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Facts
This judgment consolidates six appeals by the assessee and four by the revenue for AYs 2013-14 to 2018-19. The assessee's appeals challenged disallowance of expenditure under Section 14A read with Rule 8D, arguing no exempt income was earned. The revenue's appeals contested the deletion of additions related to Employees Stock Option (ESOP) expenses.
Held
The Tribunal ruled that no disallowance under Section 14A read with Rule 8D can be made if no exempt income is earned in the relevant assessment year, citing High Court precedents and clarifying the Finance Act, 2022 amendment to Section 14A is prospective from 01/04/2022. It upheld the deletion of ESOP expense additions by the CIT(A), noting it was in line with the Karnataka High Court's affirmation of the ITAT Bangalore Special Bench decision.
Key Issues
1. Whether disallowance under Section 14A read with Rule 8D is permissible when no exempt income is earned. 2. Applicability of the Finance Act, 2022 amendment to Section 14A. 3. Allowability of ESOP expenses.
Sections Cited
Section 14A, Rule 8D, Section 4, Section 5, Section 144A, Finance Act, 2022
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Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
Before: SHRI NARENDRA KUMAR BILLAIYA, HONBLE & SHRI RAJ KUMAR CHAUHAN, HONBLE
PER BENCH: 3 आयकर अपीलीय अधिकरण INCOME TAX APPELLATE TRIBUNAL I.T.A. No. 4248/Mum/2024 I.T.A. No. 4250/Mum/2024 I.T.A. No. 4254/Mum/2024 I.T.A. No. 4365/Mum/2024 I.T.A. No. 4373/Mum/2024 The captioned appeals have six appeals by the assessee and four appeals by the revenue preferred against separate orders of the ld. CIT(A) pertaining to AY 2013-14 to 2018-19. 2. The appeals by the assessee and the revenue have common grounds, therefore, all these appeals are disposed by this common order for the sake of convenience.
The common grievance in all the six appeals by the assessee relate to the disallowance of expenditure u/s 14A r.w.r. 8D. The common factor in the appeals by the assessee is that the assessee has not earned any exempt income during the captioned assessment years. The basis for the impugned disallowance by the AO is the amendment brought in the Act which according to the AO was effective from the AYs under consideration whereas the contention of the assessee is that the amendment is prospective and is effective from 01/04/2022 and, therefore, not applicable in the captioned AYs and since it is an admitted fact that the assessee has not earned any exempt income during the captioned AYs under consideration, there is no question of any disallowance u/s 14A r.w.r. 8D. 4 आयकर अपीलीय अधिकरण INCOME TAX APPELLATE TRIBUNAL I.T.A. No. 4248/Mum/2024 I.T.A. No. 4250/Mum/2024 I.T.A. No. 4254/Mum/2024 I.T.A. No. 4365/Mum/2024 I.T.A. No. 4373/Mum/2024
After giving a thoughtful consideration to the orders of the authorities below and after finding that the assessee has not earned any exempt income during the captioned AYs, we are of the considered view that the issue is no more res integra in light of plethora of judgments of the various Hon'ble High Courts.
The Hon'ble High Court of Delhi in the case of PCIT vs. McDonald's India (P) Ltd. reported in [2019] 101 taxmann.com 86 (Delhi), had the occasion to consider a similar issue and decided in favour of the assessee and against the revenue. The relevant findings read as under:- "
Revenue submits that the Tribunal has erred in deleting disallowance of Rs.1,64,44,211/- made by the Assessing officer under Section 14A of the Act on the ground the respondent-assessee had not earned any exempt income during the assessment year.
The Tribunal in the impugned order on the said aspect has observed:
"
Having heard both the sides and perused the relevant material on record, we find that the legal position is no more res integra in view of the judgment of the Hon'ble juri ictional High Court in the case Cheminvest Ltd v. CIT (2015) 378 ITR 33 (Del), wherein it has been held that if there is no exempt income, there can be no question of making any disallowance u/s 14A. Similar view has been taken by the Hon'ble juri ictional High Court in CIT v. Holcim India P. Ltd. (2014) 90CCH 081-Del-HC. In view of these binding precedents providing for not making any disallowance u/s 14A in the absence of any exempt income, we hold in principle that no disallowance be made in case of Nil exempt income."
