DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE- 1(1)(1), BENGALURU vs. M/S. AMBUTHIRTHA POWER PRIVATE LIMITED, BANGALORE

This appeal by the revenue is against the order dated 26.7.2019 of the CIT(Appeals)-I, Bengaluru relating to assessment year 2016-17.

The only issue that arises for consideration in this appeal is as to, whether the CIT(Appeals) was justified in deleting the disallowance of a sum of RS.2,95,61,114 made by the AO by invoking the provisions of section 14A of the Income-tax Act, 1961 [the Act].

The assessee is a company. It is engaged in the business of generation and distribution of hydro-electric power. As on 31.3.2016, the assessee made investments of Rs.55,44,80,070 in subsidiary companies. The assessee did not own any tax-free dividend income from the aforesaid investments. The AO was of the view that u/s. 14A of the Act, expenditure incurred to earn exempt income should be disallowed. The AO accordingly computed the quantum of expenses to be disallowed u/s. 14A of the Act r.w. Rule 8D of the Rules as follows:-

With regard to the contention of assessee that in absence of earning any dividend income, there can be no disallowance u/s. 14A, the AO referred to Circular No.5/2014 dated 11.12.2014 issued by the CBDT wherein it was laid down that disallowance u/s. 14A r.w. Rule 8D of the I.T. Rules has to be made even where a taxpayer in a particular year has not earned any exempt income. Aggrieved by the order of AO, the assessee preferred appeal before the CIT(Appeals).

The CIT(Appeals) deleted the disallowance made by the AO by following the decision of the Hon’ble Delhi High Court in the case of Cheminvest Ltd. v. CIT, 378 ITR 33 (Del) wherein it was held that if there is no exempt income earned, there can be no disallowance u/s. 14A of the Act. Aggrieved, the revenue has preferred the present appeal before the Tribunal.

The ld. DR relied on the order of AO and the CBDT Circular referred to by the AO in his order.

We have considered the rival submissions. We are of the view that in the light of the decision Hon’ble Delhi High Court in the case of Cheminvest Ltd., 378 ITR 33 (Del) and in light of the admitted factual position that the assessee did not earn any exempt income during the relevant previous year, the disallowance of expenses u/s. 14A was rightly deleted by the CIT(Appeals). We may also add that the High Court of Delhi in the case of Prl. CIT Vs. IL & FS Energy Development Co. Ltd. (2017) 84 taxmann.com 186(Delhi) has held that CBDT Circular upon which extensive reliance is placed by revenue does not refer to rule 8D(1) 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. The Court held that the process of interpretation adopted by the CBDT will be a truncated reading of section 14A 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, the question of taxation of 'notional income' does not arise. For all of the aforementioned reasons, the Court held that the CBDT Circular dated 11.5.2014 cannot override the express provisions of section 14A, read with rule 8D.

For the reasons given above, we do not find any merit in this appeal by the revenue.

In the result, the appeal by revenue is dismissed.