AVAILABLE FINANCE LIMITED,INDORE vs DCIT 1(1) , INDORE

Income Tax Appellate Tribunal, INDORE BENCH, INDORE

Before: SH. BAGIRATH MAL BIYANI & SH. UDAYAN DAS GUPTA

For Appellant: Ms. Ruchica

Hearing: 29.01.2025

Per: Udayan Das Gupta, JM

This appeal is filed by the assessee against the order of the ld. JCIT(A)-2,

Noida, passed u/s 250 of the Act 1961 dated 31.03.2024 which has emanated from

the order of the DCIT, 1(1), Indore, (in short the AO) u/s 143(3) of the IT Act 61

dated 10.12.2019 for A.Y. 2017-18. 2. The grounds of appeal preferred by the assessee as per memorandum of

appeal are as under;

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“1. The Learned CIT(A) in effect erred in confirming the addition made by the AO under section 14A of Rs. 10,74,492/-. That on the facts and in the circumstances of the case and in law the addition made is wrong, bad in law and is prayed to be deleted. 2. The appellant craves leave to add, to alter, amend, modify, substitute, delete and / or rescind all or any of the grounds of appeal on or before final hearing, if necessity so arises.”

The brief facts of the case are that the assessee is a limited company incorporated on 3rd February, 1993, is registered as a NBFC, duly engaged in the business of investment, finance and dealing in shares and securities . Return of income for the year under appeal was filed declaring a total income of

Rs.23,58,640/- which was assessed at Rs.34,33,130/- (with an addition of Rs.10,74,492/- u/s 14A of the Act 61.) 3.1 In course of assessment proceedings, detailed submissions and explanations has been filed by the assessee in response to various queries raised by the AO explaining the fact that no disallowance are called for in respect of investment made in unquoted / unlisted shares (of group concerns) and also in respect of

investments which fetches taxable income. It was further explained that the assessee company is holding investment in form of equity shares of various

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companies, but has not earned any exempted income during the year in respect of the said investments in listed or unlisted concerns , and in the absence of any

exempted income earned during the year, the provisions of section 14A is not attracted in the instant case. However, as a gesture of cooperation, the assessee company suo moto disallowed one percentage ( 1% ) of yearly average of monthly average investment held in quoted equity shares as per amended Rule 8D of IT Rule 1962 which works out to Rs.14,962/- as per computation of income filed. 3.2 However, the AO ( in para 6.1 of the assessment order ) has observed that

the assessee has investment in quoted and unquoted equity shares and mutual funds amounting to Rs. 10.89 crores ( which is b/f balance from earlier year ) , and in para- 6.2 and 6.4 of his order ) has observed that the investments in shares and mutual funds has generated exempted income in form of dividends during the year under consideration and the AO has laid out his satisfaction ( in para 6.2 of the order ) that the assessee has incurred expenditure in relation to income which does

not form part of the total income and since in the instant case the assessee has claimed that no such expenditure has been incurred, the provisions of section 14A(2) will be applicable . He further relied on the CBDT circular no 5/2014 dated 11/02/2014, to observe that actual earning of dividend income is not necessary for working of disallowance u/s 14A of the Act.

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3.3 Thereafter, (in para 7.6 and 7.8 of the order) the AO records his dis- satisfaction regarding the correctness of the accounts maintained by the assessee,

observing that no separate bank accounts has been maintained for recording of investments which are exempted u/s 14A , and in absence of any separate fund flow and separate expenditure account recording exempted income, he proceeds to make disallowance as per rule 8D of the ITAT Rules ’62, ( rws 14A) , to make an addition ( disallowance) of Rs. 10,74,492/-, u/s 14A of the Act 61.

