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Before: Shri V. Durga Rao & Shri Manoj Kumar Aggarwal
O R D E R
PER V. DURGA RAO, JUDICIAL MEMBER:
Both the appeals filed by the Revenue are directed against different orders of the ld. Commissioner of Income Tax (Appeals) 18, Chennai, both dated 14.09.2020 relevant to the assessment years 2014-15 and 2016-17.
Both the appeals filed by the assessee are delayed by 55 days in filing the appeal before the Tribunal due to outbreak of COVID-19 pandemic and accordingly, the delay in filing the appeals are condoned and admitted the appeals for adjudication.
The only effective ground raised in both the appeals relates to deletion of addition towards disallowance made under section 14A of the Income Tax Act, 1961 [“Act” in short] read with Rule 8D of Income Tax Rules, 1962 as well as importing the provisions of section 14A for the purpose of computation of book profit under section 115JB of the Act.
In the assessment order for the assessment year 2014-15, the Assessing Officer has observed that the assessee has earned ₹.1,34,112/- as dividend from domestic companies and claimed the same as exempt. The income from these investments are tax free and hence the expenditure incurred in relation to earning income should have been disallowed under section 14A r.w. Rule 8D. Further, the assessee has met huge interest expenditure and the interest expenditure in relation to earning exempt income has to be disallowed under Rule 8D(2)(ii). 0.5% of the average investments on shares & funds worked out at ₹.1,81,83,141/- was not considered for the purpose of disallowance under section 14A of the Act in the assessment order passed under section 143(3) r.w.s. 153(B(1)(b) of the Act on 31.03.2016. Accordingly, the ld. CIT directed the Assessing Officer to redo the assessment under section 263 of the Act. After considering the submissions of the assessee, the Assessing Officer has completed the assessment under section 143(3) r.w.s. 263 r.w.s. 153A r.w.s. 153(B)(1)(b) of the Act dated 30.11.2018 by disallowing ₹.1,81,83,141/- under section 14A of the Act.
4.1 Similarly, in the assessment year 2016-17, the assessee has earned exempt income of ₹.2,03,674/- of which ₹.58,674/- dividend income from investment in Indian Bank, in which the company holds 13,970 shares and the same was invested by the company in the FY 2006-07 out of retained earnings. A dividend amount of ₹ 1,45,000/- has been received from SBI Mutual Fund, which was invested by the company during the FY 2005-06. However, the Assessing Officer has noted that the assessee company had incurred interest expenses to the extent of ₹.237.34 crores, which was payable on working capital loans (₹.178.20 crores), term loans (₹.59.14 crores). Before the Assessing Officer, the assessee has submitted that these loans are specifically taken for purchase of fixed assets and execution of projects. Loans availed are mainly project specific loans and these loan funds were utilized for the purpose of business and hence interest payments made were accounted as expenditure. After considering the submissions of the assessee, the Assessing Officer made disallowance under section 14A r.w. Rule 8D of ₹.12,09,15,421/- against the dividend income of ₹.2,03,674/-.
The assessee carried the matter in appeal before the ld. CIT(A). After considering the submissions of the assessee and by following the decision of the Tribunal in assessee’s own case, the ld. CIT(A) directed the Assessing Officer to restrict the disallowance under section 14A of the Act to the extent of exempt income earned for both the assessment years.
Aggrieved, the Revenue is in appeal before the Tribunal for both the assessment years.
We have heard the rival contentions, perused the materials available on record and gone through the orders of authorities below including various case law filed in the form of paper book. In the assessment year 2014-15, the assessee has earned exempt income of ₹.1,34,112/- for the investments made in the financial year 2006-07 and no interest expenses were incurred for earning exempt income and no expenditure has been debited to profit and loss account having either direct or indirect nexus with the exempt income. However, as per Rule 8D(2)(ii), the Assessing Officer worked out the disallowance at 0.5% of the average investments on shares & funds at ₹.1,81,83,141/- and disallowed under section 14A of the Act.
7.1 Similarly, in the assessment year 2016-17, the Assessing Officer made disallowance under section 14A of the Act of ₹.12,09,15,421/- against the dividend income of ₹.2,03,674/- for the reason that the assessee has incurred huge interest expenses to the extent of ₹.237.34 crores.
7.2 Before the ld. CIT(A), the assessee has submitted that it had incurred interest expenses to the extent of ₹.181.74 crores in the assessment year 2014-15 and ₹.237.34 crores for the assessment year 2016-17, which are payable on the working capital loans and term loans, which are specifically taken for purchase of fixed assets and execution of projects. As loans available are mainly project specific loans and these loan funds were utilized for the purpose of business only and the interest payments are relatable to the business of the assessee company and allowable under section 36 of the Act. Accordingly, the assessee has contended before the ld. CIT(A) that the disallowance under section 14A of the Act cannot exceed the exempt income and relied on the decision of the Tribunal in assessee’s own case for the assessment year 2010-11 vide order dated 07.12.2017.
