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Income Tax Appellate Tribunal, Hyderabad ‘A’ Bench, Hyderabad
Before: Shri Rama Kanta Panda & Shri Laliet Kumar
Per Shri Laliet Kumar, J.M. This appeal is filed by the assessee, feeling aggrieved by the order passed by the Learned Commissioner of Income Tax (Appeals)-5, Hyderabad, dated 28.02.2017 for the AY 2012-13, on the following grounds (1) The order of the ld.CIT(A) is erroneous both on facts and in law. (2) The ld.CIT(A) erred in confirming the disallowance of bad debts of Rs.31,41,61,877/- without considering the fact that the said amount was written off in the books of the appellant (3) The ld.CIT(A) erred in disallowing Rs.16,31,331/- by applying the provisions of Sec.14A of the I.T.Act.
In this case, the ld. AR had submitted that the lower authorities have disallowed the bad debt in respect to the following six Government undertakings. In this regard our attention was drawn to Assessing Officer to the following effect:-
2 ITA.No.738/Hyd/2017 “ during the year, the assessee had written of the bad debts in respect of the following sundry debtors, to the extent of Rs.31,41,61,877/-.
S.No. Name of the party Amount (in Rs.) 1 AP Central Power distribution, 142489526 Hyderabad 2 Tamilnadu Electricity Board, Chennai 129684161 3 Viswanath Projects Ltd. 2193868 4 Karnataka Power Transmission Corp 13226192 Ltd, Bengaluru 5 Assam Power distribution Co.Ltd. 9256124 6 Eastern Power Distribution co Ltd., 17312006 Visakapatnam Total 31461877
The ld. AR had submitted that these are the six Government undertakings, and the assessee has furnished all the details before the lower authorities, which are required in accordance with section 36(1)(vii) of the Act, Our attention was drawn to reply given by the assessee, more particularly at page No.53 & 54 to the following effect
“In continuation of the statement of facts, the appellant may be permitted to submit the following explanation:
There are three effective grounds in all. The first ground is with regard to disallowance of RS.27,73,555/ -. According to the Assessing Officer payments on which TDS is to be effected amounted to Rs.65,65,157/_ and whereas the appellant disallowed only Rs.37,9 1,602/ ". The balance is disallowed by the Assessing Officer now. In this regard, the appellant submits that to the extent the amount was paid no disallowance can be made and, therefore,. the appellant disallowed only Rs.37,91,602/-
In so far as the bad debts written off is concerned, the appellant submits that as the amounts were due mostly from power corporations established by the Government. The appellant did not account 'for the amounts as income in the books of account as receipt towards sale ·price of the power. Further, the amounts could not be recovered from the Government. Therefore, the amount was written off in the books. It is submitted that according to the Provisions of Sec.36(1)(vii) r.w.s. 36(2) of the I.T.Act, the amounts
3 ITA.No.738/Hyd/2017 which formed part of the income for the earlier year is allowable as deduction if it is written off in the books of account. The Assessing Officer mentioned that there is no evidence that the accounts of the debtors were closed. There is no such condition either in Sec.36(1)(vii) or in Sec.36 (2) of the I.T.Act and it is enough if the amount is written off from the books of account. Therefore, the Assessing Officer is not justified in disallowing the bad debts written off. The Assessing Officer made disallowance u/s.14A of Rs.16,31,331/-. The investment made is Rs.32,62,66,325/- During the year under consideration, the appellant did not derive any income which is exempt from tax. Therefore, the provisions u/s 14A of the I.T.Act have no application.”
On the other hand, the ld. DR had drawn our attention to order passed by the ld.CIT(A) and it was the contention that the ld. DR despite various opportunities granted to the assessee and mentioned at page 6 of the ld.CIT(A) order, the assessee failed to comply the condition laid down u/s. 36 of the Act. In this regard, the ld. DR, had drawn our attention to the following
“ Details were not filed till the date of disposal of appeal i.e 27.02.2017. Hence it is inferred that assessee has no explanation to offer. The amount which were claimed to have been written off, were not offered to tax. Unless it is shown that the amount is accounted as part of the turnover in any year, the assessee cannot write off the same in a later year to claim the deduction of bad debt. Thus in accordance of provisions of sec. 32(2) I hold that addition of Rs.31,41,61,877/- is justified. Hence, ground No.4 is dismissed.
