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Income Tax Appellate Tribunal, HYDERABAD BENCH “A”, HYDERABAD
Before: SMT P. MADHAVI DEVI & SHRI S. RIFAUR RAHMAN
PER S. RIFAUR RAHMAN, A.M.:
This appeal filed by the assessee is directed against the order dated 25/10/2016 of CIT(A) – 4, Hyderabad for AY 2012-13.
Briefly the facts of the case are, assessee, an investment holding company, filed its return of income for the AY 2012-13 on 13/12/2012 declaring loss of Rs. 24,550/-. The return was processed u/s 143(1) of the Act. Subsequently, the case was selected for scrutiny and notices u/s 143(2) and 142(1) were issued. The AO completed the assessment by making an addition of Rs. 57,52,790/- on account of disallowance of expenditure u/s 14A of the I.T. Act.
Aggrieved by the order of AO, the assessee preferred an appeal before the CIT(A).
2 ITA No. 15/Hyd/17 Matrix Enport Holdings Pvt. Ltd., Sec’bad 4. Before the CIT(A), the assessee submitted that the assessee is holding investments to the tune of Rs. 101,35,62,908/- as on 01/04/2011 and 31/03/2012 and the assessee has not earned exempt incomes like dividend from the said investments. It has paid application monies to the tune of Rs. 115,05,58,000/- as on 01/04/2011 and 31/03/2011 and equity shares were not allotted for the said sums. Relying on various case, which were extracted at page 4 and 5 of CIT(A)’s order, the assessee submitted that there was no dividend income earned and it has not incurred any interest expense in relation to the investments. It only incurred administration expenses which can in no way linked with the investments. Therefore, no disallowance u/s 14A can be made in its case. Further, it was submitted that disallowance u/s 14A cannot be more than the total expenditure incurred by the assessee even if the quantum as calculated as per rule 8D(2)(iii) exceeds the actual expenditure.
The CIT(A) after considering the submissions of the assessee, confirmed the addition made by the AO.
Aggrieved by the order of CIT(A), the assessee is in appeal before us raising the following grounds of appeal: 1. In the facts and circumstances of the case, the order u/s 143(3) dt 25.02.2015 by the Asst. Commissioner of Income tax Circle 16(1), Hyderabad upheld by the Commissioner of Income Tax(Appeals) 4 vide order dt 25.10.2016 is unjustified, incorrect and not as per law.
The CIT (A) is neither correct nor justified in confirming disallowance u/s 14A of Rs 57,52,790 calculated on Rs 115,05,58,000 being the Share Application Money advanced by the appellant which is not capable of earning any incomes including exempt incomes.
The CIT (A) is incorrect in not appreciating the fact that the appellant has voluntarily disallowed Rs 55,150 u/s 14A out of total expenditure incurred of Rs 80,700 debited to Profit & loss Account for AY 2012-13.
3 ITA No. 15/Hyd/17 Matrix Enport Holdings Pvt. Ltd., Sec’bad 4. The CIT (A) has not appreciated the fact that the Assessing officer has not calculated any disallowance u/a 14A r.w.r 8D(2)(iii) on the average value of investments in equity shares of a value of Rs 101,35,62,908.
The CIT(A) is incorrect in not appreciating the fact that disallowance u/s 14A (including voluntary disallowances by assesses) cannot exceed the total expenditure debited to the Profit & loss account.
For the above and any ground or grounds that may be urged during the course of hearing.”
6.1 The assessee has raised the following additional ground by stating that the same may be admitted as it is purely legal in nature and which requires no further examination of facts: “In the absence of any exempt income derived, the disallowance u/s 14A is not justified.”
6.2 We admit the said additional ground as it does not require any further examination of facts.
Before us, the ld. Counsel for the assessee submitted that the issue under consideration is squarely covered by the decision of the coordinate bench of ITAT, Hyderabad in the case of Srinivasa Rao Kalagara in ITA No. 735/Hyd/2017 vide order dated 07/09/2017, a copy of which is filed on record.
The ld. DR, on the other hand, neither controverted the submission of the ld. AR nor brought any contrary decision in this regard.
