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Income Tax Appellate Tribunal, BENGALURU BENCH A, BENGALURU
Before: SHRI. A. K. GARODIA
PER LALIET KUMAR, JUDICIAL MEMBER :
The present appeal is filed by the Revenue against the order of the CIT (A) -1, Bengauru, dt.22.06.2018, for the assessment year 2012-13, on the following grounds : 2. The CIT (A) erred in deleting the disallowance of Rs.2,37,26,680/- 14A r.w.r 8D in respect of investments in assets yielding tax free income, holding that the investment was made out of interest free funds without appreciating the ITA.2402/Bang/2018 Page - 2 provisions of Section 14A read with Rule 8D in its true sense and right spirit and the fact that when the interest expense incurred cannot be directly attributed to any particular income or receipts, provisions of Rule 8D are automatically applicable.
3. The CIT (A) erred in not considering the Board’s circular No.5/2014 dated 11.02.2014 which has made it clear that the disallowance u/s.14A r.w.s. 8D has to be made even where the tax payer in a particular year has not earned any exempted vis-a-vis dividend income.
The Ld. DR submitted that the assessee has borrowed the loan and has paid interest on the said amount. During the assessment proceedings the assessee was called upon to prove the nexus between the borrow of loan and making the investment for earning the exempt income. However the assessee failed to prove with documentary evidence and accordingly the AO had made disallowance of Rs.2,37,26,680/-. Our attention was drawn by the assessee to the decision of the ITAT, Amritsar Bench in the matter of Lally Motors India P. Ltd v. Pr. CIT [93 taxmann.com 39] and submitted that this decision is also applicable.
Per contra the Ld. AR has drawn our attention to page 3 of the paper book where the description as Rs.49,90,457/- has been mentioned and in Schedule 10, where the particulars of other income was given, where the interest income on the bank deposit was mentioned to be Rs.2,94,394/-. However said income was taken care of in the computation at page 1 of the paper book. It was submitted that the assessee during the assessment year has not earned any exempt income on the investment made by the assessee.
ITA.2402/Bang/2018 Page - 3 The assessee relies upon the decision rendered in the case of the assessee for AY 2011-12 and has also drawn our attention to the decision of the Hon’ble Delhi High Court in the matter of Chem Investment61 taxmann.com 118.
We have heard the rival contentions and perused the record. The whole basis of the finding recorded by the AO was the decision of the Hon’ble Delhi High Court in Chem Investment [2015] 61 taxmann.com 118 (Delhi) wherein it was held as under : 15. Turning to the central question that arises for consideration, the Court finds that the complete answer is provided by the decision of this Court in CIT v. Holcim India (P.) Ltd. [2015] 57 taxmann.com 28. In that case a similar question arose, viz., whether the ITAT was justified in deleting the disallowance under Section 14A of the Act when no dividend income had been earned by the Assessee in the relevant AY? The Court referred to the decision of this Court in Maxopp Investment Ltd's. case (supra) and to the decision of the Special Bench of the ITAT in this very case i.e. Cheminvest Ltd. v. ITO [2009] 121 ITD 318. The Court also referred to three decisions of different High Courts which have decided the issue against Revenue. The first was the decision in CIT v. Lakhani Marketing Inc . [2014] 226 Taxman 45/49 taxmann.com 257 of the High Court of Punjab and Haryana which in turn referred to two earlier decisions of the same Court in CIT v. Hero Cycles Ltd. [2010] 323 ITR 518/189 Taxman 50 and CIT v. Winsome Textile Industries Ltd . [2009] 319 ITR 204. The second was of the Gujarat High Court in CIT v. Corrtech Energy (P.) Ltd. [2014] 223 Taxman 130/45 taxmann.com 116 and the third of the Allahabad High Court in CIT v. Shivam Motors (P.) Ltd . [2015] 230 Taxman 63/55 taxmann.com 262. These three decisions reiterated the position that when an Assessee had not earned any taxable income in the relevant AY in question "corresponding expenditure could not be worked out for disallowance." 16. In Holcim India (P.) Ltd's. case (supra), the Court further explained as under: "15. Income exempt under Section 10 in a particular assessment year, may not have been exemptearlier and can become taxable in ITA.2402/Bang/2018 Page - 4 future years. Further, whether income earned in a subsequent year would or would not be taxable, may depend upon the nature of transaction entered into in the subsequent assessment year. For example, long term capital gain on sale of shares is presently not taxable where security transaction tax has been paid, but a private sale of shares in an off market transaction attracts capital gains tax. It is an undisputed position that respondent assessee is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to management. Possibility of sale of shares by private placement etc. cannot be ruled out and is not an improbability. Dividend may or may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend. When declared, it is subjected to dividend distribution tax."
