DCIT CIR. 2(2)(1), MUMBAI vs. L & T POWER DEVELOPMENT LTD., MUMBAI

The dispute which has arisen between rival parties before us is in very narrow compass . The assessee had made substantial investment in shares of companies and average investment of the assessee during the year stood at 13,74,72,86,430/- . It is an undisputed fact between rival parties that the assessee did not earned any exempt income during the year under consideration by way of dividend or even otherwise. The AO applied provision of section 14A of 1961 Act r.w.r. 8D(2)(iii) of the Income-tax Rules, 1962 and made disallowance of expenditure of Rs. 6,87,36,432/- purported to be incurred in relation to earning of an exempt income by relying on CBDT circular no. 5/2014 dated 11.02.2014 and judicial precedents , vide assessment order dated 30.11.2015 passed by the AO u/s 143(3) of the 1961 Act .

4. The matter reached before learned CIT(A) at behest of the assessee wherein assessee filed first appeal against the assessment order passed by learned AO . The Ld. CIT(A) considered the submissions of the assessee and allowed relief to the assessee by deleting the entire addition made by the AO by relying on decision of Hon’ble Delhi High Court in the case of Holcim India Private Limited 57 taxmann.com 28(Del) , vide appellate orders dated 09.11.2016 , by holding as under:- “ 3.3. I had considered the submissions of the appellant. In this case the appellant had not received any exempt income during the year. The Delhi High Court in its decision in the case of CIT M/s Holcim India P Ltd in and 299/2014 has held as under: "On the issue whether the respondent - assessee could have earned dividend income and even if no dividend income was earned, yet Section 14A can be invoked, and disallowance of expenditure can be made, there are three decisions of the different High Courts directly on the issue and against the appellant -Revenue. No contrary decision of a High Court has been shown to us. The Punjab & Haryana High Court in CIT v/s Lakhani Marketing Income. IT appeal No 970/2008, dated 02.04.2014, made reference to two earlier decisions of the same Court in CIT V/s Hero Cycles Ltd [2010] 323 ITR 518/189 Taxman 50 (Punj. & Har.) and CIT V/s Winsome Textime Industries Ltd [2009] 319 ITR 204 (Punj. And Har) to hold that Section 14A, cannot be invoked when no exempt income was earned. The second decision is of the Gujarat High Court in CIT V/s Corrtech Energy (P) Ltd. [2014] 223 Taxman 130/45 taxmann.com 116. The third decision is of the Allahabad High Court in Income Tax Appeal No 88 of 2014, CIT V/s Shivam Motors (P) LTD [IT Appeal No 88 of 2014, doted 05.08.2014]. In the said decision it has been held: “As regards the second question, Section 14A of the Act provides that for the purposes of computing the total income under Chapter, 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 under the Act. Hence, what section 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of fact is that the assessee had not earned any tax free income. Hence, in the absence of any tax free income, the corresponding expenditure could not be worked out for disallowance. The view of the CIT(A), which has been affirmed by the Tribunal, hence does not give rise to any substantial question of taw. Hence, the decision of the disallowance of Rs 2,03,752/- made by the AO was in order." In view of the above decision of Delhi High Court, here appellant has not received any exempt income hence, no disallowance u/s 14A can be made. The addition made by the AO is deleted. This ground of appeal

is allowed.”

