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Facts
The assessee, engaged in manufacturing industrial catalysts, filed its return for AY 2013-14. The AO made a disallowance of Rs.87,70,450 u/s. 14A, which the CIT(A) restricted to Rs.27,54,890. The assessee appealed to the Tribunal, arguing that the disallowance u/s. 14A read with Rule 8D should not exceed the exempt income of Rs.1,06,480 earned during the year.
Held
The Tribunal held that the disallowance u/s. 14A of the Act cannot exceed the exempt income earned by the assessee, relying on Supreme Court and High Court judgments. It further clarified that the explanation inserted by the Finance Act, 2022, which makes disallowance u/s. 14A applicable irrespective of earning exempt income, is prospective and thus does not apply to AY 2013-14.
Key Issues
1. Whether disallowance under Section 14A read with Rule 8D can exceed the exempt income earned by the assessee. 2. The prospective applicability of the Finance Act, 2022 amendment to Section 14A.
Sections Cited
250, 143(3), 92CA, 14A, 10(34), Rule 8D
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, COCHIN BENCH, COCHIN
Before: Shri George George K, Vice- & Shri Inturi Rama Rao
:Asst.Year 2013-2014 Sud Chemie India Pvt. Ltd. The Deputy Commissioner of Edayar Industrial Area, v. Income-tax Binanipuram, Aluva Corporate Circle 2(1) Ernakulam – 683 502. Ernakulam. PAN :AAACU3342E. (Appellant) (Respondent) Appellant by :Sri.Radhesh Bhatt, CA Respondent by :Smt.Leena Lal, Sr.AR Date of Date of Hearing :08.04.2025 Pronouncement : 09.04.2025 O R D E R
Per George George K, Vice-President :
This appeal at the instance of assessee is directed against the order of the National Faceless Assessment Centre / Commissioner of Income Tax (Appeals) [“CIT(A)”] dated 08.09.2024 passed u/s. 250 of Income Tax Act, 1961 ("the Act" hereinafter). The relevant assessment year is 2013-2014.
There was a delay of 21 days in filing this appeal before the Tribunal. The assessee has filed a petition for condoning the delay and also the affidavit of the Managing Director of the assessee stating the reasons for the delay in filing this appeal.
. Sud Chemie India Private Limited. 2.1 We have perused the affidavit filed by the Managing Director of the assessee. We find that the delay in filing this appeal cannot attributed to any latches on the part of the assessee. In other words, there is no willful or contumacious conduct on the part of the assessee and the delay in filing this appeal was caused due to the reasons beyond the control of the assessee, hence, we condone the delay of 21 days and proceed to dispose of the same on merits.
The grounds raised read as follows:
“1. The order passed by the learned Commissioner of Appeals (CIT-A), NFAC to the extent appealed against is against law, equity and justice.
The Learned CIT -A grossly erred in partially confirming the disallowance u/s.14A, r.w.r. 8D of the Income Tax Act, made by the Learned Assessing Officer in the scrutiny assessment order.
The Learned CIT-A ought to have noted that the disallowance in any case, could not exceed the exempt income, relying on the settled position of law.
For these and other grounds that may be further adduced before or at the time of hearing, the order of the AO requires to be modified.”
Brief facts of the case are as follows:
The assessee is a private limited company. It is engaged in the business of manufacture of industrial grade catalysts for petrochemicals, refineries, fertilizer and air gas purification industries. For the assessment year 2013-2014, the return of income was filed on 28.11.2013 declaring total income of Rs.152,41,97,220. The assessment was completed u/s.143(3)
. Sud Chemie India Private Limited. r.w.s. 92CA of the Act vide order dated 31.12.2016. In the said assessment order, the Assessing Officer (“the AO”) made a disallowance u/s.14A of the Act amounting to Rs.87,70,450.
Aggrieved by the order of the AO, the assessee filed an appeal before the first appellate authority. The CIT(A) restricted the disallowance to Rs.27,54,890 by applying 0.05% of incremental increase in reserves and surplus.
Aggrieved by the order of the CIT(A), the assessee has filed the present appeal before the Tribunal. The learned AR’s limited submission before the ITAT is that the CIT(A) grossly erred in sustaining the disallowance u/s.14A r.w.Rule 8D to a sum of Rs.27,54,890. It was submitted by the learned AR that the assessee-company during the year had earned exempt income of only Rs.1,06,480 (dividend income exempt u/s.10(34) of the Act). It was submitted that it is well settled position of law that disallowance u/s.14A r.w.r 8D should be limited or should not exceed the exempt income. In this context, the learned AR relied on the order of the Cochin Bench of the Tribunal in the case of ITO v. Kerala Ayurveda Limited – & ITA No.307/Coch/2017 (order dated 14.12.2017), wherein the Tribunal by following the judgment of the Hon’ble Delhi High Court in the case of Joint Investment Private Limited v. CIT (2015) 372 ITR 694 (Del.) had restricted the disallowance u/s.14A of the Act to the exempt income earned by the assessee during the relevant assessment year.