Considered the rival submissions and perused the material on record. We find that the issue in dispute is squarely covered by the decision of the coordinate bench of ITAT, Hyderabad in the case of Srinivasa Rao Kalagara (supra), wherein the coordinate bench has observed as under:
4 ITA No. 15/Hyd/17 Matrix Enport Holdings Pvt. Ltd., Sec’bad “5. We have heard the rival submissions and perused the material on record. The issue in the present appeal is whether the provisions of Section 14A of the Act can be applied even in the absence of exempt income. This issue is no longer res integra as the several High Courts have held that for the purpose of invoking the provisions of Section 14A, it is sine qua non that there should be an exempt income. The Hon'ble Delhi High Court in the case of Principal CIT Vs. IL & FS Energy Development Company Ltd., [84 taxmann.com 186] (Delhi] after referring to its earlier decision in the case of Cheminvest Ltd., Vs. CIT [378 ITR 33] (Del) held as follows:
"12. Section 14A of the Act, which was inserted with retrospective effect from 1st April 1962, provides for disallowance of the expenditure incurred in relation to income exempted from tax. From 11 th May 2001, a proviso was inserted in Section 14A to clarify that it could not be used to reopen or rectify a completed assessment. Sub-sections (2) and (3) of Section 14A were inserted with effect from 1st April, 2007 to provide for methodology for computing of disallowance under Section 14A. However, the actual methodology was provided in terms of Rule 8D only from 24th March 2008. There was a further amendment to Rule 8D with effect from 2nd June 2016 limiting the disallowance the aggregate of the amount of expenditure directly relating to income which does not form part of total income and 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 form part of the total income. It is also provided that the amount shall not exceed the total expenditure claimed by the Assessee.
In the above background, the key question in the present case is whether the disallowance of the expenditure will be made even where the investment has not resulted in any exempt income during the A Y in question but where potential exists for exempt income being earned in later A Y s.
In the Explanatory Memorandum to the Finance Act 2001, by which Section 14A was inserted with effect from 1 st April 1962, it was clarified that "expenses incurred can be allowed only to the extent they are relatable to the earned income of taxable income". The object behind Section 14A was to provide that "no deduction shall be made in respect of any expenditure incurred by the Assessee in relation to income which does not form part of the total income under the Income Tax Act".
What is taxable under Section 5 of the Act is the "total income" which is neither notional nor speculative. It has to be 'real income'. The subsequent amendment to Section 14A does not particularly clarify whether the disallowance of the expenditure would apply even where no exempt income is earned in the A Y in question from investments made, not in that A Y, but earlier A Y s.
Rule 8D (1) of the Rules is helpful, to some extent, in understanding the above issue. It reads as under:
5 ITA No. 15/Hyd/17 Matrix Enport Holdings Pvt. Ltd., Sec’bad "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 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)."
The words "in relation to income which does not form part of the total income under the Act for such previous year" in the above Rule 8D(1) indicates a correlation between the exempt income earned in the A Y and the expenditure incurred to earn it. In other words, the expenditure as claimed by the Assessee has to be in relation to the income earned in 'such previous year'. This implies that if there is no exempt income earned in the A Y in question, the question of disallowance of the expenditure incurred to earn exempt income in terms of Section 14A read with Rule 8D would not arise.
The CBDT Circular upon which extensive reliance is placed by Mr. Hossain does not refer to Rule 8D (1) of the Rules at all but only refers to the word "includible" occurring in the title to Rule 8D as well as the title to Section 14A. The Circular concludes that it is not necessary that exempt income should necessarily be included in a particular year's income for the disallowance to be triggered.
In the considered view of the Court, this will be a truncated reading of Section 14 A and Rule 8D particularly when Rule 8D (1) uses the expression 'such previous year'. Further, it does not account for the concept of 'real income'. It does not note that under Section 5 of the Act, the question of taxation of 'notional income' does not arise. As explained in Commissioner of Income Tax v. Walfort Share and Stock Brokers Pvt. Ltd [2010] 326 ITR 1 (SC), the mandate of Section 14A of the Act is to curb the practice of claiming deduction of expenses incurred in relation to exempt income being taxable income and at the same time avail of the tax incentives by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. Consequently, the Court is not persuaded that in view of the Circular of the CBDT dated 11th May 2014, the decision of this Court in Cheminvest Ltd (supra) requires reconsideration.
In M/s. Redington (India) Ltd v. The Additional Commissioner of Income Tax, Company Range - V, Chennai (order dated 23rd December, 2016 of the High Court of Madras in TCA No. 520 of 2016), 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. " It was further explained that, "The computation of total income in terms of Rule 8D is by way
6 ITA No. 15/Hyd/17 Matrix Enport Holdings Pvt. Ltd., Sec’bad of a determination involving direct as well as indirect attribution. Thus, accepting the submission of the Revenue would result in the imposition of an artificial method of computation on notional and assumed income. We believe thus would be carrying the artifice too far."
