

7,99,01,171

1,68,58,48,339

AY 2023-24

10,99,99,914

1,79,58,48,253

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Assessment Year: 2022-23

complying with the requirement of first arriving at the satisfaction regarding incorrectness of assessee’s claim that, no part of administrative/other expenses claimed by it as deduction, were incurred in relation to the income which did not form part of the total income, by placing reliance on following decisions:
• decision of Hon’ble Bombay High Court in case of PCIT vs Godrej and Boyce Manufacturing Co Ltd reported in (2023) 149 taxman.com 222
• decision of Hon’ble Delhi High Court in case of Coforge Ltd., vs ACIT reported in (2021) 128 taxman.com 99
• decision of Hon’ble Raipur Tribunal in case of SRS industries private Ltd vs
ITO reported in (2024) 163 taxman.com 480. 4.4 The Ld.AR thus submitted that, the assessee had sufficient interest-free funds available for the purposes of investments, and that, no borrowed funds were utilised during the year under consideration to make the investments in the subsidiary company, no expenses can be said to have incurred in relation to the investment in shares, and therefore no disallowance under section 14 A r.w. Rule 8D was called for. She also emphasised that, from assessment year 2016-17 till the year under consideration, the assessee never earned any exempt income from the investments and therefore no disallowance could be made under section 14A.
4.5 The Ld. DR on the contrary, placed reliance on the observations of the Ld. CIT(A). He submitted that, during the year under consideration the law applicable is different vis-à-vis the earlier assessment years. He thus submitted that the decisions relied by the Ld.AR is thus distinguishable on the law that is applicable. It is a submission of the Ld. DR that due to the I.T.A. No.3579/Mum/2024
Assessment Year: 2022-23

amendment with effect from 01/04/2022, and relevant to assessment year under consideration being
2022-23, a disallowance has to be made even though no exempt income is earned by the assessee from the investments. The Ld. DR referring to the amended provisions of section 14A applicable to the year under consideration submitted that, being a ‘notwithstanding clause’, read with newly inserted explanation to the section, disallowance under section 14A becomes mandatory. The Ld. DR thus distinguished all the decisions relied by the Ld.AR based on the amended provision under section 14A that is applicable to the present year under consideration.
4.6. As regards to non-application of the mind by the Ld. AO alleged by the Ld.AR, it is the submission of the Ld. DR that, the assessing officer categorically verified the accounts of the assessee as is evident from the details that was called upon from the assessee for necessary verification during the assessment proceedings. He further submitted that even though the assessee had interest expenditure and that it was the mixed funds maintained by the assessee, no disallowance has been computed by the Ld.AO proportionately from interest expenditure. The Ld. DR thus supported the computation of the Ld.AO based on the amended provisions of law applicable to the assessee for the year under consideration.
I have perused the submissions advanced by both sides in light of records placed before me.

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Assessment Year: 2022-23

been incurred during the said previous year in relation to such exempt income.
5. This amendment will take effect from 1st April, 2022. 6. It is also proposed to amend sub-section (1) of the said section, so as to include a non-obstante clause in respect of other provisions of the Income- tax Act and provide that no deduction shall be allowed in relation to exempt income, notwithstanding anything to the contrary contained in this Act.
7. This amendment will take effect from 1st April, 2022 and will accordingly apply in relation to the assessment year 2022-23 and subsequent assessment years." (emphasis supplied)
5.2. Thus, it is very clear that for assessment year under consideration being A.Y.2022-23, the amended provisions are applicable that reads as under:
14A. (1) [Notwithstanding anything to the contrary contained in this Act, for the purposes of] computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.
………
Explanation.—For the removal of doubts, it is hereby clarified that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, 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 income not forming part of the total income.

Thus, there is a departure from the position of law by the amendment introduced by Finance Act, 2022. 5.3 On perusal of the orders passed by this Tribunal for assessment year 2018-19 and 2021-22(supra), it is noted that the I.T.A. No.3579/Mum/2024
Assessment Year: 2022-23