We have heard the rival contention of the parties and perused the material available on record. Section 36(1)(vii) of the Act provides as under :-
(vii) subject to the provisions of sub-section (2), the amount of [any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year]: [Provided that in the case of [an assessee] to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause:] [Provided further that where the amount of such debt or part thereof has been taken into account in computing the income of the assessee of the previous year
4 ITA.No.738/Hyd/2017 in which the amount of such debt or part thereof becomes irrecoverable or of an earlier previous year on the basis of income computation and disclosure standards notified under sub-section (2) of section 145 without recording the same in the accounts, then, such debt or part thereof shall be allowed in the previous year in which such debt or part thereof becomes irrecoverable and it shall be deemed that such debt or part thereof has been written off as irrecoverable in the accounts for the purposes of this clause.] [Explanation 1].—For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee.] [Explanation 2.—For the removal of doubts, it is hereby clarified that for the purposes of the proviso to clause (vii) of this sub-section and clause (v) of sub- section (2), the account referred to therein shall be only one account in respect of provision for bad and doubtful debts under clause (viia) and such account shall relate to all types of advances, including advances made by rural branches;]
5.1 Undoubtedly, it is required for the assessee to prove that amount of such debt or part thereof has been taken into account in computing the income of the assessee of the previous year, before such amount was irrecoverable . However, despite the opportunities granted before the lower authority, nothing had been brought to their notice that the such bad amount for which assessee had sought be written off was earlier considered to be part of the turnover in any of the previous assessment years.
5.2 However the ld. AR before us had submitted that the assessee was incapacity on account of the fact that the assessee was a non function company and the record of the assessee companies are not available at that time, therefore the requisite details were not filled before the lower authority and ld. AR undertaken on behalf of the assessee to produce all the details before the lower authority if the matter is remanded back to the file of the lower authorities.
5.3 In the light of the above and considering the fact of these six companies happens to government companies and dues pertains to supply of electricity to these companies, we deem it appropriate to remand back the matter to the file of the AO with the direction to pass a fresh assessment order, after affording
5 ITA.No.738/Hyd/2017 opportunity giving to the assessee. Needless to say that the assessee shall produce all the documents in support of the claim at the first hearing and shall not take any undue adjournment in the matter.
The second issue raised before us pertains to 14A, in this regard, the ld. AR for the assessee had drawn our attention to paragraph 6.6 to 6.9 of the ld.CIT(A) order.
“6.6 Thus, there may not be any exempted income this year, yet the expenditure incurred in pursuit of earning such income is deductible. I am of the view that similar proposition will apply while interpreting the aforesaid provision Contained in section 14A(1). Therefore, r am not in agreement with the ld. AR in respect this argument. Thus, where investment has been made in shares, which did not yield any dividend in the year under consideration, the expenditure incurred for earning the income is deductible notwithstanding the fact that no such income has been earned. Thus I am of the view that ratio of these cases will apply mutatis mutandis under sec. 14A of the Act also while ascertaining the expenditure incurred for earning tax-free income from investment [Technopak Advisors (P.) Ltd [2012) 50 SOT 31 (Delhi) para 3, Relaxo footwears ltd. V. Addl. CIT (2012) 50 SOT 102 (Delhi) and Cheminvest Ltd. v. Income-Tax Officer [2009] 121 ITD 318 (DELHI)(SB) followed).
