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Facts
The assessee, engaged in manufacturing tiles, made an investment of Rs. 4.13 crores in a subsidiary company from its free reserves. During Assessment Year 2014-15, no dividend income was earned from this investment, leading the assessee to argue Section 14A was inapplicable. However, the Assessing Officer disallowed Rs. 12,47,396/- under Section 14A read with Rule 8D, an action upheld by the CIT(A).
Held
The Tribunal held that Section 14A and Rule 8D cannot be invoked for disallowance when no exempt income is actually earned or claimed by the assessee during the relevant financial year. It clarified that the Explanation to Section 14A inserted by Finance Act 2022 has prospective effect from AY 2022-23 onwards, and CBDT circulars prejudicial to the assessee are not binding. Consequently, the CIT(A)'s order upholding the disallowance was quashed.
Key Issues
Whether Section 14A and Rule 8D are applicable for disallowance of expenditure when no exempt income is actually earned during the assessment year; And, the prospective applicability of the Explanation to Section 14A inserted by Finance Act 2022.
Sections Cited
Section 143(3), Section 147, Section 14A, Rule 8D, Finance Act 2022, Section 36(va)
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Income Tax Appellate Tribunal, RAJKOT BENCH, RAJKOT
Before: DR. ARJUN LAL SAINI, AM. &
आदेश / O R D E R PER DINESH MOHAN SINHA, JM:
Captioned appeal filed by the assessee is directed against the order passed by the National Faceless Appeal Centre [(in short “NFAC/Ld. CIT(A)”] vide order dated 30.09.2024, which in turn assessment order passed by Assessment Unit, Income Tax
Department / Assessing Officer under section 143(3) r.w.s. 147 of the Income Tax Act, 1961 (in short “the Act”). Grounds of Appeal:
1. The Learned Additional/Joint Commissioner (Appeals) - 1, Jaipur erred in upholding action of Assessing Officer in disallowing Rs. 12,47,396/- u/s 14A of the Act by holding that interest bearing funds were utilized to earn exempt income.
2. The Learned Additional/Joint Commissioner (Appeals) - 1, Jaipur failed to appreciate that there was no exempt income earned by the Appellant during the year under consideration.
3. The Learned Additional/Joint Commissioner (Appeals) - 1, Jaipur erred in not following the cited judicial decisions which were in favor of appellant and also of Hon'ble Rajkot Tribunal in own cases of earlier years.
4. The appellant craves leave to add, amend, alter and withdraw any ground of appeal anytime up to the hearing of this appeal.
2. Statement of facts, as narrated in Form No. 35 by the appellant is as under:- During the year under consideration, the appellant was engaged in the business of manufacturing and trading of wall glazed tiles and packing boxes. The return of income for the year was filed by the appellant on 27-09-2014 declaring total income of Rs.2,32,25,494/- The assessment is completed u/s 143(3) of the Act on 12-07-2016 determining total income at Rs.2.44,72,890/-.
During the course of assessment proceedings, the A.O. noticed that the appellant had made total investment of Rs. 4,13,59,980/- in shares of companies on which interest expenses were incurred. Vide its letter dated 01-07-2016, the appellant submitted that the company had made investment of Rs. 4.13 crores in 100% subsidiary company from its free reserves and surplus that amounted to Rs. 23.54 crores as on 31-03- 2014. The appellant further submitted that there was no dividend income earned during the year and that hence Sec. 14A was not attracted. Further, no new investment was made during the year as can be seen from the Page 2 of the assessment order. The appellant further gave commercial justification for making the investment and showed that interest-bearing funds were used for other specific purposes and not for making investment in subsidiary company. The appellant relied upon various judicial pronouncements in support of its contentions. The 2
A.O. however, did not find the submissions of the appellant tenable by stating various reasons in the assessment order and proceeded to disallow Rs. 12,47,396/- u/s 14A read with Rule 8D of the Act.
That the Assessee being dissatisfied with the order of Ld. A.O. filed an appeal before Ld. CIT(A). That the Ld. CIT(A) has disposed of the appeal with observing that “I am of the opinion that A.O. has rightly made disallowances u/s 14A of Rs. 12,47,396. wide order dated 30-09-2024 under the Act. In the result, the appeal is dismissed.”
The assessee is in appeal is against the impugned order of the Ld. CIT dated 21-08-2024 before us. (i) During the course of hearing the Ld. AR of the assessee Submitted that assessee has invested in share capital of the subsidiary company from the Reserves and Surplus for earning dividend income. That company has sufficient funds available for investment, the company has not earned a dividend income during the year even then the A.O. has applied Section 14A of the Act. and computed disallowances of expenses according to Rule 8D of the act. That the assessee has investment fund, out of the corpus of Rs. 43 crores of the company, that investment in share is Rs. 4.13 crores. Explanation 14A inserted by Finance Act 2022 is having prospective effect in Nature and amendment applied w.e.f. A.Y. 2022-23 and onwards. AR relied on the order of his own case - 374/Rjt/2016.