The matter was carried in appeal before the first appellate authority and the ld. first appellate authority dismissed the appeal of the assessee observing that the correct approach should be to first examine whether the investment made by the appellant is capable of earning any exempted income or not. If the answer is affirmative, then the provisions of section 14A would be rightly invoked and the expenditure incurred in relation to such investment could be disallowed. He further

relied on the judgment of the Hon’ble Apex Court in the case of Maxopp Investment (reported 402 ITR 640), and in the case of Godrej and Boyce Mfg. Co. Ltd. 328 ITR 81 (Bombay) and has dismissed the appeal by observing as under: (relevant portion reproduced)

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“8. The actual earning or receipt of exempt income in a particular year is not the determinative factor. The appellant cannot be permitted to claim any expenditure against such exempt income as that would amount to conferring double benefit to the appellant - first, the income earned would be exempt from tax and second, the appellant would also claim deduction of expenses incurred to earn such exempt income. This would defeat the legislative intent and purpose behind the special provision of section 14A which has an overriding effect over any other provision of the Income-tax Act. The decisions relied upon by the appellant have been rendered in the context of the facts of those cases and cannot be applied as a straitjacket formula. The binding nature of the judgments of the Hon'ble Supreme Court in Maxopp Investment and Godrej & Boyce (supra) has not been considered in the cases relied upon by the appellant. 9. In view of the above discussion, I am of the considered opinion that the Ld. AO was fully justified in invoking the provisions of section 14A read with Rule 8D to compute the disallowance of expenditure incurred in relation to exempt income in the facts and circumstances of the case. Accordingly, ground no. 1 raised by the appellant is dismissed.”

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Now the assessee is in appeal before the Tribunal on the ground contained in memorandum of appeal.

In course of hearing, the ld. AR of the assessee, filed copies of written submissions which were filed before the ld. first appellate authority and submitted that the provisions of section 14A r.w.r. 8D, will not be applicable in the instant case , because the assessee has not earned any exempted income during the year under appeal , ( and the observation of the AO is factually incorrect ) and as such no disallowance is called for u/s 14A of the Act. He further submits with respect

to investment in quoted shares amounting to Rs.14,96,022/- , that the tax auditor has already reported the disallowance of Rs.14,962/- (being 1% of annual monthly average investment held in quoted shares), and the said amount has been suo moto disallowed in the computation of income by the assessee. He further submitted that this disallowance of 1% ( one percentage ) is only applicable which fetches exempt income and as such, in respect of investment in unquoted shares, no

disallowance is called for. He further submitted that the assessee has not invested borrowed loans in shares and securities and all investments and listed shares has been made in earlier years from free reserves and own capital. Referring to the audited accounts, he explained that own capital and reserves stood at Rs. 11534.21 lakhs at the beginning of the year and at Rs.18202.71 lakhs at the year end, and

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investments ( other than project participation investment ) stood at Rs. 11404.41 lakhs at the beginning and also at the year end, which substantiate that no

investments has been made out of borrowed funds in equities as the appellant has sufficient funds and free reserves, of its own. 7. The Ld. AR further submitted that in the instant case in the absence of any exempted income being earned or credited in the books of accounts of the assessee, for the year, applicability of section 14A does not arise and in support of his contention he relied upon the following judicial precedents:

(Relevant portion of written submission) “The appellant places heavy reliance on the decision rendered by the Honourable Madras High Court in Redington (India) Ltd v, Addl. Cl I, [ICA No.520 of 2016, dt.23.12.2016, wherein it is held that where there is no exempt income in relevant year, there cannot be a disallowance of expenditure U/S.14A to any assumed income. Recently Honourable Income Tax Appellate Tribunal, Bangalore Bench in the case of M/S Deepak Cales Inda Limited, vs Addl.C.LT., Bangalore delivered on on 4 June, 2019 in ITA 1285/1286/Bangalore 2016, relied upon this decision of the Honourable Madras High Court has held that: " Respectfully following the aforesaid decision of the Hon’ble Madras High Court in the case of Redington (India) Ltd., we delete the disallowances made by the AO under sect ion 14 A r.w. Rule 8D(2)(iii) of the Rules since the assesses has not earned any exempt income

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during these two Assessment Years 2011-12 and 2012-13. Consequently, the grounds raised by the assesses are allowed."

Regarding the CBDT circular No 5 of 2014 , dated 11th February, 2014 , 8.

relied upon by the Ld. first appellate authority , that section 14A was applicable

even when no exempt income had been earned during the financial year , the Ld.

AR of the assessee relied upon the Delhi High Court decision in the case of PCIT

vs IL and FS Energy Development Co Ltd [2017] 84 taxmann.com186(Delhi) to

submit that judicial precedents has consistently held that the circular cannot

override the Act or judicial interpretations , and since in the instant case there is no

exempt income for the year under appeal , the provisions of section 14A of the Act

61, cannot be made applicable . and as such he prayed that the addition of Rs.