On facts, it was noticed in Holcim India (P.) Ltd's. case (supra) that the Revenue had accepted the genuineness of the expenditure incurred by the Assessee in that case and that expenditure had been incurred to protect investment made.
In the present case, the factual position that has not been disputed is that the investment by the Assessee in the shares of Max India Ltd. is in the form of a strategic investment. Since the business of the Assessee is of holding investments, the interest expenditure must be held to have been incurred for holding and maintaining such investment. The interest expenditure incurred by the Assessee is in relation to such investments which gives rise to income which does not form part of total income.
In light of the clear exposition of the law in Holcim India (P.) Ltd's. case (supra) and in view of the admitted factual position in this case that the Assessee has made strategic investment in shares of Max India Ltd.; that no exempted income was earned by the Assessee in the relevant AY and since the genuineness of the expenditure incurred by the Assessee is not in doubt, the question framed is required to be answered in favour of the Assessee and against the Revenue.
Since the Special Bench has relied upon the decision of the Supreme Court in Rajendra Prasad Moody's case (supra), it is considered necessary to discuss the true purport of the said decision. It is noticed to begin with that the issue before the Supreme Court in the said case was whether the expenditure under Section 57(iii) of the Act could be allowed as a deduction against ITA.2402/Bang/2018 Page - 5 dividend incomeassessable under the head "income from other sources". Under Section 57(iii) of the Act deduction is allowed in respect of any expenditure laid out or expended wholly or exclusively for the purpose of making or earning such income. The Supreme Court explained that the expression "incurred for making or earning such income', did not mean that any income should in fact have been earned as a condition precedent for claiming the expenditure. The Court explained: "What s. 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of s. 57(iii) and that purpose must be making or earning of income. s. 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There is in fact nothing in the language of s. 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the language of s. 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure."
There is merit in the contention of Mr. Vohra that the decision of the Supreme Court in Rajendra Prasad Moody's case (supra) was rendered in the context of allowability of deduction under Section 57(iii) of the Act, where the expression used is 'for the purpose of making or earning such income'. Section 14A of the Act on the other hand contains the expression 'in relation to income which does not form part of the total income.' The decision in Rajendra Prasad Moody's case (supra) cannot be used in the reverse to contend that even if no income has been received, the expenditure incurred can be disallowed under Section 14A of the Act.
In the impugned order, the ITAT has referred to the decision in Maxopp Investment Ltd's. case (supra) and remanded the matter to the AO for reconsideration of the issue afresh. The issue in Maxopp Investment Ltd's. case (supra) was whether the expenditure (including interest on borrowed funds) in respect of investment in shares of operating companies for acquiring and retaining a controlling interest therein was disallowable under ITA.2402/Bang/2018 Page - 6 Section 14A of the Act. In the said case admittedly there was dividend earned on such investment. In other words, it was not a case, as the present, where no exempt income was earned in the year in question. Consequently, the said decision was not relevant and did not apply in the context of the issue projected in the present case.
In the context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression 'does not form part of the total income' in Section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year. However we may record that subsequently the Hon’ble High Court reversed the finding recorded by the Special Bench and held that if the assessee has not earned any exempt income there is no occasion of any disallowance as per the provisions of Section 14A r.w. Rule 8D.
Respectfully following the decision rendered by the Hon’ble Delhi High Court and also in the facts of the case when the assessee has not earned any income during the assessment year, we do not find any merit in the appeal of the Revenue. We dismiss the same.
In the result, appeal of the Revene is dismissed. Order pronounced in the open court on 19th day of December, 2018.