(ii) On the contrary, DR has relied on the order of lower authority. In the CIT Appeal order relied on under following para : 7.2.1 It is pertinent to mention here that the CBDT vide its clarificatory Circular No. 5/2014 dated 11.02.2014 has already clarified the position of the applicability of section 14A even before the insertion of the Explanation. It has been clarified by 3 the usage of term "includible" in the heading of section 14A of the Act as well as Rule 8D of the Rules. This fact shows that it is not necessary for invocation of the provision of section 14A of the Act that exempt income necessarily exists in a particular year. The phrase "income under the Act" is quite different than the phrase "income of the year". Hence, it is not material that the assessee should have earned such exempt income in the year under consideration. Considering the above discussed facts and language used in Rule 8D(2)(ii) and 8D (2) (iii) of the Rules the CBDT has clarified that provisions of section 14A of the Act r.w.s. Rule 8D are applicable in particular year also where the assessee has not earned any exempt income. 7.2.2 The Hon'ble Supreme Court in the case of CIT vs. Rajendra Prasad Moody (2002-TIOL-751-SC/115 ITR 519 (SC) has held that even if there was no income, the expenditure is allowable. It is now well-settled that income includes loss also as held by the Hon'ble Supreme Court in the case of Walfort Share & Stock Brokers Pvt. Ltd." reported in [2010] 192 Taxman 211 (SC)/[2010] 326 ITR 1 (SC) that only the net of the income is taxable i.e. gross income minus expenditure and discussed above the net income may be a loss also. Since the earning of positive net income is not a condition precedent for claiming deduction of expenditure, on the same analogy, the earning of exempt income is also not a condition precedent for attracting disallowance of expenditure incurred to earn exempt income. Considering the above discussion, I am of the opinion that the AO has rightly made disallowance u/s 14A of Rs. 12,47,396/-
We have heard both the parties and perused the material available on record. (i) We note that the Ld. Assessee submitted that section 14A was inserted by Finance Act 2022 which has prospective effect in nature and applicable from A.Y. 2022-23 & onward, the assessee relied on the under mentioned judgement of Hon’ble High Court. Wherein it has been clarified the applicability of Section 14A of the Act. Hon’ble High Court of Delhi in the case of PCIT vs. Alchemist Ltd., 167 taxmann.com 284 held as “Whether Explanation inserted to section 14A by virtue of Finance Act 2022 with effect from 1-4-2022, which seeks to assert that provision would apply irrespective of whether exempt income had arisen, accrued or had been received in previous year will take effect from 1-4-2022 and accordingly will apply to assessment year 2022-23 onwards - Held, yes [Paras 22 to 33] [ln favor of assessee]” 4
Hon’ble High Court of Madhya Pradesh in the case of PCIT vs. Keti Construction Ltd., 162 taxmann.com 278 held as “Explanation vide Finance Act, 2022 is applicable prospectively from assessment year 2022-23 and not applicable to assessment year 2013-14 - Held, yes - Whether thus, no disallowance under section 14A would be attracted, if no exempt income was received or receivable during relevant previous year by assessee - Held, yes [Paras 16 and 18] [In favor of assessee]”
(ii)We note the assessee did not make any claim for exemption of income from payment of tax (as per computation of Income) the Section 14A of the Act has no application reliance is placed on Hon’ble High Court of Gujarat in the case of CIT vs. Corrtech Energy (P.) Ltd., 45 taxmann.com 116 held as “Where assessee has not sought any income exemption, there cannot be any expense there against to be disallowed.”
(iii) We further note that the assessee relied its own case in for A.Y. 2012-13 and A.Y. 2013-14 where the Ld. A.O. made the similar disallowance u/s 14A of the Act space upon appeal of the order before CIT(A), the Ld. CIT has deleted the addition. Revenue has challenged the Validity of the order by moving of an appeal before this Tribunal, the appeal has been dismissed by this tribunal. By order dated 08-02-2017 the relevant portion of the order is reproduced.