10,74,492/- sustained by the Ld first appellate authority by invoking the provisions

of section 14A may please be deleted.

(Relevant portion of the submission) “In this regard the-appellant place reliance on the recent judgement given by the H'ble Delhi high court in the case of PCIT Vs IL&FS Energy Development Company Ltd. (Delhi High Court) in 1TA no. IT Appeal No. 520 of 2017 wherein it has been held that "The words "in relation to income which does not form part of the total income under the Act for such previous year" in rule 8D(1) indicates a correlation between the exempt income earned in the assessment year and the expenditure incurred to earn it. This implies that if there is no exempt income earned in assessment year in question, the question of disallowance of the

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expenditure incurred to earn exempt income in terms of section 14A read with rule 8D would not arise. CBDT's Circular dated 11-2-2014 does not refer to rule 8D(1) of the Rules at all but only refers to the word "includible" occurring in the title to Rule8D as well as the title to section 14A." This judgement appropriately deals with the Circular No. 5/2014, dt. 11- 2-2014 which has been heavily relied by the Learned AO, in this regard the Honourable High court has held that the CBDT Circular dated Tl,hMay 2014 cannot override the express provisions of Section 14A read with Rule 8D.

8.1 The Ld. AR further submitted that the instant case is distinguishable on facts

from the case of Maxopp Investments Limited vs CIT (relied upon by the first

appellate authority ) and the same is distinguished as under :

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8.2 As such he prayed that considering the fact that in absence of any exempt

income no expenditure has been incurred for earning exempt income, and as such the addition of Rs. 10,74,492/- sustained by the Ld. first appellate authority by invoking the provisions of section 14A may please be deleted.

Ld. DR relied on the order of the Ld. CIT (A) and the AO and submitted that in the instant case satisfaction of the AO is recorded regarding the incorrect claim

of the assessee with respect to the books of accounts and as such he has correctly proceeded to determine the disallowance u/s 14A (as per prescribed procedure laid out in Rule 8D of the IT Rules 62) and he prayed that the order of the Ld. CIT(A) may please be upheld.

10.

We have heard the rival submissions and considered the materials on record

and we find that (the observation of the AO in the assessment order (para 6.4) that the investment in shares and mutual funds has generated exempted income during the year under appeal is factually incorrect), and in the instant case there is no exempt income for the year under appeal, and in absence of any exempted income, the provisions of section 14A is not applicable.

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10.1 On this issue, respectfully following the law laid down by the Hon’ble Apex

court in the case of (i) CIT vs Chettinad Logistics Pvt Ltd [2018]

95taxmann.com250(SC), (ii) Cheminvest Ltd vs CIT, 378 ITR 33, (iii) PCIT vs Oil

Industry Development Board [2019]262 taxmann 102 ( 103taxmann.com 326) ,

we have no hesitation in deleting the addition of Rs.10,74,492/- u/s 14A, being not

legally sustainable.

11.

In the result, the appeal of the assessee bearing ITA No. 478/Ind/2024 is allowed.

Order pronounced on 27.03.2025 under Rule 34(4) of the Income Tax

Appellate Tribunal Rules 1963.

Sd/- Sd/- (BAGIRATH MAL BIYANI) (UDAYAN DAS GUPTA) Accountant Member Judicial Member AKV

Copy of the order forwarded to:

(1)The Appellant (2) The Respondent (3) The CIT (4) The CIT (Appeals) (5) The DR, I.T.A.T. True Copy By order

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Date Initia l 1. Draft dictated on 12.03.25 Sr.PS/ PS 2. Draft placed before author 12.03.25 Sr.PS/ PS 3. Draft proposed & placed JM/A before the Second Member M 4. Draft discussed/approved by JM/A Second Member M 5. Approved Draft comes to Sr.PS/ the Sr. P.S./P.S. PS 6. Kept for pronouncement on Sr.PS/ PS 7. File sent to the Bench Clerk Sr.PS/ PS 8. Date on which file goes to the Head Clerk 9. Date on which file goes to the AR 10. Date of dispatch of Order

AVAILABLE FINANCE LIMITED,INDORE vs. DCIT 1(1) , INDORE