5. Aggrieved by the appellate order dated 09.11.2016 passed by learned CIT(A), Revenue has filed an appeal before the tribunal . The Ld. DR relied upon the assessment order passed by the AO while on the other hand Ld. AR explained the factual matrix of the case and submitted that the assessee has not received any dividend income which can be claimed as an exempt income or as a matter of fact the assessee also did not received any other exempt income during the relevant previous year to the impugned assessment year under consideration before the Bench. It was submitted that Ld. CIT(A) relied upon the decision of Hon’ble Delhi High Court in the case of CIT v. Holcim India P. Ltd. in of 2014 and 229 of 2014 and gave relief of the assessee by deleting the additions as were made by the AO by invoking provisions of Section 14A of the 1961 Act read with Rule 8D(2)(iii) of the 1962 Rules. It was submitted that AO merely relied upon circular no. 5/2014 dated 11.02.2014 to fasten liability against the assessee by making additions u/s. 14A of the 1961 Act r.w.r. 8D(2)(iii) of the 1962 Rule despite the fact that the assessee did not earn any exempt income . The Ld. Counsel for the assessee relied upon the decision of Mumbai-tribunal in assessee’s own case for earlier years viz. AY 2010-11 vide ITA no. 3829/Mum/2015 orders dated 25.05.2017 and for AY 2011-12 vide ITA no.5333/Mum/2015 orders dated 21.03.2018, wherein under similar factual matrix of the case , the Mumbai-tribunal decided the issue in favour of the assessee and held that no disallowance can be made u/s 14A of the 1961 Act when no exempt income is earned by the assessee. The aforesaid decision of Mumbai-tribunal in Revenue’s appeal in ITA no. 5333/Mum/2015 for AY 2011-12 dated 21.03.2018 , is reproduced hereunder wherein tribunal decided the issue in favour of the assessee by holding as under:- “3. In this appeal, the solitary dispute raised by the assessee arises from the action of CIT(A) in deleting the addition made by the Assessing Officer u/s 14A of the Act amounting to Rs.3,16,59,443/-. Notably, the CIT(A) has deleted the addition finding that during the year under consideration there was no exempt income claimed by the assessee and thus, there was no necessity of invoking Sec. 14A of the Act.

4. Before us, the ld. DR has not assailed the finding of the CIT(A) to the effect that there was no exempt income earned during the year under consideration. As a consequence, we find that the CIT(A) made no mistake in deleting the addition inasmuch as the same is in conformity with the judgment of the Hon'ble Delhi High Court in the case of Cheminvest Ltd. v. CIT [2015] 61 taxmann.com 118 (Delhi).

5. Before parting, we may also make an observation that right from the stage of assessment, assessee has, inter-alia, canvassed against invoking of Sec. 14A of the Act by pointing out that in this year it has not earned any income which is exempt from tax. At the time of hearing, the learned representative supported the said assertion by referring to the Profit & Loss Account, wherein also no such income has been reported. In fact, in the course of hearing, the learned representative relied upon the decision of the Tribunal in the assessee’s own case for the immediately preceding Assessment Year of 2010-11 in dated 25.05.2017, which has also been rendered on similar lines.

6. At the time of hearing, the ld. DR relied upon the CBDT Circular no. 5/2014 dated 11.02.2014 to put forth that invocation of Sec. 14A of the Act is permissible even in the absence of exempt income during a particular year. In our considered opinion, the said Circular of CBDT does not distract from the legal position laid down by the Hon'ble Delhi High Court in the case of Cheminvest Ltd. (supra), and we further noticed that our co-ordinate Bench in assessee’s own case for Assessment Year 2010- 11 (supra) has considered the said Circular and thereafter, applied the ratio of Hon'ble Delhi High Court and deleted the addition.

7. In view of the aforesaid discussion, we hereby affirm the order of CIT(A) and appeal of the Revenue is dismissed.

Thus , it was strenuously submitted that Mumbai-tribunal has granted relief to the assessee for AY 2011-12 by holding that if no exempt income is earned during relevant previous year , then no disallowance u/s 14A of the 1961 Act is warranted and keeping in view that factual matrix in the year under consideration before the Bench remaining same keeping in view principle of consistency, the aforesaid order of tribunal for AY 2011-12 should be followed by the Bench. Further reliance was placed by Ld. Counsel for the assessee in the case of Mumbai Tribunal orders in for AY 2012-13 vide orders dated 19.12.2017 in the case of DCIT v. RKW Developers Private Ltd. wherein Accountant Member is part of Division Bench who passed the said order granting relief to the assessee based on the same proposition that if no exempt income was received or receivable during the relevant previous year under consideration , no disallowance of expenditure can be made u/s. 14A of the 1961 Act. While passing the aforesaid order dated 19.12.2017 in RKW Developers Private Limited, the Mumbai-tribunal mainly relied upon decision of Hon’ble Delhi High Court in the case of Cheminvest Limited v. CIT in ITA No. 749/2014 and also decision of Jurisdictional High Court in the case of Ballarpur Industries Ltd. in ITA no. 51 of 2016 reported in (2016) (10) TMI 1039( Bombay High Court) . The decision of tribunal in the case of RKW Developers P. Ltd.(supra) is reproduced here under:-

