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Facts
The assessee, a Housing Finance Company, filed its income tax return for AY 2021-22. The Assessing Officer (AO) made disallowances under Section 14A read with Rule 8D amounting to Rs. 2,06,16,000 and also disallowed Rs. 24,10,000 paid as penalty to NHB. The CIT(A) partly allowed the appeal.
Held
The Tribunal held that investments yielding exempt income are to be considered for disallowance under Section 14A, and investments not yielding exempt income should be excluded. Regarding the penalty paid to NHB, the Tribunal held it to be allowable as business expenditure as it was incidental to the business and not an offense prohibited by law.
Key Issues
1. Whether investments not yielding exempt income should be considered for disallowance under Section 14A? 2. Whether penal charges paid to NHB are allowable as business expenditure?
Sections Cited
14A, Rule 8D, Section 37(1)
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Income Tax Appellate Tribunal, ‘C’ BENCH
Before: SHRI BR BASKARAN & SHRI SUNIL KUMAR SINGH
आदेश / O R D E R PER SUNIL KUMAR SINGH (J.M): 1. This appeal has been preferred against the impugned order dated 31.01.2024 passed in Appeal no. CIT(A) 54, Mumbai/10024/2020-21 by the Ld. Commissioner of Income– tax(Appeals)/ National Faceless Appeal Centre (NFAC) [hereinafter referred to as the “CIT(A)”] u/s. 250 of the Income- Indiabulls Housing Finance Limited Tax Act, 1961 [hereinafter referred to as "Act"] for the Assessment year [A.Y.] 2021-22, wherein assessee’s appeal has been allowed and the addition made by the Assessing Officer, vide assessment order dated 30.12.2022 have been deleted.
The brief facts related to the appeal state that:– 2.1. The assessee is a Housing Finance Company and engaged in the business of money lending to Housing and earned interest thereon. Assessee company e-filed its original return of income on 14.03.2022, declaring total income at Rs. 1249,24,66,610/-. Thereafter the return was revised on 31.03.2022, declaring total income at Rs. 1249,24,66,610/-. The original return was duly processed on 01.07.2022 and 22.09.2022 u/s. 143(1) of the Act. 2.2. The return of income was selected for scrutiny under CASS for the reasons that assessee has made substantial purchases from suppliers who are either non filers or have filed non-business ITR 1,2 or reflected a substantially lower turnover in ITR. Statutory notices u/s. 143(2) and 142(1) of the Act were issued and served upon the assessee. Assessee submitted the required details in response to the aforesaid notices. During the assessment proceedings, assessing officer noticed that the assessee company had claimed exempt income of Rs. 19,27,537/-. The assessee company had suo-moto Indiabulls Housing Finance Limited disallowed a sum of Rs. 3,90,767/- being related to the earning of exempt income. 2.3. The assessee’s submissions were not found acceptable by the assessing officer and learned assessing officer worked out the disallowance after taking into consideration all the investments which yielded exempt income and were capable of yielding exempt income irrespective of the fact that such investment did not yield exempt income and having regard to the accounts of the assessee of the previous year relevant to A.Y. 2021-22 and computed the disallowance at Rs. 2,10,06,767/-. After adjustment of suo-moto disallowance of Rs. 3,90,767/-, the balance amount of Rs. 2,06,16,000/- was disallowed u/s. 14A r/w Rule 8D and was added to the total income of the assessee. Penalty of Rs. 24,10,000/- imposed by NHB was also disallowed u/s. 37 of the Act and added in the income of the assessee.
Aggrieved assessee preferred an appeal before learned CIT(A), who partly allowed assessee’s appeal with direction to assessee to give bifurcation of investments that earned exempt income and that did not result into exempt income before assessing officer and also directed assessing officer to compute disallowance u/s. 14A, taking average investments that have yielded the exempt income earned by the assessee.
