LEAYAN GLOBAL PVT.LTD,KANPUR vs. ASSTT. COMMISSIONER OF INCOME TAX CIRCLE 2(3)(1),, KANPUR

1. 1. The Id. CIT(A), has erred in law and on facts in upholding the disallowance of Rs.49,12,160/-, appears to have been made by the Id. Assessing Officer by invoking explanation below section 14A, reading as under: 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 Page 2 of 10 been incurred during the said previous year in relation to such income not forming part of the total income. (2) disallowance in question had been made/upheld by the Authorities below, by making a reference to (i) instruction of CBDT issued vide its Circular no.5 of 2014; and (ii) provision contained in 8D(2)(ii) of the Income Tax Rules 1962; which have been erroneously referred to and applied in the instant case. the Boards instruction as well as Income-tax Rules referred to by the authorities below, are not applicable as in same, number of judicial pronouncements, to the effect that no disallowance under section 14A would be made, in the cases where there were no exempt income are available on record; 4. Even the instruction issued by CBDT, as has been referred to in the Order passed by the Id. CIT(A), should be treated to have been overruled by large number of case laws which are to the effect that no such disallowance under section 14A was called for and justified, where there was no accrual of ‘exempt income’ and/or claimed as ‘exempt income’; 5. the order appealed against is contrary to the facts, law applicable thereto and principles of natural justice.”

The facts giving rise to the present appeal are that in this case, the return of income declaring total income of Rs.9,75,48,650/- was filed through electronic mode on 31.10.2017. The assessee company is a private limited company duly incorporated under the Companies Act has been engaged in the business of manufacturing and sale of leather goods. The case was selected for complete scrutiny through Computer Assisted Scrutiny System (CASS). Accordingly, a notice u/s 143(2) of the Income Tax Act, 1961 (“Act”, for short) dated 14.08.2018 was issued and duly served upon the assessee within the time and manner prescribed under the Act. The Assessing Officer while framing the assessment observed that as per balance-sheet as on 31.03.2017, the assessee claimed investment in unquoted shares. He was of the view that the investment in such assets would accrue exempt income to the assessee. AO observed that the assessee company had debited Page 3 of 10 huge amount of administrative expenses including interest to the Profit & Loss Account. Therefore, he was of the opinion that the assessee ought to have made suo-moto disallowance as contemplated u/s 14A of the Act. Therefore, he called upon the assessee as to why in terms of provisions of Section 14A read with Rule 8D(2) of the Income Tax Rules, 1962 (“Rules”, for short) disallowance should not be made. The assessee duly replied the query and stated that the assessee has not earned any exempt income, therefore, no disallowance is called for. It was stated that the issue is well covered in favour of the assessee by the binding judicial pronouncements. The AO being not satisfied with the contention of the assessee that no expenditure was incurred by it in relation to the income which does not form part of the total income. Hence, he proceeded to compute the disallowance as per the method prescribed by Rule 8D of the Income Tax Rules, 1962 (Rules) (“Rules”, for short) and made addition of Rs.49,12,160/- in this regard. The assessee feeling aggrieved, carried the matter in appeal before the Ld. CIT(A) who also sustained the impugned disallowance. Aggrieved, the assessee is in appeal before this Tribunal.

The solitary effective ground in this appeal is against the impugned disallowance made by the assessing authority by invoking the provisions of Section 14A of the Act.