7.3 After considering the submissions of the assessee, the ld. CIT(A) has observed and held as under: 11.4 The appellant contended that the disallowance u/s 14A of the Act cannot exceed the exempt income received during the year and relied on judicial pronouncement in the case of State Bank of Patiala [Punjab & Haryana] rendered by the Hon'ble High Court of Punjab and Haryana that has been further endorsed by the Hon'ble Supreme Court [99 taxmann.com 286 (SC)/[2018] wherein it was held that amount of disallowance u/s. 14A could be restricted to the exempt income only and dismissed the SLP filed by the department. The AR also relied on various judicial pronouncements viz., Principal CIT vs. Caraf Builders &, Constructions (P) Ltd [2019] 112 taxmann.com 322(SC); Delhi High Court decision in the case of Joint Investment P Ltd vs. CIT; Punjab and Haryana High Court in case of M/s. Empire Package Pvt. Ltd ; ACIT vs. Punjab State Co-op & Marketing Federation Ltd and Delhi Tribunal decision in the case of Sahara India Financial Corpn. and Global Capital Ltd: Bangalore Bench Tribunal in the case of M/s. John Distilleries Ltd vs. DCIT. The AR also brought to the notice of the undersigned the decision of the jurisdictional in the assessees own case for earlier years and prayed for restricting the disallowance to the extent of exempt income. 11.5. In view of the above mentioned facts and in view of the judicial precedence discussed above including that of the jurisdictional Tribunal in the assessee's own case, the AO is directed to restrict the disallowance u/s. 14A to the extent of exempt income earned. 'The appellant's grounds connected to the disallowance u/s. 14A are partly allowed. 7.4 By considering the decision of the Coordinate Benches of the Tribunal including various judgements of various Courts, the ld. CIT(A) has rightly directed the Assessing Officer to restrict the disallowance under section 14A of the Act to the extent of exempt income earned. We find no reason to interfere with the order passed by the ld. CIT(A) on this issue and accordingly, the ground raised by the Revenue is dismissed for both the assessment years.
So far as disallowance under section 14A of the Act made by the Assessing Officer for the purpose of computation of book profit under section 115JB of the Act is concerned, after considering the submissions of the assessee, the ld. CIT(A) has observed as under: “11.6. With regard to the assessee's ground on the matter of importing the provisions of Sec. 14A for the purpose of computation of book profit u/s. l 15JB, the Hon’ble Special Bench of the Hon'ble ITAT in the case of ACIT v. Vireet Investment (P) Ltd. [2017] 82 taxmann.com 415 (Delhi - Trib.)(SB), the Delhi Special Bench of the Tribunal has ruled that the computation under clause (f) of Explanation I to S 115JB of the Act is to be made without resorting to computation as contemplated under S 14A read with rule 8D.The facts of the case of the appellant are squarely covered by the decision of the Special Bench. Further, the jurisdictional Tribunal in order dated 26.06.2019 in the case of ACIT Corporate Circle 6(1), Vs. M/s Samalpatti Power Company Pvt (I.T.A.Nos.1592 & 1593/Chny/2018) relied on the above decision of the Special Bench ruled in favour of the taxpayer by directing the AO to exclude the disallowance under S 14A r.w. rule 8D while computing MAT under S 11JB of the Act. In view of the aforementioned discussions, I hold that the disallowance is not liable to be considered for the purpose of assessed book profit so as to quantify the MAT. Accordingly, the appellant's ground on this issue is allowed.” 8.1 Before us, the ld. DR has submitted that in view of the amendment made by the Finance Act, 2022 to section 14A of the Act by inserting a non obstante clause and an explanation after the proviso, a change in law has been brought about and consequently, it was prayed for reversing the order passed by the ld. CIT(A).
8.1 On the other hand, by filing the copy of judgement of Hon’ble High Court of Delhi in the case of PCIT v. Era Infrastructure (India) Ltd. [2022] 141 taxmann.com 289 (Delhi), the ld. Counsel for the assessee prayed for following the same.
8.2 By considering various judgements, the Hon’ble Delhi High Court has observed and held as under: “8. Consequently, this Court is of the view that the amendment of Section 14A, which is "for removal of doubts" cannot be presumed to be retrospective even where such language is used, if it alters or changes the law as it earlier stood.
9. Though the judgment of this Court has been challenged and is pending adjudication before the Supreme Court, yet there is no stay of the said judgment till date. Consequently, in view of the judgments passed by the Supreme Court in Kunhayammed and Others vs. State of Kerala and Another, (2000) 6 SCC 359 and Shree Chamundi Mopeds Ltd. Vs. Church of South India Trust Association CSI Cinod Secretariat, Madras (1992) 3 SCC 1, the present appeal is dismissed being covered by the judgment passed by the learned predecessor Division Bench in PCIT vs. IL & FS Energy Development Company Ltd (supra) and Cheminvest Limited vs. Commissioner of Income Tax-VI, (2015) 378 ITR 33.
Accordingly, the appeal and application are dismissed. However, it is clarified that the order passed in the present appeal shall abide by the final decision of the Supreme Court in the SLP filed in the case of PCIT vs. IL & FS Energy Development Company Ltd (supra). 8.3 As of now, it has been clear that the amendment made by the Finance Act, 2022 to section 14A of the Act will take effect from 1st April, 2022 and will apply in relation to the assessment year 2022-23 and subsequent assessment years. Accordingly, the argument of the ld. DR is rejected. Moreover, we find no infirmity in the order passed by the ld. CIT(A) on this issue. Accordingly, the ground raised by the Revenue is dismissed.
In the result, both the appeals filed by the Revenue are dismissed. Order pronounced on the 21st September, 2022 at Chennai.