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Income Tax Appellate Tribunal, “B”, BENCH KOLKATA
Before: SHRI S.S.GODARA, JM &DR. A.L.SAINI, AM
आदेश / O R D E R Per Bench:
The captioned appeal filed by the Revenue, pertaining to assessment year 2014-15, is directed against the order passed by the Commissioner of Income Tax (Appeal)-5, Kolkata, which in turn arises out of an assessment order passed by the Assessing Officer u/s 143(3) of the Income Tax Act, 1961 (in short the Act) dated 27/12/2016.
At the time of hearing none appeared on behalf of assessee in spite of issuance of notice for hearing more than one occasion and Ld. Departmental Representative(DR), was present for the appellant Revenue. In the absence of any appearance by the assessee, the appeal is being disposed of ex parte qua the M/s Caravan Creation Pvt. Ltd. M/s Caravan Creation Pvt. Ltd. Year: Assessment Year:2014-15 assessee, after hearing Ld. DR for the Revenue on merits in terms of Rule 24 of assessee, after hearing Ld. DR for the Revenue on merits in terms of Rule 24 of assessee, after hearing Ld. DR for the Revenue on merits in terms of Rule 24 of the Income Tax Appellate, Tribunal, Rules, 1963. the Income Tax Appellate, Tribunal, Rules, 1963.
The grounds of appeal raised by the 3. The grounds of appeal raised by the Revenue are as follows:
1. That on the facts and circumstances of the case and in law, the ld. That on the facts and circumstances of the case and in law, the ld. That on the facts and circumstances of the case and in law, the ld. CIT(A) erred in deleting the disallowance of Rs. 1,82,18,707/ CIT(A) erred in deleting the disallowance of Rs. 1,82,18,707/ CIT(A) erred in deleting the disallowance of Rs. 1,82,18,707/- made u/s 14A of I.T. Act by the Assessing Officer and added the expenses which 14A of I.T. Act by the Assessing Officer and added the expenses which 14A of I.T. Act by the Assessing Officer and added the expenses which relatable to earning of exempt income, without to earning of exempt income, without substantiating the CBDT substantiating the CBDT circular no. 5/2014 dt. 11.02.2014.. circular no. 5/2014 dt. 11.02.2014..
2. That the appellant reserves the right to amend, alter or add to any 2. That the appellant reserves the right to amend, alter or add to any 2. That the appellant reserves the right to amend, alter or add to any ground(s) of appeal before or at the time of hearing of the appeal. ground(s) of appeal before or at the time of hearing of the appeal. ground(s) of appeal before or at the time of hearing of the appeal.
Brief facts qua the issue are that 4. Brief facts qua the issue are that during the assessment proceedings, the essment proceedings, the Assessing Officer noticed that the assessee did not make disallowance u/s 14A in Assessing Officer noticed that the assessee did not make disallowance u/s 14A in Assessing Officer noticed that the assessee did not make disallowance u/s 14A in relation to exempt income. The Assessing Officer was of the view that relation to exempt income. The Assessing Officer was of the view that relation to exempt income. The Assessing Officer was of the view that when the expenditure in relation to earning of exempt income, is not directly at expenditure in relation to earning of exempt income, is not directly at expenditure in relation to earning of exempt income, is not directly attributable, proportionate expenditure is to be calculated as per the provisions contained in proportionate expenditure is to be calculated as per the provisions contained in proportionate expenditure is to be calculated as per the provisions contained in Rule 8D of the Income tax Rule, 1962. Accordingly, proportionate expenditure in Rule 8D of the Income tax Rule, 1962. Accordingly, proportionate expenditure in Rule 8D of the Income tax Rule, 1962. Accordingly, proportionate expenditure in relation to the investment which yields exempted income relation to the investment which yields exempted income was calculated by was calculated by Officer as follows: Assessing Officer as follows:
M/s Caravan Creation Pvt. Ltd. Assessment Year:2014-15 The Assessing Officer observed that the assessee company was required to disallow the proportionate expenditure of Rs. 1,82,18,706/- in connection with its investments, but it has not disallowed any expenditure in relation to its above mentioned investments. As per the CBDT circular-5 dated 11/02/2014, even if the assessee has not earned any exempt income during the year under consideration, Section 14A and Rule 8D is applicable. Having regard to the above observations and keeping in view the CBDT Circular-5/2014, the proportionate expenditure to the tune of Rs. 1,82,18,706/- was disallowed by Assessing Officer.
Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the ld. CIT(A) who has deleted the addition made by the Assessing Officer observing the followings:
“I have considered the submission of the appellant and perused the relevant assessment records. The AO had made disallowance u/s 14A without reference to Rule 8D of the Income Tax Rules, 1962. The A.O. has not recorded the satisfaction for bringing in section 14A read with Rule 8D to play. The A.O. had made disallowance u/s 14A without assigning any reasons which is against the spirit of law u/s 14A. The AO has to record reasons based on inspection of the books of accounts, that the appellant had incurred expenditure for earning exempt income before he can proceed to make any disallowance u/s 14A. The general observation cited by the AO does not constitute satisfaction as envisaged under the Act. As held in a number of judicial decisions, including that of the jurisdictional High Court in the case of of CIT vs. R.E.I. Agro Ltd. in ITAT No. 161 of 2013, the satisfaction must be based on the examination of the accounts of the appellant. The disallowance made by the AO is without application of mind and against spirit of section 14A read with Rule 8D. This disallowance has no legal basis. The Appellant in his submission had also pressed the point, that during the year, the assessee company did not earn any exempt income which is sine qua non for invoking provisions of Sec 14A of the Act. Since the assessee's income does not consist of any exempt income, the AO erred in invoking the provisions of Sec. 14A r/w rule 8D. In the absence of exempt income, Section 14A read with Rule 8D will not come to play. There is merit in the submission of the appellant. As held by the Madras High Court in M/s Redington (India) Ltd vs Additional CIT [2017] 77 taxmann.com 257 (Madras) "The provisions of section 14A were inserted as a response to the judgments of the Supreme Court in CIT v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452 and Rajasthan State Ware Housing Corpn. v. CIT [2000] 242 ITR 450/109 Taxman 145 in terms of which, expenditure incurred by an assessee carrying on a composite business giving rise to both taxable as well as non- taxable income, was allowable in entirety without apportionment. It was thus that s. 14A was inserted providing that no deduction shall be allowable in respect of expenditure incurred in relation to the earning of income exempt from taxation. As observed by the Supreme Court in the judgment in the case of CIT v. Walfort Share & Stock Brokers (P.) Ltd. [2010] 326 ITR 1/192 Taxman 211." The Page | 3
M/s Caravan Creation Pvt. Ltd. Assessment Year:2014-15 mandate of s. 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by way of an exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income.'
The provision thus is clearly relatable to the earning of actual income and not notional or anticipated income. The submission of the Department to the effect that section 14A would be attracted even to exempt income 'includable' in total income would entail the assessment of notional income, assumed to be exempt in the future, in the present assessment year. The computation of total income in terms of section 5 of the Act is on real income and there is no sanction in law for the assessment of admittedly notional income, particularly in the context of affecting a disallowance in connection therewith." As held by the jurisdictional ITAT in the case of Deputy Commissioner of Income-tax, Circle-6, Kolkata Versus Gulshan Investment Co. Ltd. I.T. Appeal No. 666 (Kol.) of 2012. It is so for the elementary reason that the one of the variables on the basis of which disallowance under rules 8D(2)(ii) and (iii) is to be computed is the value of 'investments, income from which does not or shall not form part of total income', and, when there are no such investments, the rule cannot have any application. When no amount can be computed in the light of the formula given in rule 8 D(ii) and (iii), no disallowance can be made under rule 8D (2)(ii) and (iii) either. As held by Hon'ble Supreme Court in the case of CIT v. B C Srinivas Shetty (128 ITR 294), when computation provisions fail, the charging provisions cannot be applied, and by the same logic, when the computation provisions under rule 8 D (2) (ii) and (iii) fail, disallowance under the said provisions cannot be made either as the said provision is rendered unworkable.
