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ITA 273/2019 1
IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 26TH DAY OF MARCH, 2021 PRESENT
THE HON’BLE MR.JUSTICE SATISH CHANDRA SHARMA AND
THE HON’BLE MR. JUSTICE S.VISHWAJITH SHETTY
I.T.A.No.273/2019 (I-IT) BETWEEN: 1. PR. COMMISSIONER OF INCOME TAX-5, BMTC COMPLEX, KORAMANGALA, BENGALURU .
THE INCOME-TAX OFFICER WARD 5(1)(1), BENGALURU.
… APPELLANTS
(By Sri E.I.Sanmathi, Adv.)
AND:
M/S. NAM ESTATES PRIVATE LIMITED, 1ST FLOOR, EMBASSY POINT, 150, INFANTRY ROAD, BENGALURU – 560 001.
… RESPONDENT
(By Sri T.Suryanarayana, Adv.)
THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF THE INCOME-TAX ACT, 1961, PRAYING TO SET ASIDE THE APPELLATE ORDER DATED27/11/2018 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, 'A' BENCH, BENGALURU IN APPEAL PROCEEDINGS NO. ITA NO.
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2102/BANG/2018 FOR ASSESSMENT YEAR 2013-14 (ANNEXUE-A), AS SOUGHT FOR IN THIS APPEAL.
THIS APPEAL COMING ON FOR HEARING, THIS DAY, SATISH CHANDRA SHARMA J., DELIVERED THE FOLLOWING:
JUDGMENT
The present appeal is arising out of the order dated 27.11.2018 passed by the Income Tax Appellate Tribunal (ITAT) in I.T.A.No.2102/Bang/2018 in respect of the assessment year 2013-14.
The facts of the case reveal that the assessee is a company engaged in the business as property developers and filed its return of income for the assessment year 2013-14 showing income as nil. The case of the asseessee was selected for scrutiny in the year under consideration and assessment order was contemplated under Section 143(3) of the Income Tax Act, 1961 (for short, ‘I.T.Act’), whereas the assessee’s loss was determined at Rs.6,00,36,601/- in view of disallowance of Rs.6,11,21,496/- under Section 14A of the I.T.Act read with Rule 8D(2) of the I.T.Rules, 1962. The assessee preferred an appeal before the CIT and the appeal of the assessee was dismissed. Thereafter, the assessee has
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preferred an appeal before the ITAT and the ITAT has allowed the appeal preferred by the assessee, against which, the department has preferred the present appeal.
This Court has admitted the appeal on the following substantial question of law. “whether on the facts and in the circumstances of the case, the Tribunal is justified in law in deleting the disallowances made under Section 14A r.w. Rule 8D(2)(ii) and 8D(2)(ii) of the Act without appreciating the Board’s Circular No.05/2014 dated 11.02.2014 which emphasizes that the only expenditure allowable is related to earnings of income, and therefore the expenses which are relatable to earnings of exempt income have to be considered for disallowance, irrespective of the fact whether any such income has been earned during the financial year or not?”
Learned Counsel for the parties have drawn the attention of this Court towards Section 14A of the I.T.Act and the same reads as under: “14A) Where in the assessment for any previous year or in any intimation or deemed intimation under sub-section (1) of Section 143
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for any previous year, credit for income-tax paid in any country outside India or a specified territory outside India referred to in section 90, section 90A or section 91 has not been given on the ground that the payment of such tax was under dispute, and if subsequently such dispute is settled; and the assessee, within six months from the end of the month in which the dispute is settled, furnishes to the Assessing Officer evidence of settlement of dispute and evidence of payment of such tax along with an undertaking that no credit in respect of such amount has directly or indirectly been claimed or shall be claimed for any other assessment year, the Assessing Officer shall amend the order of assessment or any intimation or deemed intimation under sub- section (1) of section 143, as the case may be, and the provisions of section 154 shall, so far as may be, apply thereto:
Provided that the credit of tax which was under dispute shall be allowed for the year in which such income is offered to tax or assessed to tax in India.”
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Learned Counsel for the assessee has stated before this Court with the aid and assistance of the documents that the assessee in the relevant year has not at all earned any exempted income, and therefore, the question of disallowance as has been done by the Assessing Officer does not arise and the ITAT was justified in allowing the appeal preferred by the assessee. The aforesaid factual aspect relating to earning of exempted income as made, has been disputed by the department.