The impugned order and reasoning follows the judgment of the Delhi High Court in Cheminvest Ltd. v. CIT [2015] 378 ITR 33/234 Taxman 761/61 taxmann.com 118 and CIT v. Holcim India (P.) Ltd. [2015] 57 taxmann.com 28 (Delhi). Similar view has been taken by several High Court including the Punjab & Haryana High Court in CIT v. Lakhani Marketing Inc. [2014] 226 Taxman 45/49 taxmann.com 257 the 5 आयकर अपीलीय अधिकरण INCOME TAX APPELLATE TRIBUNAL I.T.A. No. 4248/Mum/2024 I.T.A. No. 4250/Mum/2024 I.T.A. No. 4254/Mum/2024 I.T.A. No. 4365/Mum/2024 I.T.A. No. 4373/Mum/2024 Gujarat High Coulrt in CIT v. Corrtech Energy (P.) Ltd. [2014] 223 Taxman 130/[2014] 45 taxmann.com 116 and the Allahabad High Court in Income Tax Appeal No.88/2014 CIT v. Shivam Motors (P.) Ltd. [2015] 55 taxmann.com 262/230 Taxman 63 and the Madras High Court in CIT v. Chettinad Logistics (P.) Ltd. [2017] 248 Тахтап 55/80 taxmann.com 221. 5. Counsel for the Revenue referring to the decision of the Supreme Court in Maxopp Investment Ltd. v. CIT [2018] 402 ITR 640/254 Taxman 325/91 taxmann.com 154 and an earlier judgment of the Supreme Court in CIT v. Walfort Share & Stock Brokers (P.) Ltd. [2010] 326 ITR 1/192 Taxman 211 submits the ratio and view expressed in Cheminvest Ltd. (Supra) and Holcim India (P.) Ltd. (Supra) has been overruled and atleast requires reconsideration.
We have considered the said judgments, but do not think that there is any ground or reason to not follow the clear and categorical ratio of the decisions of the Delhi High Court in Cheminvest Ltd. (Supra) and Holcim India (P.) Ltd. (Supra)." The Hon'ble High Court of Madras in the case of Commisioner of Income-tax, Central 1, Chennai v. Chettinad Logistics (P.) Ltd., reported in [2017] 80 taxmann.com 221 (Madras), considering the similar issue held as follows:- “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.
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.
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.
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.
4 Rule 8 D, in our view, cannot go beyond what is provided in Section 14 A of the Act. 6 आयकर अपीलीय अधिकरण INCOME TAX APPELLATE TRIBUNAL I.T.A. No. 4248/Mum/2024 I.T.A. No. 4250/Mum/2024 I.T.A. No. 4254/Mum/2024 I.T.A. No. 4365/Mum/2024 I.T.A. No. 4373/Mum/2024
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.
1 A Co-ordinate Bench of this Court, vide judgment dated 23.12.2016, rejected the plea of the Revenue advanced in that behalf.
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.
3 Pertinently, the Division Bench in Redington (India)Ltd. (supra) case has repelled this precise argument.
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.
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.
2 While coming to this conclusion, the Division Bench also took note of the aforementioned Circular, issued by the Board.
3 The reasoning of the Division Bench is contained in the following part of the judgment:
"
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.
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 7 आयकर अपीलीय अधिकरण INCOME TAX APPELLATE TRIBUNAL I.T.A. No. 4248/Mum/2024 I.T.A. No. 4250/Mum/2024 I.T.A. No. 4254/Mum/2024 I.T.A. No. 4365/Mum/2024 I.T.A. No. 4373/Mum/2024 would apply not only where exempted income is 'included' in the total income, but also where exempt income is 'includable' in total income.
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.