Appellant revenue has raised following grounds under appeal:
Indiabulls Housing Finance Limited “i. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in holding that investment which yielded exempt income are only to be considered for the purpose of disallowance u/s. 14A r.w.r. 8D(2) and to exclude such investment which did not earn exempt income from the total investment for the purpose of computation of disallowance u/s. 14A, thereby ignoring the clarificatory Explanation of section 14A(1) inserted vide the Finance Act2022 that the provisions of this section shall apply and shall be deemed to have always applied even in a case when exempt income has not accrued or arises or has not been received during the previous year but expenditure has been incurred during the said previous year in relation to earning of such exempt income? ii. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has justified in holding that the penal charges to NHB are allowable as business expenditure, thereby ignoring that the term 'penalty', which is the amount paid owing to offence on account of violation of NHB Guidelines, which is prohibited by law. Explanation 1 of sub-section (1) of section 37 of the Act provides that if any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.”
In response to the notice issued by the tribunal, learned representative for the assessee appeared and participated in the proceedings.
We have perused the material on record and heard learned representatives for both the parties.
The following points are to be determined under appeal: 1) Whether learned CIT(A) is justified in holding that the investments, which yielded exempt income, are only to be considered for the purpose of disallowance u/s. 14A r/w Rule 8 D(2) and to exclude such investments which did not earn exempt income? 2) Whether learned CIT(A) is justified in holding that the penal charges paid to NHB are allowable as business expenditure? 8. Learned departmental representative for the appellant revenue has submitted that the investments which did not earn Indiabulls Housing Finance Limited exempt income are also required to be considered for the purpose of computation of disallowance u/s. 14A in view of clarificatory explanation of section 14A(1) of the Act. Further submitted that the penal charges imposed upon assessee by NHB are penalty, hence no allowance can be permitted to such an expenditure. Prayed to set aside the impugned order and to confirm the assessment order.
Learned representative for the assessee has supported the impugned order passed by learned CIT(A).
We shall first take up aforesaid point no. 1, covering first ground of appeal
. Assessee has suo-moto offered an amount of Rs. 3,90,767/- as expenditure disallowable u/s. 14A of the Act, considering the investments on which it had earned exempt income and excluded those investments which were capable of generating exempt income.
11. The essential component of above referred Section 14A is that, for making disallowances from the total income of the assessee, there has to be an expenditure incurred in relation to the exempt income. Assessee submitted before learned assessing officer that no dividend income were earned by the assessee from investments on shares, during the year under consideration. The assessee further submitted that as per amended provisions of the finance Act 2020-21, dividend income became taxable in the hands of the recipient of dividend. Learned assessing officer rejected the claim of assessee and taking support from the CBDT circular no. 5/2014 dated 11.02.2014, concluded that disallowance u/s. Indiabulls Housing Finance Limited 14A can be invoked even if no exempt income is earned during financial year under consideration. Learned CIT(A) in para 6.16 of the impugned order referred his predecessor’s view, who, while deciding the appeal of the assessee for A.Y. 2017- 18, took the view that the disallowance u/s. 14A is to be restricted to the exempt income earned during the year. Further, taking support from the decision of special bench ITAT Delhi in ACIT V. Vineet Investment (P) Ltd. [2017]82 taxman.com 415 (Delhi-Trib.)(SB) held that the investments that yielded exempt income during the year have to be considered for computing average investments for the purpose of rule 8D. Learned CIT(A), thus followed his predecessor in favour of the assessee.
The co-ordinate bench of ITAT Mumbai in in assessee’s own case for A.Y. 2020-21 has followed Vineet Investments (P) Ltd (Supra), reiterating that the investment that yielded exempt income during the year only have to be considered and not the investment which did not yield any exempt income. Further, holding that the explanation inserted by Finance Act 2022 w.e.f 01.04.2022 is applicable from A.Y. 2022-23 onwards as held by Hon’ble Delhi High Court in PCIT V Era Infrastructure (India) Ltd. [2022] 448 ITR 674 (Delhi).
We notice that the ld. CIT(A) has followed the decision rendered by the Special Bench of ITAT Delhi in Vireet Investments Pvt. Ltd. (supra) to hold that only those investments which have yielded exempt income should only be Indiabulls Housing Finance Limited considered for computing the average value of investments for the purpose of Rule 8D. Further, he has followed order dated 23.04.2019 rendered by the Jurisdictional Bombay High Court in M/s. Nirved Traders Pvt. Ltd. (ITA No. 149/2017), holding that the disallowance cannot exceed the exempt income. Since the ld. CIT(A) has followed the decision rendered by the Special Bench of ITAT and the Jurisdictional High Court in adjudicating this issue, we do not find any reason to interfere with the decision so rendered by the ld. CIT(A) on this issue. The first point is accordingly determined against the appellant revenue and in favour of the assessee.
