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Income Tax Appellate Tribunal, “E” BENCH, NEW DELHI
Before: SHRI D. MANMOHAN, VP & SHRI MANOJ KUMAR AGGARWAL, AM
Per Manoj Kumar Aggarwal (Accountant Member) 1. The captioned appeal by revenue for Assessment Year [AY] 2011-12 assails the order of the Ld. Commissioner of Income-Tax (Appeals)-20 [CIT(A)], New Delhi, Appeal No.320/2015-16 qua relief provided to the assessee by Ld. first appellate authority against disallowance made by Ld. Assessing Officer u/s 14A. The assessment for impugned AY was framed u/s 143(3) on 19/03/2014 by Ld. Additional Commissioner of Income Tax [AO], Range-6, New Delhi. 2.1 Facts leading to the same are that the assessee being resident corporate assessee engaged in the business of manufacturing of Milk Products was assessed at Loss of Rs.771.87 Lacs as against returned loss of Rs.815.29 Lacs e-filed by the assessee on 20/09/2011. 2.2 During assessment proceedings, it was noted that the assessee made huge investments in shares of its subsidiary companies and sister concerns which called for disallowance u/s 14A. The assessee contested that the investments were old and no borrowed funds were utilized by the assessee to make the said investments and further no exempt income was earned from investment during the year and hence, the disallowance was not justified. However, not convinced, Ld. AO, by applying Rule 8D, computed the said disallowance at Rs.43.06 Lacs and reduced the loss to that extent. 3. Aggrieved the assessee contested the same successfully before Ld. CIT(A) vide impugned order dated 21/12/2015 where Ld. CIT(A)
Milkfood Limited Assessment Year-2011-12 noted that the assessee did not earn any exempt income during the year and hence, no disallowance was called for u/s 14A in view of the catena of judgments of higher authorities and more particularly the decision of Hon’ble Delhi High Court rendered in Cheminvest Ltd. Vs. CIT [2015 94 CCH 2]. Resultantly, the disallowance was deleted, against which the revenue is in further appeal before us. The respective representatives have placed reliance on lower authorities for various contentions.
We have gone through the quantum assessment order and appellate order. Upon consideration of the same, it is quite evident that the assessee has not earned any exempt income during the impugned AY. It is well settled legal proposition that no disallowance u/s 14A is warranted for in case no exempt income is earned by the assessee. The case laws relied upon by the Ld. CIT(A) in this regard fortifies the same and settles the legal position.
For the sake of completeness, we find that said proposition has been reiterated by Hon’ble Delhi High Court rendered in a recent judgment titled as PCIT Vs. IL&FS Energy Development Co. Ltd. [84 Taxmann.com 186 dated 16/08/2017] where the Hon’ble court has discussed the issue elaborately in the light of statutory provisions and CBDT circular dated 11/05/2014. We are inclined to reproduce here-in- below the relevant observations made by Hon’ble court in the said judgment:- 11. At the outset, it requires to be noticed that we are concerned with the AY 2011- 12 and, therefore, the question of the applicability of Rule 8D, which was inserted with effect from 24th March 2008, is not in doubt.
Section 14A of the Act, which was inserted with retrospective effect from 1st April 1962, provides for disallowance of the expenditure incurred in relation to income exempted from tax. From 11th May 2001, a proviso was inserted in Section 14A to clarify that it could not be used to reopen or rectify a completed assessment.
Milkfood Limited Assessment Year-2011-12 Sub-sections (2) and (3) of Section 14A were inserted with effect from 1st April, 2007 to provide for methodology for computing of disallowance under Section 14A. However, the actual methodology was provided in terms of Rule 8D only from 24th March 2008. There was a further amendment to Rule 8D with effect from 2nd June 2016 limiting the disallowance the aggregate of the amount of expenditure directly relating to income which does not form part of total income and an amount equal to one per cent of the annual average of the monthly average of the opening and closing balances of the value of investment, income from which does not form part of the total income. It is also provided that the amount shall not exceed the total expenditure claimed by the Assessee.
In the above background, the key question in the present case is whether the disallowance of the expenditure will be made even where the investment has not resulted in any exempt income during the AY in question but where potential exists for exempt income being earned in later AYs.
In the Explanatory Memorandum to the Finance Act 2001, by which Section 14A was inserted with effect from 1st April 1962, it was clarified that "expenses incurred can be allowed only to the extent they are relatable to the earned income of taxable income". The object behind Section 14A was to provide that "no deduction shall be made in respect of any expenditure incurred by the Assessee in relation to income which does not form part of the total income under the Income Tax Act".
What is taxable under Section 5 of the Act is the "total income" which is neither notional nor speculative. It has to be 'real income'. The subsequent amendment to Section 14A does not particularly clarify whether the disallowance of the expenditure would apply even where no exempt income is earned in the AY in question from investments made, not in that AY, but earlier AYs.
