D.C.I.T.,CC-2(2), KOLKATA vs. M/S VIKRAM POWER VENTURES PVT. LTD., KOLKATA

The present appeal has been preferred by the revenue against the order dated 11.09.2019 of the Commissioner of Income Tax (Appeals)- 20, Kolkata [hereinafter referred to as ‘CIT(A)’] passed u/s 250 of the Income Tax Act [hereinafter referred to as the ‘Act’]. The revenue in this appeal has taken the following grounds of appeal: “i. That on the facts and in the circumstances of the case, the ld. CIT(A), Kolkata has erred in law to hold that disallowances u/s 14A read with 8D for the A.Y. 2016- 17 will not apply where no exempt income in received or receivable during the relevant previous year by ignoring the provision of Rule 8D that provides for computation of expenditure in respect of not only those investments, income from which does not form part of total income but also those investments, income from which shall not form part of total income. ii. That on the facts and in the circumstances of the case, the ld. CIT(A), Kolkata has erred in law in deciding that disallowance u/s 14A read with Rule 8D cannot be made in a year in which no exempt income has been earned or received by the assessee without considering the CBDT’s Circular No. 03/2018 dated 11.07.2018 and correct computation under Rule 8D.

Brief facts of the case are that the assessee is a company which derived income from management & consultancy and filed its return of income for A.Y. 2016-17 on 17.10.2016 declaring a total income of Rs. 12,25,640/-. The case of the assessee was selected for scrutiny and notice u/s 143(2) of the Act was issued on 28.07.2017 and subsequently notice u/s 142(1) of the Act along with the questionnaire were issued on 01.10.2018 and the same was served upon the assessee on 03.10.2018 in response to notices papers, documents were filed by the assessee and the AO has made a disallowance of Rs. 1,71,11,384/- by invoking the provision of section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962.Since the assessee has not earned any exempt income for the subject assessment year and the AO has made disallowance on the ground that assessee may have incurred certain expenses on making investment in shares which would later on yield exempted income. The AO has stated that as the company has paid interest on borrowed funds there may have been utilization on such borrowed funds for making the investments and he proceeded to invoke the provision of section 14A read with Rule 8D and accordingly pass the assessment order.

Dissatisfied with the above order, the assessee preferred an appeal before the ld. CIT(A). However, the appeal of the assessee was allowed by the ld. CIT(A).

Aggrieved by the above order, revenue preferred the instant appeal before the Tribunal against the ld. CIT(A) deleting the disallowance made u/s 14A of the Act read with Rule 8D.

At the time of hearing, ld. CIT, DR supported the order of AO by relying on the CBDT’s Circular No. 5/2014 dated 11.02.2014 which states that disallowance u/s 14A

Per contra, the ld. AR of the assessee relied on the order of ld. CIT(A). He contended that PCIT vs IL&FS Energy Development Pvt. Ltd. (399 ITR 483) after considering the Board Circular No. 5/2014 has upheld the assessee’s contention that in absence of any exempt income earned in the year in question the disallowance u/s 14A of the Act is unwarranted.

We have heard both the parties and we deem it fit to deal with the CBDT’s Circular No. 5/2014 relied upon the revenue and it is not well settled in law that any rule or circular issued by CBDT cannot go beyond the literal language used in the main provision. As a corollary computation mechanism as set out in Rule 8D of Income-tax Rules, 1962, hereinafter the rules cannot go beyond the provision contained in section 14A of the Act itself. Going by the language employed in section 14A of the Act, the possession which emerges is that whether the assessee has not earned any exempt income, there cannot be “disallowance’ of the expenditure as it would resulting imposing tax on hypothetical income which is wholly impermissible in law, in view of the decision rendered by various High Courts as well as Tribunal. It is also noted that while deciding the issue, the ld. CIT(A) relied on the judgement of the Hon’ble Supreme Court dated 08.02.2019 in the case of CIT vs Oil Industry Development Board (SLP Civil No. 2755/2019) has dismissed the SLP filed by the revenue against the judgement of Hon’ble Delhi High Court dated 16.02.2018 by relying upon the decision in the case of CIT vs Essar Teleholdings Limited (2018) 3 SCC 253. The Hon’ble Delhi High Court had rules that, in absence of any exempt income, disallowance u/s 14A of the Act of any amount was not permissible. In arriving at this conclusion, the Hon’ble Delhi High Court had relied upon its earlier decision in the case of Cheminvest Ltd. vs CIT (378 ITR 33). The above proposition of law has been well accepted by various courts and as such we do not want to interfere in the order passed by the ld. CIT(a) and following the decision of Co-ordinate Bench of Mumbai in in the case of ACIT vs K. Raheja Corporate Services Pvt. Ltd. We do not see any reason to M/s. Vikram Power Ventures Pvt. Ltd. A.Y. 2016-17 interfere with the order of ld. CIT(A) on this issue and accordingly dismiss ground no. 1 of this appeal and remaining ground no. 2, 3 & 4 are consequential in nature, therefore, need not required to be adjudicated. Accordingly, appeal of the revenue is dismissed.

In the result, the appeal of the revenue is dismissed. Order pronounced in the open court on 22.09.2022.