We shall now take up second issue under consideration as to whether penal charges paid to NHB are allowable as business expenditure? 15. Learned assessing officer has disallowed Rs. 24,10,000/- paid towards penalty on account of violation of NHB guidelines as per explanation no. 1 of the provisions of section 37 of the Act. This disallowance has been deleted by learned CIT(A). Learned representative for the AR has referred (i) Mangal Keshav Security Ltd. v ACIT 4(3), Mumbai [2017]85 taxmann.com 226(Mumbai-Trib), wherein the co-ordinate bench of this Tribunal with reference to TRF Ltd. V CIT [2010] (SC) 323 ITR 397/190 taxmann.com 391 held that the penalty levied by stock exchange on stock broker for failure to maintain KYC form etc. being compensatory in nature was allowable as deduction u/s. 37(1). Learned AR has further referred (ii) EON Hadapsar, Infrastructure (P) Ltd. V ACIT.
Indiabulls Housing Finance Limited Central circle-2(1), Pune, [2016] 71 taxmann.com 115(Pune- Trib), wherein the co-ordinate Pune bench of this Tribunal has held that the explanation to section 37(1) of the Act was inserted in respect of any expenditure incurred for any purpose, which was an offence or which was prohibited by law. The circular of Reserve Bank of India itself provided that where the assessee had committed an irregularity while dealing foreign earnings or expenditure outgoes, than such action of the applicant could be compounded as per rules and regulations provided in the said circular. It is not in case where the assessee has been held to have committed an offence or the amount has been paid for purpose, which was prohibited in law, hence, the provisions of explanation to section 37(1) of the Act are not detected.
In the instant case, learned CIT(A) has deleted the aforesaid disallowance made by learned assessing officer on the strength of Hon’ble Supreme Court Judgement in CIT V Ahmedabad Cotton Mfg Co. Ltd (1993) 205 ITR 163 (SC) and referred the relevant part of the order as under: “...what needs to be done by an assessing authority law I.T. Act, 1961 in examining the claim of an assessee that the payment made by such assessee was a deductible expenditure under section 37 of the I.T. Act although called penalty is, to see whether the law or scheme under which the amount was paid required such payment to be made, as penalty or as something akin of penalty. that is imposed, by way of punishment for breach or infraction of the law; or the statutory scheme. If the amount so paid is found to be not a penalty or something akin to penalty due to the fact that the amount paid by the assessee was in exercise of the option conferred upon him under the very law or scheme concerned, the assessing authority has to regard such payment as business expenditure of the assessee, allowable under Section 37 of the I.T. Act, as an incident of business laid out and expended wholly and exclusively for the purposes of the business. However, if such payment of the assessee is that which is made in exercise of the option given to such assessee by the law or the statutory scheme, there arises no need for assessing authority to go into-the question whether the payment could be regarded as that made as a measure of business expediency, for Indiabulls Housing Finance Limited it cannot ignore the fact in that the law or the statutory scheme enables incurring of such expenditure in the course of assessee's business.”
According to the letter dated 08.10.2020 issued by National Housing Bank (NHB) and addressed to the assessee company, which is placed at page no. 111-112 of assessee’s paper book, an amount of Rs. 3,45,000/- has been directed to be paid as penalty for violating the various non- compliances/directions. Similarly, another letter dated 26.02.2021 issued by the NHB and addressed to the assessee company, penalty of Rs. 20,65,000/- in respect of various non-compliances, has further been imposed upon the assessee. As per these two letters issued by the NHB, the total amount of Rs. 24,10,000/- is the penal charges, which are said to have been paid by the appellant assessee are incidental to the business of the assessee and cannot be held to be an offence or infraction of law. Learned CIT(A) has thus rightly held that such penal charges are to be allowable as business expenditure. The aforesaid second issue under consideration is also determined against the appellant revenue and in favour of the assessee.
In the result the revenue’s appeal is dismissed. Order pronounced on 24.10.2024.