assessing officer had applied the amended provision retrospectively.
This Tribunal while considering the issue for assessment year 2018-
19 in ITA no.5262/Mum/2024 vide order dated 12/11/2024 allowed identical argument of Ld.AR following the decision of Hon’ble High
Delhi Court in case of PCIT vs. Era Infrastructure (India) Ltd., reported in (2022) 141 taxmann.com 289, and held that, insertion of non-obstante clause and explanation as amended by the Finance
Act, 2022 to Section 14A would take effect from 01.04.22 and could not be presumed to have retrospective effect. Hon’ble Court then relying on the decision of Hon’ble Delhi High Court in case of Cheminvest Ltd. vs. CIT reported in (2015) 61 taxmann.com 118
allowed the claim of assessee therein.
5.4 At this juncture, this bench called for submissions of the Ld.AR by referring to the decision of Hon’ble Delhi High Court in case of Indiabulls Financial Services Ltd. vs. DCIT reported in (2016)
76 taxmann.com 268. The Ld.AR once again relied on the following decisions referred by her, reproduced herein above of the juri ictional High Court in case of:
• decision of Hon’ble Bombay High Court in case of PCIT vs Godrej and Boyce Manufacturing Co Ltd (supra);
• Hon’ble Bombay High Court in case of HDFC Bank ltd., vs. DCIT (supra)
• And decision of coordinate bench of this Tribunal inassessee’s own case for assessment year 2018-19 and 2021-22(supra)
She vehemently submitted that, the view adopted by this Tribunal in assessee’s own case on identical facts has to be followed.
5.5 Be that as it may, it is relevant to note the observation of Hon’ble Delhi High Court in case of Indiabulls Financial Services Ltd.

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Assessment Year: 2022-23

vs. DCIT(supra) in respect of recording satisfaction by the Ld..AO.
While interpreting the provisions of section 14A, Hon’ble Court observed that the satisfaction is to be drawn by the Ld.AO based on the suo moto disallowance by the assessee having regards to the accounts of the assessee. Hon’ble Court observed as under:
“7. Undoubtedly, the language of Section 14A presupposes that the AO has to adduce some reasons if he is not satisfied with the amount offered by way of disallowance by the assessee. At the same time Section 14A (2) as indeed Rule 8D(i) leave the AO equally with no choice in the matter inasmuch as the statute in both these provisions mandates that the particular methodology enacted should be followed. In other words, the AO is under a mandate to apply the formulae as it were under Rule 8D because of Section 14A(2). If in a given case, therefore, the AO is confronted with a figure which, prima facie, is not in accord with what should approximately be the figure on a fair working out of the provisions, he is but bound to reject it. In such circumstances the AO ordinarily would express his opinion by rejecting the disallowance offered and then proceed to work out the methodology enacted.
8. In this instance the elaborate analysis carried out by the AO - as indeed the three important steps indicated by him in the order, shows that all these elements were present in his mind, that he did not expressly record his dissatisfaction in these circumstances, would not per se justify this Court in concluding that he was not satisfied or did not record cogent reasons for his dissatisfaction to reject the AO's conclusion. To insist that the AO should pay such lip service regardless of the substantial compliance with the provisions would, in fact, destroy the mandate of Section 14A.”
5.6 It is noted that, for the year under consideration, under Rule
8D(2)(ii), the Ld.AO computed disallowance considering the investments alone. It is also noted that, admittedly, no disallowance of proportionate interest expenditure is made by the Ld.AO. At this juncture, Rule 8D is necessary to be read:
8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with—
(a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been I.T.A. No.3579/Mum/2024
Assessment Year: 2022-23

incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2).
(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:—
(i) the amount of expenditure directly relating to income which does not form part of total income; and (ii) an amount equal to one per cent of the annual average of the monthly average of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income :
Provided that the amount referred to in clause (i) and clause (ii) shall not exceed the total expenditure claimed by the assessee.
5.7 From the above it is clear that, there is only two limbs under sub clause 2 of Rule 8D to compute disallowance. Further from the show cause notices issued by the Ld.AO it is clear that the evidences and documents called upon by Ld.AO was having regards to the accounts filed by the assessee. Though there was interest expenditure claimed by the assessee in its profit and loss account,
Ld.AO computed disallowance only under the second limb sub in clause 2 of Rule 8D. Thus, the argument advanced by the Ld.AR that, there is non application of mind and that, no satisfaction is recorded by the Ld.AO, deserves to be rejected. This argument deserves to be rejected on one more count, that, even after the amended provisions being applicable to the year under consideration, the assessee failed to compute suo moto disallowance which is mandatory, even if no exempt income is earned.
6. From the above discussion, no error is found in the computation of disallowance under section 14A r.w. Rule 8D. I

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therefore do not find any infirmity in the view taken by the Ld.
CIT(A) and the same is upheld.
Accordingly grounds raised by the assessee stands dismissed.
In the result the appeal filed by the assessee stands dismissed.
Order pronounced in the open court on 13.01.2025 (BEENA PILLAI)

Judicial Member

AKV/Dragon.
(On Tour to Mumbai)

Copy of the order forwarded to:
(1)The Appellant
(2) The Respondent
(3) The CIT
(4) The CIT (Appeals)
(5) The DR, I.T.A.T.By order