We are unable to subscribe to the aforesaid view. The provisions of section 14A were inserted as a response to the judgments of the Supreme Court in Commissioner of Income Tax v. Maharashtra Sugar Mills Limited [1971] 82 ITR 452 and Rajasthan State Ware Housing Corporation v. Commissioner of Income-tax [2002] 242 ITR 450 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 Commissioner of Income-tax v. Walfort Share and Stock Brokers (P) Ltd. [2010] 326 ITR 1 '.... The 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 this is clearly relatable to the earning of actual income and not notional or anticipated income. The submission of the Department to the effect that s.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 8 आयकर अपीलीय अधिकरण INCOME TAX APPELLATE TRIBUNAL I.T.A. No. 4248/Mum/2024 I.T.A. No. 4250/Mum/2024 I.T.A. No. 4254/Mum/2024 I.T.A. No. 4365/Mum/2024 I.T.A. No. 4373/Mum/2024 income in terms of s.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 effecting a disallowance in connection therewith.
The computation of disallowance 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 this would be carrying the artifice too far. (emphasis is ours)"
Mr.Senthil Kumar, seeks to distinguish the judgment in Redington (India) Ltd. case (supra) based on the fact that Rule 8D had not kicked-in by AY 2007-08, which was the AY being considered in the said case.
According to us, this was not the argument, put forth, before the Division Bench. As a matter of fact, the Revenue relied heavily on Rule 8D.
1 Mr.Ravikumar, who appeared for the Revenue, in that matter and who is present in this Court, informs us that he had in fact argued that the Rule was clarifactory in nature and would apply retrospectively, and that, the Division Bench, therefore, discussed the impact of Rule 8D of the Rules.
However, it is, our view, as indicated above, independent of the reasoning given in Redington (India) Ltd. case (supra) that Rule 8D cannot be read in a manner, which takes it beyond the scope and content of the main provision, which is, Section 14 A of the Act.
1 Therefore, as adverted to above, Rule 8D, cannot come to the rescue of the Revenue.
2 In any event, the Tribunal, via, the impugned judgment has remitted the matter to the Assessing Officer.
3 Therefore, for the foregoing reasons, we are of the view, that no interference is called for qua the impugned judgment."
The SLP of the revenue was dismissed by the Hon'ble Supreme Court in [2018] 95 taxmann.com 250 (SC). 9 आयकर अपीलीय अधिकरण INCOME TAX APPELLATE TRIBUNAL I.T.A. No. 4248/Mum/2024 I.T.A. No. 4250/Mum/2024 I.T.A. No. 4254/Mum/2024 I.T.A. No. 4365/Mum/2024 I.T.A. No. 4373/Mum/2024
The Hon'ble High Court of Bombay in the case of PCIT vs. Kohinoor Project (P.) Ltd. 425 ITR 700 (Bombay), was seized with the following substantial question of law:- "(i) Whether on the facts and in circumstances of the case and in law, Hon'ble ITAT was justified in deleting the addition of Rs. 5,79,95,481/- on the ground that when there is no exempt income declared during the year, there cannot be any disallowance u/s. 14A of the Income-tax Act, 1961 read with rule 8D of the Income-tax Rules, 1962 while confirming the order of the Ld. CIT(A) restricting the disallowance to Rs. 1,16,03,269/- under rule 8D(2)(ii) of the IT Rules, 1962? (ii) Whether on the facts and in the circumstances of the case and in law, Hon'ble ITAT was justified in confirming the order of the Ld. CIT(A) to restrict the disallowance to Rs. 1.16 crore without appreciating the fact that by doing this, Hon'ble ITAT has allowed the application of rule 8D(2)(ii) of the IT Rules, 1962 in the case of the assessee even when it has not earned any exempt income?”
And the Hon'ble High Court answered as under:- “4. Respondent in its return of income for the assessment year under consideration declared total loss of Rs. (-) 10,16,33,795/-. The case was selected for scrutiny and thereafter subjected to scrutiny assessment. Assessing Officer noted that assessee had made investment of Rs. 7.90 Crores in shares of Kohinor CTNL Infrastructure Co. Ltd. which was held to be strategic investment for which assessee would receive future benefits. Notwithstanding the fact that the assessee had earned no exempt income for the relevant previous year, Assessing Officer made disallowance to the extent of Rs. 6,95,98,750/- under section 14A of the Act.