6. We have heard Ld. DR and we have perused the material on record including relevant case laws as well written submissions made by learned DR. We have observed the assessee is in the business of property development. The assessee has made investments in equity shares which are capable of yielding exempt income , however during the year no exempt income has been received by the assessee by way of dividend etc. . The A.O has disallowed Rs.97,90,947/- by invoking Section 14A read with Rule 8D as under:- Disallowance u/s. 14A of the IT. Act, 1961 Aggregate of the following i) Expense's directly attributable to exempt income Rs. Nil ii) Amount of Expenditure by way of interest Rs. 15,963/- iii) 0.5% of Average value of Investment Rs.96,93,984/ - Total Rs.97,09,947/- We have observed that Hon’ble Delhi High Court in the case of Cheminvest Limited(supra) had held that no disallowance can be made u/s. 14A . if no exempt income is received or receivable during the year. The decision of the Hon’ble Delhi High Court is approved by Hon’ble Bombay High Court in the case of Principal CIT v. Ballarpur Industries Ltd. in of 2016 reported in {2016 (10) TMI 1039 Bombay High Court}. Thus keeping in view ratio of decision of Hon’ble Delhi High Court in the case of Cheminvest Limited (supra) and Hon’ble Bombay High Court in the case of Ballarpur Industries Ltd.(supra) , we order deletion of the addition of Rs. 97,90,947/- as made by the A.O u/s. 14A by applying Rule 8D as the assessee has not 6 received any exempt income during the previous year relevant to the impugned assessment year . We do not find any infirmity in the decision of the Ld. CIT(A) which we affirm/confirm .Thus , the appeal of the Revenue stands dismissed. We order accordingly.

It is also submitted that the Hon’ble Supreme Court in the case of CIT v. Chettinad Logistics P. Ltd. vide decision in SLP (Civil) Diary no. 15631 of 2018 reported in (2018) 95 taxmann.com 250(SC), vide orders dated 02.07.2018 has dismissed SLP filed by Revenue on the ground of delay as well on merits . The said SLP arose from the decision of Hon’ble Madras High Court in the case of CIT v. Chettinad Logistics P Ltd. reported in (2017) 80 taxmann.com 221(Mad).

5. We have considered rival contentions and perused the material on record including case laws relied upon. We have observed that the assessee is engaged in the business of developing, investing, operating and maintaining power generation projects. The assessee has made investments in shares of companies and average investment of Rs. 13,74,72,86,430/- was held by the assessee during the year . It is undisputed fact between rival parties that the assessee did not receive any dividend income or even otherwise no exempt income was received during the relevant previous year under consideration before us. The assessee filed before the tribunal audited financial statements as well computation of income to make its point that no dividend or as a matter no exempt income was received during the year under consideration as also to make its point that all investments are in shares of companies and no investments were made in Mutual Funds. The said audited financial statements as well computation of income are placed in file. The finding of the AO that the assessee had made investments in Mutual funds is already discarded by learned CIT(A) while it is concurrent finding by both the authorities namely the AO and learned CIT(A) that the assessee did not receive any exempt income during the year under consideration. The AO has disallowed expenditure of Rs. 6,87,36,432/- purported to be incurred in relation to earning of an exempt income by invoking provisions of Section 14A 7 of the 1961 Act r.w.r. 8D(2)(iii) of the 1962 Rules . The learned CIT(A) has given relief to the assessee based upon the proposition that if no exempt income has been received during the relevant year, no disallowance can be made u/s. 14A of the Act. The finding of learned CIT(A) is extracted by us in preceding para’s of this order. We have also observed that the same issue came up for adjudication before Mumbai-tribunal for AY 2010-11 and 2011-12 in assessee’s own case. The Mumbai-tribunal decided the issue under similar factual matrix in favour of assessee wherein it was held by tribunal that no disallowance can be made u/s 14A of the 1961 Act when no exempt income is earned by the assessee. The aforesaid decision of Mumbai- tribunal in Revenue’s appeal in for AY 2011- 12 dated 21.03.2018 , is reproduced hereunder wherein tribunal decided the issue in favour of the assessee by holding as under:- “3. In this appeal, the solitary dispute raised by the assessee arises from the action of CIT(A) in deleting the addition made by the Assessing Officer u/s 14A of the Act amounting to Rs.3,16,59,443/-. Notably, the CIT(A) has deleted the addition finding that during the year under consideration there was no exempt income claimed by the assessee and thus, there was no necessity of invoking Sec. 14A of the Act.