5. “In first appeal, the CIT(A), however, re-examined the issue and allowed the appeal of the assessee. The relevant extracts of the operative para of the order of the CIT(A) reads as under:- "3.0 Decision: 3.1 The 1 ground of appeal is regarding disallowance u/s.14A of Rs. 17,66,181/-. It was noted by AO that there was investment of Rs.4.13 crores in a 100% subsidiary company which was capable of yielding dividend income have been made during the 5
year. It was informed by the appellant that during the instant year, no tax-exempt income had been claimed. It was informed by appellant that the appellant has Reserve and Surplus of Rs.15.87 crores and as such the interest-bearing loans were taken for other specific person and were not utilized for this specific investment. AO did not agree with above contentions stating inter alia that non generation of tax-exempt income in a particular AY is not a bar for invoking section 14A as evident in the Circular No.5 of 2015 dated. 11/7/2014 by CBDT which highlights the word "includible" and "income under the act". It was also stated by AO that the investment in the subsidiary company was fresh investment made during the current year which has also seen raising of fresh interest-bearing loan and thus indirectly the interest- bearing loan are the source of these investments. Accordingly, be computed disallowance u/s. 14A under rule 8D at Rs. 17,66,181/-. During the appellate proceedings same argument were reiterated i. 1) there is direct nexus of loan taken with other specific business purpose and as such no interest bearing loan was utilized for share investment as there was sufficient Reserve & Surplus [Reliance was placed on judgement of Hon'ble Gujarat High Court 354 ITR 0630 CIT vs. Suzlon Energy Ltd. and on 376 ITR 0353 (Guj.)there is no tax exempt income hence provision of section 14A does not come into picture as ruled by Hon'ble Gujarat High Court in case of CIT vs. Corrtech Energy Pvt. Ltd. 363 ITGR 047 (Gujarat). Further argument was also made that investment in subsidiary company is of the nature of strategic investment out of business expediency and therefore provisions of section 14A should not be invoked for disallowance of interest and other expenses incurred on such investment. I agree with Ld.AR in respect of all 3 arguments. The Hon'ble High Court has very clearly ruled in (2015) 372 ITR 0079 (Guj) that: (Quote) " Income AO made disallowance of expenditure of specified amount under section 14A-Disallowance was confirmed by CIT(Appeals)-Tribunal held that Assessee did not make any claim for exemption and in such situation. Section 14A could have no application-Held, S. 14A(1) provides that for the purpose of computing total income under chapter IV of the Act, 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. Assessee did not make any claim for exemption and in such a situation. S.14A could have no application and Revenue's Appeal was dismissed." (Unquote) 3.2. Respectfully following the above, disallowance mode u/s. 14A is hereby deleted. Thus ground 1 & 2 are allowed. 4.0 The 3rd ground is regarding disallowance ws.36(va) of an amount of Rs.76,500/- when AO noted that assessee has made belated payment employee's contribution towards provident fund for the month of March 2012. No explanation was submitted 6 before the AO nor was any submission made before me. 1 do not find any fault in AO's action in making such disallowance. This ground is dismissed. 5.0 In the result, the appeal is allowed."
Aggrieved thereto, the Revenue is in appeal before the Tribunal.
In appeal before Tribunal by the Revenue against the impugned order of CIT(A), the Ld. DR for the Revenue Mr. Pravin Verma relied upon the order of the AO and in furtherance submitted that CBDT Circular No.5 of 2014 dated 11/07/2014 squarely covers the issue against the assessee. Thus, it was pleaded that the conclusion of the CIT(A) is wholly incorrect.
The Ld. AR Mr. D.M. Rindani, on the other hand, relied upon the findings of the CIT(A) and the judgement of Hon'ble Gujarat High Court on the issue in the case of CIT vs. Corrtech Energy Pvt. Ltd. reported in 363 ITR 474(Guj.).
We have carefully considered the rival submissions and perused the orders of the authorities below. The question that arises for determination is whether section 14A is applicable when the assessee has not actually received any exempt income during the year from assets capable of yielding exempt income. In this regard, we note that the CBDT vide Circular No.5 of 2014 dated 11/02/2014 came out with the clarification that the legislative intend is to allow only that expenditure which is relatable to earning of taxable income It had laid emphasis on uses of term "includible" used in the heading in section 14A and Rule8D and stated that it indicates that exempt income need not necessarily be included in particular year's income for disallowance to be triggered. The CBDT is thus of the view that disallowance under 14A is not dependent on actual presence of tax-free income. However, we note that the identical issue came up for consideration before Hon'ble Gujarat High Court in the case of CIT vs. Corretech Energy Pvt. Ltd.(supra) and host of other Judicial forums. The Hon'ble Gujarat High Court has held that when there is no exempt income and no claim of exemption has been made, section 14A and Rule 8D have no application and consequently no disallowance can be made. Although the judgement of the Hon'ble Gujarat High Court in the case of Corretech Energy Pvt. Ltd. (supra) and many of the other High Courts have been rendered prior to introduction of Rule 8D, we observe that Rule 8D is only a machinery/mechanism to compute the disallowance. It is trite that the Rules are sub servient to the main enactment. Rules can never override the main provisions of the Act. If the facts of the case warrants no disallowance, the computational provision does not come into picture at all. Further, the Circulars of the CBDT prejudicial to Assessee do not exert binding force on the assessee. Accordingly, where no exempt income is received or receivable during the relevant financial year, provisions of section 14A would not operate. In this view of 7
the matter, the disallowance made by the AO is not sustainable having regard to absence of any exempt income during the financial year relevant to the assessment year in question. Therefore, we concur with the action of the CIT(A) in deleting the disallowance made by the AO. No interference therewith is called for.”
In view of the above and in the interest of justice we are of the view that the order of the Ld. CIT(A) dated 21-08-2024 upholding the order of A.O. on the issue of disallowance u/s 14A of the Act of Rs. 12,47,396 is not tenable in the eye of law. On this legal issue we quash the impugned order dated 30/09/2024 of the Ld. CIT(A) and the appeal of the revenue is dismissed assessee.
In result the appeal of the revenue to stand dismissed on this legal issue. In the view, Appeal is Allowed for Statistical Purpose.