Apropos to the grounds of appeal

We have heard the Ld. Representatives of the parties and perused the material available on record. The only dispute in the present case is with regard to disallowance made by invoking the provisions of Section 14A of the Act. There is no dispute with regard to the fact that the assessee has not earned any exempt income during the relevant financial year. The claim of the assessee is that when he has not claimed any exempt income so there is no question of disallowance of expenditure in terms of Rule 8D of the Rules. In this background, we need to examine the correctness of the finding of the lower authorities. The Ld. CIT(A) sustained the disallowance of expenditure by observing as under: - “5.1 Held: I have considered the submissions made by the appellant on the basis of circumstances and facts of the case along with the order of the AO and perused the material available on record. The contention of the Page 6 of 10 appellant is basically that since there is no exempt income, no disallowance is called for u/s 14A of the Act. It is not out of place to mention that Section 14A has been amended by Finance Act, 2022 with effect from 01.04.2022 wherein the following explanation has been inserted: - Explanation.—For the removal of doubts, 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. The above explanation is explanatory in nature and is clearly applicable in the Case under consideration. The Assessing Officer in his order has underlined the following issues to highlight that no expense has been segregated and allocated to the earning of exempt income. In this context, the relevant extract of the assessment order is reproduced as under: “.....From the perusal of case laws cited by the assessee, it is noteworthy to mention here that the decisions in the cases cited by the assessee were delivered by various Hon'ble Courts with reference to the Rules as were existed prior to amendment in Rule 8D(2) substituted by the IT (Fourteenth Amdt.) Rules 2016 w.e.f. 02.06.2016. Therefore, the verdicts delivered in the cases quoted by the assessee are not applicable in the assessee’s case. Further the following points are worth mentioning:- The assessee does not maintain separate books of accounts for operation activities financing activities/investment activities. All the expenses are incurred through common pool of fund. Every income whether taxable or exempt requires expenses viz. finance cost, administrative expenses, etc. Since assessee has not maintained separate books of accounts and incurred expenditure through common pool, therefore, provisions as contained u/s 14A of the LT. Act, 1967 read with Rule 8D of I.T. Rules are attracted in this case. Hence, in view of the above, I am not satisfied with the correctness of the claim of the assessee that no expenditure was incurred by it in relation to income which does not form part of total income. The provisions in this regard are very clear, which describes as under:- Section 14A(1) of the Act provides that the expenditure incurred by the taxpayer in relation to the income which does not form part of the total income under the Act shall not be allowed as a deduction in computing the taxable income of the taxpayer. Section 14A(2) of the Act provides for determining the quantum of such expenditure which shall not be allowed as a deduction. That is the machinery provision in so far as Section 14A of the Act is concerned. In that provision, it has been provided that if the A.O. is not satisfied with the correctness of the computations made by the taxpayer, he/she shall compute the quantum in accordance with the method that may be Prescribed. For this matter, Rule 8D has already been prescribed. Section 14A(3) further provides that even in a case where the taxpayer claims that no expenditure was incurred, the tax authority has to presume the incurring of such expenditure as provided under Section 14A(2) read with Rule prescribed. Therefore, it becomes clear that even in a case where Page 7 of 10 the taxpayer claims that no expenditure was So incurred, the statute has provided for a presumptive expenditure which has to be disallowed by the force of the statute. Hence, as per the provisions of Act and the investment details submitted by the assessee company, inadmissible expenditure in this case is worked out in accordance with the Section 14A of the Act r.w. Rule 8D of the Income Tax Rules,1962.........” And accordingly, proceeding to workout disallowance @ 1% of the weighted average investment. 5.2 Surely, it cannot be the contention of the appellant that no managerial time or company resources were used to manage such huge investments. In view of the detailed fining of the Assessing Officer, the explanation inserted in the Finance Act, 2022 and no disallowance or suo moto bifurcation of expenses by the appellant, I find no reason to interfere with the order of the Assessing Officer and find the disallowance made u/s 14A of the Act made as reasonable and lawful. Accordingly, the order of the AO is upheld and appeal of the appellant on these grounds of appeal

There was and is no ambiguity in the main provision of Section 9(1)(ii). It includes salaries in the total income of an assessee if the assessee has earned it in India. The word "earned" had been judicially defined in S.G. Pgnatale [(1980) 124 ITR 391 (Guj)] by the High Court of Gujarat, in our view, correctly, to mean as income "arising or accruing in India". The amendment to the section by way of an Explanation in 1983 effected a change in the scope of that judicial definition so as to include with effect from 1979, "income payable for service rendered in India".

When the Explanation seeks to give an artificial meaning to "earned in India" and brings about a change effectively in the existing law and in addition is stated to come into force with effect from a future date, there is no principle of interpretation which would justify reading the Explanation as operating retrospectively." (emphasis supplied) 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.

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.

Ld. Counsel for the assessee has also brought to our notice that the SLP (Civil Appeal No.002292/2019) preferred by the Revenue has been dismissed. Therefore, the judgment of the Page 9 of 10 Hon’ble Delhi High Court rendered in the case of PCIT vs IL & FS Energy Development Company Ltd (2017) 84 taxmann.com 186 (Del) has now attained finality.

In the result, the appeal of the assessee is allowed. Order pronounced in the open Court on 29/07/2025.