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Facts
The assessee company filed its return of income for AY 2017-18 and earned exempt dividend income. It made a suo motu disallowance of expenses under Section 14A read with Rule 8D. However, the Assessing Officer made an additional disallowance, computing it on all investments irrespective of whether they yielded exempt income, which was subsequently confirmed by the CIT(A).
Held
The Tribunal held that the amendment to Section 14A by Finance Act, 2022, which broadened the scope of disallowance, is prospective and not applicable for AY 2017-18. It was decided that disallowance under Section 14A read with Rule 8D for the relevant assessment year must be restricted only to investments that yielded exempt dividend income. Consequently, the Tribunal directed the Assessing Officer to delete the additional disallowance made on non-dividend yielding investments.
Key Issues
The key legal issues were the retrospective versus prospective applicability of the Section 14A amendment introduced by Finance Act, 2022, and whether disallowance under Rule 8D(2)(ii) for AY 2017-18 should apply to all investments or only to those yielding exempt income.
Sections Cited
14A, 143(2), 142(1), Rule 8D, Rule 8D(2)(ii), Income Tax Act, 1961, Income Tax Rules, 1962, Finance Act, 2022
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Income Tax Appellate Tribunal, ‘SMC’ BENCH, KOLKATA
Before: Shri Duvvuru RL Reddy, Vice-(KZ)
The present appeal is directed at the instance of assessee against the order of Id. Addl./Joint Commissioner of Income Tax
Facts in brief are that the assessee is a limited domestic company which furnished its return of income for the assessment year 2017-18 electronically on 28.10.2017 declaring total income of Rs.18,25,380/-. The assessee filed a revised return of income on 26.03.2019 declaring the same total income. The return was selected for limited scrutiny assessment under CASS and notice under section 143(2) of the Act was issued through ITBA module and duly served upon the assessee-company. Thereafter notices under section 142(1) and questionnaires were issued on different occasions and duly served on the assessee-company through ITBA module. It was noticed that the assessee earned total dividend income, which did not form part of total income, to the tune of Rs.17,06,800/-. The assessee was asked to furnish detailed computation of expenses incurred for earning exempt income. It was seen that the assessee had suo motu disallowed expenses amounting to Rs.1,30,821/- under section 14A read with Rule 8D. Thereafter the assessee was requested to furnish the monthly opening and closing averages of all the investments irrespective of whether dividend form such investment has been received or not. Since the assessee itself disallowed a sum of Rs.1,30,821/- under section 14A read with the Rule 8D, the balance amount of Rs.6,82,775/- was disallowed under section 14A read with Rule 8D by the ld. Assessing Officer and added to the total income of the assessee. Finally, ld. Assessing Officer determined the total assessed income of the assessee at Rs.25,08,160/-.
On being aggrieved, the assesese preferred an appeal before the ld. CIT(Appeals). The ld. Addl./JCIT(Appeals) confirmed the addition made by the ld. Assessing Officer and dismissed the appeal of the assessee by relying judgment of different Hon’ble High Courts saying that if there is no exempt income, no disallowance under section 14A can be made.
On being aggrieved, the assessee preferred an appeal before the Tribunal and raised the following ground:- “The ld. CIT(Appeals) erred on the facts of the case and in law in confirming that the disallowance under section 14A of the Income Tax Act, 1961 read with Rule 8D(2)(ii) of the Income Tax Rules, 1962 of the amount equal to one per cent of the annual average of the monthly averages of the opening and closing balances of the value of investment should be computed on total investments and not on the dividend yielding investments”.
5. I have heard both the sides. It was the submission of the ld. Counsel for the assessee that the ld. Assessing Officer made disallowance under section 14A with reference to all investments instead of dividend yielding investments by referring to the amendment made to section 14A by Finance Act, 2022 by virtue of which, the disallowance in terms of Rule 8D has to be computed with reference to all investments, irrespective whether it yielded exempt income or not. He further submitted that the aforesaid reasoning given by the ld. Assessing Officer as well as ld. Addl./JCIT (Appeals) are misplaced as the amendment made to section 14A is applicable 3 (A.Y. 2017-2018) Rajasthan Industries Limited prospectively, i.e. from assessment year 2022-23 and onwards and it was not applicable in the relevant assessment year 2017-18. The said view is supported by the decision of the Hon’ble Delhi High Court in the case of Pr. CIT -vs.- M/s. Era Infrastructure (India) Limited [288 taxman 384] dated 20th July, 2022, wherein it was held that the amendment to section 14A of Finance Act, 2022, as referred to by the ld. Addl./JCIT(Appeals) has been held to be applicable prospectively. Following the same, the Hon’ble ITAT, Kolkata also passed an order in favour of the assessee in the case of Babul Fiscal Services (P) Limited -vs.- ACIT in ITA No. 318/KOL/2022. Therefore, the disallowance under section 14A read with Rule 8D(2)(ii) has to be restricted to only to those investments which actually yielded exempt dividend income in assessment years prior to assessment year 2022-23. He pleaded to set aside the orders passed by the lower authorities.
On the other hand, ld. Departmental Representative relied on the orders passed by the revenue authorities.
I have perused the material available on record. It is an admitted fact that during the relevant assessment year, the appellant held investment in shares and securities, whose annual average of the monthly averages of investment was Rs.20,41,23,356/-. During the year, the appellant earned dividend income of Rs.17,06,800/-, (A.Y. 2017-2018) Rajasthan Industries Limited which was derived from investments, whose annual average value of the monthly averages for FY 2016-17 was Rs.1,27,82,653/-. It is also an admitted fact that the appellant-assessee voluntarily disallowed the aggregated amount of Rs.1,30,821/- under section 14A read with Rule 8D. It is also an admitted fact that the ld. Assessing Officer considered it for the purpose of computation of disallowance under Rule 8D(2)(ii) whether investment yielded dividend income or not. It is also an admitted fact that there was an amendment under section 14A, which was made by Finance Act, 2022. The only grievance of the assessee is that it is applicable only from the assessment year 2022-23. On this aspect, he relied on the decision of the Hon’ble Delhi High Court in the case of Pr. CIT -vs.- M/s. Era Infrastructure (India) Limited [288 taxman 384] dated 20th July, 2022, wherein it was held that the amendment to section 14A of Finance Act, 2022 is prospective in nature and it is applicable from AY 2022- 23 onwards. After considering the facts and circumstances of the case and the ratio laid down by the Hon’ble Delhi High Court, I am of the view that the suo motu disallowance made by the ld. Assessing Officer under section 14A read with Rule 8D with reference to dividend yielded investment was reasonable and it is in accordance with law. Therefore, I direct the ld. Assessing Officer to delete the disallowance made by him on this account. The grounds raised by the assessee in this appeal are allowed.