In this case as the appellant had not earned any exempt income, a question of disallowance any expenditure for earning exempt income does not arise as highlighted by various judicial judgements, computation of income u/s. 5 of the Act relates to real income and not notional income. The Madras High Court in the case of M/s Redington (India) Ltd vs Additional CIT 2017] 77 taxmann.com 257 (Madras) while dismissing the appeal of revenue has rule "the exemption extended to dividend income would relate only to the previous year when the income was earned and none other and consequently the expenditure incurred in connection therewith should also be dealt with in the same previous year. Thus, by application of the matching concept, in a year where there is no exempt income, there cannot be a disallowance of, expenditure in relation to such assumed income. Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802/91 Taxman 340 (SC). The language of S.14A (1) should be read in that context and such that it advances the scheme of the Act rather than distort it. In conclusion, we are of the view that the provisions of s. 14A read with Rule 8D of the Rules cannot be made applicable in a vacuum i.e. in the absence of exempt income."
The Jurisdictional High Court in the case of CIT vs Ashika Global Securities Ltd ITAT 100 of 2014 GA 2122 of 2014 had ruled that in absence of exempt income, there was no question of disallowance u/s 14A read with Rule 8D. The Hon'ble Court had held that "This is another useless appeal without any substance. In course of assessment, a sum of about Rs. 99 lakh debited as interest paid on unsecured loans another sum of about Rs. 9 lakh engaged the attention of the officer. The Assessing Officer required the assessee to explain why the interest Page | 4
M/s Caravan Creation Pvt. Ltd. Assessment Year:2014-15 expense and the administrative expenses should not be disallowed in view of Section 14A of the Income Tax Act, 1961 The assessee replied that such income was not exempted income earned during the year and there was no question of disallowance under Rule 8D of the Income Tax Rules, 1962 read with Section 14A of the Act. Both the Commissioner and the Appellate Tribunal found as a matter of fact that there was no exempt income for the operation of the relevant Rule. In the light of such concurrent findings and, in particular, the Department failing to demonstrate any error therein, no question of law arises in this matter. ITAT 100 of 2014 and GA 2122 of 2014 are dismissed. There will be no order as to costs." The Apex Court ir. the case of CIT(Central) vs Chettinad Logistics (P) Ltd [2018] 95 taxmann.com (SC) had dismissed SLP on the grounds of delay as well as on merits filed by the revenue against the decision of the Madras High Court which has held that when there was no exempt income i.e. dividend, was earned in relevant assessment year by the assessee, section 14A could not be invoked.The A.O in his assessment order took the view that in the light of Circular No. 5/2014 dated 11/02/2014 disallowance u/s 14A of the Act, as per Rule 8D is required to be made on expenses which are relatable to earning of exempt income, even if thereis- no- exempt income.. However, the Delhi High Court in PCIT Ttr & FS Energy Development Company Ltd [2017] 84 taxmann.com 186 (Delhi) held that the CBDT Circular cannot override the expressed provisions of Section 14A of the Act read with Rule 8D.After a careful consideration of the decisions as foregoing including that of the jurisdictional High Court, and ITAT the assessment records and the submission of the assessee, disallowance of Rs.1,82,18,707/- under Section 14A of the Act read with Rule 8D (2) is to be deleted. The Assessing Officer is directed accordingly. This ground of appeal succeeds and is, therefore, allowed.”
6. Aggrieved by the order of the ld. CIT(A), the revenue is in appeal before us.
The ld. DR has primarily reiterated the stand taken by the Assessing Officer which we have already noted in our earlier para and the same is not being repeated for the sake of brevity and on the other hand, the ld. Counsel for the assessee has defended the order of the ld. CIT(A).
We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials available on record. Having gone through the order of the ld. CIT(A) we note that there is no infirmity in the order of the ld. CIT(A)
M/s Caravan Creation Pvt. Ltd. Assessment Year:2014-15 therefore, his order on this issue, is hereby upheld and the ground of appeal raised by the revenue is dismissed.
In the result, the appeal of the revenue is dismissed.
Order pronounced in the Court on 13.11.2019