The decisions in CITv. M/s Lakhani Marketing Inc. 2014 SCC Online P&H 20357, CIT v. Winsome Textile Industries Limited [2009] 319 ITR 204 (P&H), CIT v. Shivam Motors (P) Ltd [2014]272 CTR (All) 277 have all taken a similar view. The decision in Taikisha Engineering India Pvt. Ltd (supra) does not specifically deal with this issue.
It was suggested by Mr. Hossain that, in the context of Section 57(iii), the Supreme Court in Prasad Moody {1978] 115 ITR 519 (SC) explained that deduction is allowable even where income was not actually earned in the A Y in question. This aspect of the matter was dealt with by this Court in Mis Cheminvest Ltd (supra) where it reversed the decision of the Special Bench of the IT AT by observing as under:
"20. Since the Special Bench has relied upon the decision of the Supreme Court in Rajendra Prasad Moody (supra), it is considered necessary to discuss the true purport of the said decision. It is noticed to begin with that the issue before the Supreme Court in the said case was whether the expenditure under Section 57 (iii) of the Act could be allowed as a deduction against dividend income assessable under the head "income from other sources". Under Section 57 (iii) of the Act deduction is allowed in respect of any expenditure laid out or expended wholly or exclusively for the purpose of making or earning such income. The Supreme Court explained that the expression "incurred for making or earning such income", did not mean that any income should in fact have been earned as a condition precedent for claiming the expenditure. The Court explained:
"What s. 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of s. 57(iii) and that purpose must be making or earning of income. s. 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There is in fact nothing in the language of s. 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the language of s. 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure."
There is merit in the contention of Mr. Vohra that the decision of the Supreme Court in Rajendra Prasad Moody (supra) was rendered
7 ITA No. 15/Hyd/17 Matrix Enport Holdings Pvt. Ltd., Sec’bad 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 income." Section 14Aof the Act on the other hand contains the expression "in relation to income which does not form part of the total income." The decision in Rajendra Prasad Moody (supra) cannot be used in the reverse to contend that even if no income has been received, the expenditure incurred can be disallowed under Section 14A of the Act."
The decisions of the ITAT in ACITv. Ratan Housing Development Ltd (supra) and Relaxo Footwear Ltd v. Addl. CIT (supra), to the extent that they are inconsistent with what has been held hereinbefore do not merit acceptance. Further, the mere fact that in the audit report for the A Y in question, the auditors may have suggested that there should be a disallowance cannot be determinative of the legal position. That would not preclude the Assessee from taking a stand that no disallowance under Section 14 A of the Act was called for in the A Y in question because no exempt income was earned.
For all of the aforementioned reasons, this Court is of the view that the CBDT Circular dated 11 th May 2014 cannot override the expressed provisions of Section 14A read with Rule 8D".
5.1. Therefore, in the light of the above legal position, we hold that in the absence of exempt income, the provisions of Section 14A cannot be applied. Grounds of Appeal are allowed.
In the result, appeal of assessee is allowed.”
As the issue under consideration is materially identical to that of the above case, following the decision therein, we allow the additional ground raised by the assessee. With regard to other grounds, since the issue is adjudicated in favour of the assessee, they become academic in nature, therefore, not required to be adjudicated.
In the result, appeal of the assessee is allowed.
Pronounced in the open Court on 8th June, 2018.
Sd/- Sd/- (P. MADHAVI DEVI) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated: 8th June, 2018 kv
8 ITA No. 15/Hyd/17 Matrix Enport Holdings Pvt. Ltd., Sec’bad
Copy to:-
1) Matrix Enport Holdings Pvt. Ltd., C/o Ch. Parthasarathy & Co., 1-1-298/2/B/3, 1st Floor, Sowbhagya Avenue, St. No. 1, Ashoknagar, Hyderabad – 500 020. 2) ACIT, circle – 16(2), 2nd Floor, A Block, IT Towers, AC Guards, Hyderabad – 4. 3) CIT(A) – 4, Hyderabad. 4) Pr. CIT - 4, Hyd. 5) The Departmental Representative, I.T.A.T., Hyderabad. 6) Guard File