We have heard rival submissions and perused the material available on record. The limited submission of the learned AR before the Tribunal is that sec.14A disallowed ought to be restricted to the exempt income earned by the assessee during the relevant assessment year. It is an admitted fact that the assessee had earned exempt income only to the extent of Rs.1,06,480 for the relevant assessment year, viz., A.Y. 2013-2014. The Cochin Bench of the Tribunal in the case of Kerala Ayurveda Limited (supra) had held that the disallowance u/s.14A of the Act cannot exceed the exempt income earned by the assessee during the relevant assessment year. In the said order of the Tribunal, it had relied on the judgment of the Hon’ble Delhi High Court in the case of Joint Investment Private Limited (supra). The relevant finding of the Cochin Bench of the Tribunal reads as follow:-
“10. Insofar as the disallowance of administrative and general expenses under Rule 8D(2) (iii) is concerned, the assessee claims that, it did not incur any expenditure for earning exempt income. The assessee further contended that the investments are made in group companies which are invested in earlier years. Though it has incurred certain common expenses in the nature of general administrative expenses, no specific expenditure has been incurred to earn exempt income. We do not find any merit in the arguments of the assessee for the reason that when there is no substantial investments in shares which yield exempt income, the possibility of incurring certain common expenditure attributable to investment cannot be ruled out. Though the assessee claims to have not incurred any specific expenditure, it is abundantly clear that the assessee has incurred various administrative and general expenses, which are in common . Sud Chemie India Private Limited. nature. Therefore, we are of view that the A.O. was right in computing disallowance towards expenses incurred in relation to exempt income. However, the disallowances contemplated u/s 14A can in any way swallow the entire exempt income earned by the assessee. The window for disallowance for invoking the provisions of section 14A is only to the extent of disallowing expenditure incurred by the assessee in relation to the exempt income. This proportion or portion of the tax exempt income surely cannot swallow the entire amount. In this case, admittedly, the assessee has earned dividend income of Rs.4,000 from investment in shares of Canara Bank, whereas the A.O. has determined disallowance of expenditure at Rs.3,23,520. Therefore, we are of the view that the disallowance determined u/s 14A cannot exceed the exempt income. This legal proposition is supported by the decision of the Hon'ble Delhi High Court in the case of Joint Investment Private Limited v. CIT [(2015) 372 ITR 694 (Del.)), wherein it was observed as under:- "9. In the present case, the O has not firstly disclosed why the appellant / assessee's claim for attributing Rs.2,97,440 as a disallowance under s.14A had to be rejected. Taikisha Engg. India Ltd. (supra) says that the jurisdiction to proceed further and determine amounts is derived after examination of the accounts and rejection if any of the assessee's claim or explanation. The second aspect is there appears to have been no scrutiny of the accounts by the AO-an aspect which is completely unnoticed by the CIT(A) and the Tribunal. The third, and in the opinion of the Court, important anomaly which we cannot be unmindful is that whereas the entire tax exempt income is Rs.48,90,000, the disallowance ultimately directed works out to nearly 110 per cent of that sum, i.e., Rs.52,56,197. By no stretch of imagination can s.14A or r.8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in s.14A, and is only to the extent of disallowing expenditure "incurred by the assessee in relation to the tax exempt income". This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case."
In view of the matter and considering the ratio of the case law discussed above, we are of the considered view that disallowance as contemplated u/s 14A of the Act cannot exceed exempt income. Therefore, we direct the A.O. to restrict
The Hon’ble Supreme Court while disposing of the case of Maxopp investments Ltd. v. CIT reported in 254 Taxman 325 along with the case of State Bank of Patiala upheld the judgment of the High Court of Punjab & Haryana reported in 391 ITR 281 (P&H), wherein it was held that disallowance u/s.14A ought to be restricted to exempt income. Similar view has been expressed by the Hon’ble Madras High Court in the case of PCIT v. Envestor Ventures Ltd. reported in 278 Taxman 377.
Before concluding, it is also to be mentioned that explanation was inserted by the Finance Act, 2022, to sec.14A of the Act. The explanation states that disallowance u/s.14A is to be made irrespective whether the assessee has earned exempt income or not. However, the Hon’ble Delhi High Court in the case of PCIT v. Era Infrastructure (India) Ltd. (2022) 141 taxmann.com 289 had held that the said explanation is prospective. In the instant case, since we are concerned with the assessment year 2013-2014 and the amendment effected by the Finance Act, 2022 being prospective, we direct the AO to limit the disallowance made u/s.14A of the Act to the exempt income earned by the assessee-company during the relevant assessment year. It is ordered accordingly.
Order pronounced on this 9th day of April, 2025.