Rule 8D (1) of the Rules is helpful, to some extent, in understanding the above issue. It reads as under: "8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with— (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2)."
The words "in relation to income which does not form part of the total income under the Act for such previous year" in the above Rule 8 D (1) indicates a correlation between the exempt income earned in the AY and the expenditure incurred to earn it. In other words, the expenditure as claimed by the Assessee has to be in relation to the income earned in 'such previous year'. This implies that if there is no exempt income earned in the AY in question, the question of disallowance of the expenditure incurred to earn exempt income in terms of Section 14A read with Rule 8D would not arise.
The CBDT Circular upon which extensive reliance is placed by Mr. Hossain does not refer to Rule 8D (1) of the Rules at all but only refers to the word "includible" occurring in the title to Rule 8D as well as the title to Section 14A. The Circular Milkfood Limited Assessment Year-2011-12 concludes that it is not necessary that exempt income should necessarily be included in a particular year's income for the disallowance to be triggered.
In the considered view of the Court, this will be a truncated reading of Section 14 A and Rule 8D particularly when Rule 8D (1) uses the expression 'such previous year'. Further, it does not account for the concept of 'real income'. It does not note that under Section 5 of the Act, the question of taxation of 'notional income' does not arise. As explained in Commissioner of Income Tax v. Walfort Share and Stock Brokers Pvt. Ltd [2010] 326 ITR 1 (SC), the mandate of Section 14A of the Act is to curb the practice of claiming deduction of expenses incurred in relation to exempt income being taxable income and at the same time avail of the tax incentives by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. Consequently, the Court is not persuaded that in view of the Circular of the CBDT dated 11th May 2014, the decision of this Court in Cheminvest Ltd. (supra) requires reconsideration.
In M/s. Redington (India) Ltd. v. The Additional Commissioner of Income Tax, Company Range – V, Chennai (order dated 23rd December, 2016 of the High Court of Madras in TCA No. 520 of 2016), a similar contention of the Revenue was negated. The Court there declined to apply the CBDT Circular by explaining that Section 14A is "clearly relatable to the earning of the actual income and not notional income or anticipated income." It was further explained that, "The computation of total income in terms of Rule 8D is by way of a determination involving direct as well as indirect attribution. Thus, accepting the submission of the Revenue would result in the imposition of an artificial method of computation on notional and assumed income. We believe thus would be carrying the artifice too far."
The decisions in CIT v. M/s Lakhani Marketing Inc. 2014 SCC Online P&H 20357, CIT v. Winsome Textile Industries Limited [2009] 319 ITR 204 (P&H), CIT v. Shivam Motors (P) Ltd. [2014]272 CTR (All) 277 have all taken a similar view. The decision in Taikisha Engineering India Pvt. Ltd. (supra) does not specifically deal with this issue.
It was suggested by Mr. Hossain that, in the context of Section 57(iii), the Supreme Court in Commissioner Of Income Tax, West v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC) explained that deduction is allowable even where income was not actually earned in the AY in question. This aspect of the matter was dealt with by this Court in M/s Cheminvest Ltd. (supra) where it reversed the decision of the Special Bench of the ITAT by observing as under: "20. Since the Special Bench has relied upon the decision of the Supreme Court in Rajendra Prasad Moody (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 dividend income assessable 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:
Milkfood Limited Assessment Year-2011-12 "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."
21. There is merit in the contention of Mr. Vohra that the decision of the Supreme Court in Rajendra Prasad Moody (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 (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."
The decisions of the ITAT in ACIT v. Ratan Housing Development Ltd. (supra) and Relaxo Footwear Ltd. v. Addl. CIT (supra), to the extent that they are inconsistent with what has been held hereinbefore do not merit acceptance. Further, the mere fact that in the audit report for the AY in question, the auditors may have suggested that there should be a disallowance cannot be determinative of the legal position. That would not preclude the Assessee from taking a stand that no disallowance under Section 14 A of the Act was called for in the AY in question because no exempt income was earned.
For all of the aforementioned reasons, this Court is of the view that the CBDT Circular dated 11th May 2014 cannot override the expressed provisions of Section 14A read with Rule 8D.
No substantial question of law arises from the impugned order of the ITAT. The appeal is accordingly dismissed.
Respectfully following the binding judicial precedents, we dismiss the revenue’s appeal. Order pronounced in the open court on 17th November, 2017. Sd/- Sd/- (D. Manmohan) (Manoj Kumar Aggarwal) उपा�य� उपा�य� उपा�य� / Vice President लेखा उपा�य� लेखा लेखा सदःय लेखा सदःय सदःय / Accountant Member सदःय नई नई �द�ली नई नई �द�ली �द�ली /New Delhi; �दनांक �द�ली �दनांक �दनांक Dated : 17.11.2017 �दनांक Sr.PS:- Sujeet