Learned Counsel for the assessee has also drawn the attention of this Court towards the judgment delivered in the case of THE COMMISSONER OF INCOME TAX, BANGALORE & OTHERS VS QUEST GLOBAL ENGINEERING SERVICES PVT. LTD. i.e., I.T.A.No.133/2015 decided on 15.02.2021, and has argued before this Court that the controversy involved in the case stands concluded on account of the aforesaid judgment. Paragraphs 14 & 15 of the aforesaid judgment reads as under: “14. Now we may advert to the second substantial question of law. It is pertinent to note that for Assessment Year 2009-10 the
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assessee has not earned dividend income. The aforesaid fact has not been disputed by the revenue. It is also relevant to mention that Circular No.5/2014 dated 11.02.2014 is not applicable in the instant case as the instant case pertains to Assessment Year 2009-10. The aforesaid Circular has no retrospective operation. It is noteworthy that aforesaid Circular was not even relied by the parties. This court in COMMISSIONER OF INCOME TAX VS. KINGFISHER INVESTMENT INDIA LTD. vide judgment dated 29.09.2020 inter alia held that disallowance under Section 14A read with Rule 8D has to be made even when taxpayer in a particular year has not earned any exempt income. This court relied on the decision of the Supreme Court in MAXOPP INVESTMENT LTD supra which was reproduced in Paragraph 5 of the decision and reliance was also placed on Circular dated 11.02.2014 issued by Central Board of Direct Taxes (CBDT). However, the aforesaid decision was subsequently considered by this court in judgment dated 16.01.2021 passed in I.T.A.No.271/2017 (PRINCIPAL COMMISSIONER OF INCOME TAX VS. NOVEL SOFTWARE DEVELOPMENT) in which it was held that decision of this court in KINGFISHER
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FINVEST LTD. was distinguishable as the basis of the aforesaid decision of this court was the decision of the Supreme Court in MAXOPP INVESTMENTS LTD. supra and it was held that the aforesaid decision does not deal with applicability of Section 14A of the Act. However, eventually this court agreed with the view taken by High Court of Madras in CIT VS. CHETTINAD LOGISTICS P LTD., (2017) 80 TAXMANN.COM 221 (MAD.) AND KEM INVEST LTD. VS. CIT, (2015) 16 TAXMANN.COM 118 (DELHI) and held that since no exempt income has accrued to the assessee therefore, the provisions of Section 14A of the Act do not apply to the fact situation of the case. Therefore, it has become necessary for us to clarify the view taken in the two decisions viz., KINGFISHER FINVEST INDIA LTD. AND M/S NOVEL SOFTWARE INDIA (P) LTD. supra. At this stage, we may refer to Paragraph 40 of the decision of the Supreme Court in MAXOPP supra, the relevant extract of which reads as under: It is to be kept in mind that in those cases where shares are held as 'stock-in- trade', it becomes a business activity of the assessee to the deal in those shares as a business proposition. Whether dividend is earned or not becomes immaterial. In fact, it would be a quirk of fate that when
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the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. The situation here is therefore, different from the case like Maxopp Investment Ltd. where the assessee would continue to hold those shares as it wants to retain control over the investee company. In that case, whenever dividend is declared by the investee company that would necessarily be earned by the assessee and the assessee alone. Therefore, even that the time of investing into those shares, the assessee knows that it may generate dividend income as well and as and when such dividend income is generated that would be earned by the assessee. In contrast, where the shares are held as stock-in-trade, this may not be necessarily a situation. The main purpose is to liquidate those shares whenever the share price goes upon order to earn profits. In the result, the appeals filed by the revenue challenging the judgment of the Punjab and Haryana High Court in State Bank of Patiala also fail, though law in this respect has been clarified hereinabove.
From perusal of the relevant extract of the Supreme Court, it is evident that the decision in MAXOPP INVESTMENT LTD. supra deals with applicability of Section 14A of the Act. Therefore, the observations made with regard to applicability of Section 14A in M/S NOVEL SOFTWARE INDIA (P) LTD. are factually incorrect and we hasten to clarify the same.
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However, from relevant extract of Paragraph 40, it is evident that only expenses proportionate to earning of exempt income could be disallowed under Section 14A of the Act and the decision of MAXOPP INVESTMENT LTD is an authority for the aforesaid proposition that the provision is relatable to earning of actual income. The object of Section 14A is 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 exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The High Court of Madras has relied on the decision of the Supreme Court in COMMISSIONER OF INCOME TAX VS. WALFORT SHARE AND STOCK BROKERS (2010) 326 ITR 1 wherein it has been held that Section 14A is relatable to income of actual income or not notional or anticipated income. Therefore, the conclusion arrived at by us in M/S NOVEL SOFTWARE INDIA (P) LTD. is affirmed but for different reasons. It is also clarified by us that while recording the conclusion in KINGFISHER FINVEST LTD. that disallowance under Section 14A has to be made even taxpayer has not earned any exempt income, this court has
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misread the ratio of the decision of the Supreme Court in MAXOPP INVESTMENT LTD supra and therefore, the aforesaid view being contrary to the law laid down by the Supreme Court is not a binding precedent.”
Keeping in the aforesaid judgment, as for the assessment year 2013-14, the assessee has not earned any exempted income. The aforesaid fact has not been disputed by the revenue, and therefore, the ITAT was justified in allowing the appeal preferred by the assessee.
Resultantly, the question of law framed in the present appeal is answered in favour of the assessee and against the revenue. Accordingly, the appeal stands dismissed.
Sd/- JUDGE
Sd/- JUDGE