Aggrieved by the aforesaid, assessee preferred appeal before the Commissioner of Income-tax (Appeals)-12, Mumbai. In the appeal proceedings the first appellate authority held that the Assessing Officer was justified in invoking section 14A of the Act by taking the view that the assessee had made investments that would give rise to exempt income and, therefore, Section 14A of the Act was applicable. Accordingly, vide order dated 8-5-2013, first appellate authority affirmed the action of the 10 आयकर अपीलीय अधिकरण INCOME TAX APPELLATE TRIBUNAL I.T.A. No. 4248/Mum/2024 I.T.A. No. 4250/Mum/2024 I.T.A. No. 4254/Mum/2024 I.T.A. No. 4365/Mum/2024 I.T.A. No. 4373/Mum/2024 Assessing Officer in invoking section 14A of the Act but reduced the quantum of disallowance to Rs. 1,16,03,269/- for the grounds and reasons mentioned in the appellate order.
Aggrieved by the reduction in the quantum of disallowance revenue preferred appeal before the Tribunal. The Tribunal considered the contention of the assessee that no exempt income was claimed by the assessee under section 14A of the Act and, therefore, no disallowance could have been made by the Assessing Officer by invoking section 14A together with Rule 8D(2)(ii) of the Income-tax Rules, 1962. Tribunal relied upon the decision of the Delhi High Court in the case of Cheminvest Ltd. v. CIT [2015] 61 taxmann.com 118/234 Тахтап 761/378 ITR 33 (Delhi); the decision of the Punjab and Haryana High Court in CIT v. Lakhani Marketing Inc. [2014] 49 taxmann.com 257/226 Тахтап 45 (Mag.); and decision of the Allahabad High Court in the case of CIT v. Shivam Motors (P.) Ltd. [2015] 55 taxmann.com 262/230 Taxman 63 (All.) and observed that there is uniformity in the view that in case there is no exempt income claimed by the assessee in the return of income, no disallowance can be made by the revenue. Consequently, vide order dated 18-10-2016 Tribunal dismissed the appeal of the revenue.
Submissions made by learned counsel for the parties have been considered.
Section 14A of the Act deals with expenditure incurred in relation to income not includible in total income. As per sub-section (1) of section 14A, for the purpose of computing the total income, 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. In Cheminvest Ltd. (supra) Delhi High Court examined the expression "does not form part of the total income" as appearing in sub-section (1) of section 14A of the Act. Delhi High Court held that the said expression 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. It was clarified that section 14A will not apply if no exempt income is received or receivable during the relevant previous year.
This view has been followed in several decisions by this Court. In fact in Pr. CIT v. Man Infraprojects Ltd. [IT Appeal No. 259 of 2017, dated 9-4-2019], this Court 11 आयकर अपीलीय अधिकरण INCOME TAX APPELLATE TRIBUNAL I.T.A. No. 4248/Mum/2024 I.T.A. No. 4250/Mum/2024 I.T.A. No. 4254/Mum/2024 I.T.A. No. 4365/Mum/2024 I.T.A. No. 4373/Mum/2024 followed the decision of the Delhi High Court in Cheminvest Ltd. (supra). It was further noted in MAN Infraprojects Ltd. that the decision of the Delhi High Court was challenged by the revenue before the Supreme Court by fling SLP but the SLP was dismissed.
In the light of the above, we hold that no substantial question of law arises from the order of the Tribunal. The appeal is devoid of merit and is accordingly, dismissed. Considering the facts of the case in totality, in light of the decisions discussed hereinabove, we direct the AO to delete the impugned disallowance from the captioned assessment years.
Before parting, the contention of the revenue that post amendment, brought by Finance Act, 2022, the provisions of Section 14A of the Act has been amended and disallowance can be made even if there is no exempt income.
The Hon'ble High Court of Delhi in the case of PCIT vs. Era Infrastructure (India) Ltd. [2022] 141 taxmann.com 289 (Delhi), has held that “Amendment made by Finance Act, 2022 to section 14A by inserting a non-obstante clause and Explanation will take effect from 1-4-2022 and cannot be presumed to have retrospective effects