6.7 For an example the interest paid on borrowings for the purchase of shares is treated as allowable under section 57 as an expenditure incurred for earning or making income or under section 36( 1) (iii) as an expenditure incurred wholly and exclusively for the purpose of business prior to introduction of section 14A. Now since dividend was exempt, as a consequence thereof expenditure had to be disallowed. In Walfort Share and Stock Brokers (P.) Ltd. (Supra), the Supreme Court made it very clear that the permissible deductions enumerated in sections 15 to 59 are now to be allowed only with reference to income which is brought under one of the heads of income and is chargeable to tax. And at the same time the Supreme Court clarified that if an income like dividend income is not part of the total income, the expenditure / deduction related to such income, though of the nature specified in section 15 to 59, cannot be allowed against other income which is includable in the total income for the· purpose chargeability to tax.
6.8 The Central Board of Direct Taxes, in exercise of its powers under section 119 of the Act clarified that Rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income. The relevant circular reads as follows:
6 ITA.No.738/Hyd/2017 SECTION 14A OF THE INCOME-TAX ACT, 1961, READ WITH RULE 8D OF THE INCOME-TAX RULES, 1962 - EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME - CLARIFICATION ON DISALLOWANCE OF EXPENSES UNDER SECTION 14A IN CASES WHERE CORRESPONDING EXEMPT INCOME HAS NOT BEEN EARNED DURING THE FINANCIAL YEAR CIRCULAR NO.5/2014 [F.NO.225/182/2013-ITA.II], DATED 11-2-2014 Section 14A of the Income-tax Act, 1961 [Act'] provides for disallowance of expenditure in relation to income not "includible" in total income.
A controversy has arisen in certain cases as to whether disallowance can be made by invoking section l4A of the Act even in those cases where no income has been earned by an assessee which has been claimed as exempt during the financial year.
The matter has been examined in the Board. It is pertinent to mention that section 14A of the Act was introduced by the Finance Act, 200 1 with retrospective effect from 01.04. J 962. The purpose for introduction of section l4A with retrospective effect since inception of the Act was clarified vide Circular No. 14 of 200 1 as under:
"Certain incomes are not includible while computing the total income, as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i.e., gross income minus the expenditure, is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income".
Thus, legislative intent is to allow only 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 6f the fact whether any such income has been earned during the financial year or not.
The above position is further clarified by the usage of term 'includible' in the Heading to section 14A of the Act and also the Heading to Rule-8D of I.T. Rules, 1962 which indicates that it is not necessary that exempt income should necessarily be included in a particular year's income, for disallowance to be triggered. Also, section l4A of the Act does not use the word "income of the year" but "income under the Act". This also indicates that for invoking disallowance under section l4A, it is not material that assessee should have earned such exempt income during the financial year under consideration.
The above position is further substantiated by a language used in Rule 8D(2)(ii) & 8D(2)(iii) of I.T. Rules which are extracted below.
7 ITA.No.738/Hyd/2017 "(ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt of amount computed in accordance with the following formula, namely:-
A*B/C
Where .....
B=the average of value of investment, income from which does not or shall not form part of the total income as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year;"
(iii) an amount equal to one-half percent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance-sheet of the assessee, on the first day and the last day of the previous year."
(Emphasis added)
Thus, in light of above, Central Board of Direct Taxes, in exercise of its powers under section 119 of the Act hereby clarifies that Rule 8D read with section l4A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income.
This may be brought to the notice of all concerned.
6.9 Thus, in light of above I hold that Rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income as in the present case. After the introduction of Rule 8D, the language of the Rule is so clear that the disallowance is statutory as per the method and working given in the said Rule and the AO has no option but to follow the Rule. The third component of Rule 8D is an artificial figure - one half per cent of the average value of the investment, income from which does not or shall not form part of the total income, as appearing in the balance sheets of the assessee, on the first day and the last day of the previous year. I hold that the indirect expenses in the form of efforts made by the staff and management for managing such huge investments, which does not yield any taxable income, are to be disallowed. Accordingly, the provisions of Section 14A r. w.r. 8D(iii) correctly invoked. Thus I confirm the addition of Rs. 16,31,331/ - made by the AO. In the result, the appeal is dismissed.”