8. According to us, this exercise, in the given facts which emerge from the record, was clearly unnecessary, as the CIT(A) had returned the finding of fact that no dividend had been earned in the relevant assessment year, with which, we are concerned, in the present appeal.

9. In our opinion Section 14 A of the Act, can only be triggered, if, the Assessee seeks to square off expenditure against income which does not form part of the total income under the Act. 9.1 The legislature, in order to do away with the pernicious practice adopted by the Assessees', to claim expenditure, against income exempt from tax, introduced the said provision. 10. In the instant case, there is no dispute that no income i.e., dividend, which did not form part of total income of the Assessee was earned in the relevant assessment year. 10.1 Therefore, to our minds, the addition made by the Assessing Officer by relying upon Section 14 A of the Act, was completely contrary to the provisions of the said Section. 10.2 Mr.Senthil Kumar, who appears for the Revenue, submitted that the Revenue could disallow the expenditure even in such a circumstance by taking recourse to Rule 8D. 10.3 According to us, Rule 8D, only provides for a method to determine the amount of expenditure incurred in relation to income, which does not form part of the total income of the Assessee. 10.4 Rule 8 D, in our view, cannot go beyond what is provided in Section 14 A of the Act. 11. Furthermore, we may note that a similar argument was sought to be advanced by the Revenue in the matter concerning, Redington (India) Ltd. v. Addl. CIT [2017] 77 taxmann.com 257 (Mad.)which was, subject matter of T.C.A.No.520 of 2016. 11.1 A Co-ordinate Bench of this Court, vide judgment dated 23.12.2016, rejected the plea of the Revenue advanced in that behalf. 11.2 As a matter of fact, a perusal of the judgment would show that the Revenue had sought to argue that because exempt income could be earned in future years, therefore, recourse could be taken to the provisions of Section 14A of the Act, to disallow expenditure. In other words the stand taken by the Revenue was irrespective of the fact whether or not income was earned in the concerned assessment year expenditure under Section 14A could be disallowed against anticipated income. 11.3 Pertinently, the Division Bench in Redington (India)Ltd. (supra) case has repelled this precise argument. 12. The Division Bench, in our view, quiet correctly held that, the computation of total income, in terms of Section 5 of the Act, is made qua real income and not, vis-a-vis, notional income. 12.1 The Division Bench went on to hold that Section 4 of the Act brings to tax, that income, which is relatable to the assessment year in issue. The Division Bench, thus, held that where no exempt income is earned in the previous year, relevant to the assessment year in issue, provisions of Section 14 A of the Act, read with Rule 8 D could not be invoked. 12.2 While coming to this conclusion, the Division Bench also took note of the aforementioned Circular, issued by the Board. 12.3 The reasoning of the Division Bench is contained in the following part of the judgment: "4. The admitted position is that no exempt income has been earned by the assessee in the financial year relevant to the assessment year in issue. The order of assessment records a finding of fact to that effect. The issue to be decided thus lies within the short compass of whether a disallowance in terms of s.14A of the Act read with Rule 8D of the Rules can be contemplated even in a situation where no exempt income has admittedly been earned by the assessee in the relevant financial year.

7. Per contra, Sri. T. Ravikumar appearing on behalf of the revenue drew our attention to the marginal notes of s.14 A pointing out that the provision would apply not only where exempted income is 'included' in the total income, but also where exempt income is 'includable' in total income.

8. He relied upon a Circular issued by the Central Board of Direct taxes in Circular No.5 of 2014 dated 11.2.2014 to the effect that s.14A was intended to cover even those situations whether there is a possibility of exempt income being earned in future. The Circular, at paragraph 4, states that it is not necessary for exempt income to have been included in the income of a particular year for the disallowance to be triggered. According to the Learned Standing Counsel, the provisions of s.14A are made applicable, in terms of sub section (1) thereof to income 'under the act' and not 'of the year' and a disallowance under s.14A r.w.Rule 8D can thus be effected even in a situation where a tax payer has not earned any taxable income in a particular year.