It was submitted that he lower authorities have disallowed the expenditure to the extent of Rs. 16,31,331/- relying upon Rule 8D of the I.T.Act.
8 ITA.No.738/Hyd/2017 8. On the other hand the ld. DR for the revenue had drawn our attention to the recent decision of the Guwahati Bench in ITA No. 154 to 156/Gau/2019 & 159/Gau/2019 in the case Williamson Financial Services Ltd. order dated 06.07.2022 whereby the Co- ordinate bench has taken a view that the amendment introduced w.e.f. 01.04.2022 is retrospective nature and the issue is required to be adjudicated in accordance with above said principles.
“34. Now applying the same principles, we have to see whether the newly inserted explanation to Section 14A vide Finance Act 2022 would operate prospectively or retrospectively.
A perusal of the said explanation reveals that it starts with the words “For the removal of doubts, it is hereby clarified ……” Then the wording in the body of the provision expressly states: “…..the provisions of this section shall apply and shall be deemed to have always applied…...”
The opening words of the explanation reveal in an unambiguous manner that the said provision is clarificatory and has been inserted for removal of doubts. Further, as provided in the memorandum explaining the aforesaid provision, the aforesaid explanation has been inserted in order to make the intention clear and to make it free from any misinterpretation.
The said explanation when seen in the light of the principle laid down by the various decisions of the Supreme Court as discussed above, there leaves no doubt that the said explanation is clarificatory in nature inserted for the purpose of removal of doubts and to make the intention of the legislature clear and free from misinterpretation and thus the same, obviously, would operate retrospectively. Any contrary interpretation that the said explanation shall operative prospectively will render the words “shall apply and shall be deemed to have always applied” contained in the said statutory provision as redundant and meaningless, which, in our view, is not the intention of the legislature.”
We have heard the rival contention of the parties and perused the material available on record. In this case, the Assessing Officer had made the addition in the hands of the assessee by invoking the provision of Rule 8D of r.w.s. 14A of the I.T.Act. The
9 ITA.No.738/Hyd/2017 said disallowances, was confirmed by the ld.CIT(A) for an amount of Rs. 16,31,331/- by applying the formula given in Rule 8D(iii) r.w.s 14A @0.5% of the average value of investment in respect for which is exempt from the tax. The section 14A had been amended by the Finance Act, 2022 and after the amendment section 14A reads as under:-
[Expenditure incurred in relation to income not includible in total income. 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.] [(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act :] [Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.] [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.]
Recently, the co-ordinate Bench in the case of Williamson Financial Services Ltd. in ITA No.154 to 156/Gau/2019 had the occasion to examine the above said provision and also the aspect whether the recent amendment in section 14A was clarificatory in nature and hence, have a retrospective applicability. After
10 ITA.No.738/Hyd/2017 examining the details, the co-ordinate Bench had came to the conclusion that the amendment to section 14A of the I.T.Act was clarificatory in nature and therefore, it is required to be applied retrospectively even to the pending appeals before the Tribunal. We may fruitfully rely upon the paragraph 34 (supra). In view of the decision of the co-ordinate bench holding that the amendment in section 14A is retrospective, hence matter is restored back to the file of Assessing Officer with a view to re-examine the issue in the light of newly amended Section 14A read with applicable rules and decide accordingly.
In the light of the above, the appeal of the assessee is allowed for statistical purposes.
Order pronounced in the Open Court on 14th July, 2022.
Sd/- Sd/- (RAMA KANTA PANDA) (LALIET KUMAR) ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad, dated 14th July, 2022. Thirumalesh/sps Copy to: S.No Addresses 1 Victory Electricals Ltd., Plot No.8, Survey No.855, IDA, Medchal, Ranga Reddy, Hyderabad-501 401 2 DCIT,Circle-17(2) Signature towers Kondapur Hyderbabad 3 CIT(A)-5, Hyderabad 4 Pr.CIT-5, Hyderabad 5 DR, ITAT Hyderabad Benches 6 Guard File
By Order