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Income Tax Appellate Tribunal, “D”, BENCH KOLKATA
Before: SHRI A.T. VARKEY, JM & DR. A.L.SAINI, AM
आदेश / O R D E R
Per Dr. Arjun Lal Saini, AM:
The captioned appeal filed by the Revenue, pertaining to assessment year 2011-12, is directed against an order passed by the Commissioner of Income Tax(Appeals)-4, Kolkata, in Appeal No.1204/CIT(A)-4/Circle- 12/Kol/14-15, dated 24.08.2016, which in turn arises out of an assessment order passed by the AO u/s 143(3) of the I.T. Act, 1961 (hereinafter referred to as the ‘Act’), dated 04.03.2014.
2.The grounds of appeal raised by the Revenue reads as under:
1. On facts and circumstances of the case, the ld. CIT(A) has erred in allowing relief to the assessee on account of disallowance u/s 14A, ignoring the fact that the assessee had made various expenditures as per its own wish and capitalized the same during the year without allocating any part of the said expenditure made towards earning of exempt income and avoid payment of tax thereon on such expenditure.
M/s. Jhabua Power Ltd. Assessment Year: 2011-12 2. On facts and circumstances of the case, the ld. CIT(A) has erred in allowing relief to the assessee on account of disallowance u/s 14A without appreciating. 3. The appellant craves leave to add/alter/modify the grounds of appeal.”
3.The brief facts apropos this issue are that assessee filed his return of income for assessment year 2011-12 declaring total income of Rs.2,37,54,826/- on 28.09.2011. The assessee’s case was selected for scrutiny u/s 143(2) of the Income Tax Act and the AO completed the assessment u/s 143(3) of the Act by making the disallowance u/s 14A of the Act. During the course of assessment proceedings, the AO examined the profit and loss account submitted by the assessee and it was found that assessee declared NIL income, however, assessee has earned income from interest, sale of mutual fund and dividend income. The assessee has shown net income and expenditure in “Project capital expenditure” in the balance sheet. The AO noted that the assessee did not prepare profit and loss account when the assessee has huge mutual fund investment and incomefrom there to avoid applicability of section 14A read with rule 8D. Therefore, the AO observed that the intention of the assessee is to avoid the applicability of the provision of section 14A read with rule 8D. It was submitted by the assessee during the course of scrutiny proceedings that assessee was engaged in developing a thermal power plant at Seoni, (Madhya Pradesh) and all the expenses incurred were capitalized under the head “project development expenditure”. The AO also observed that assessee debited the expenditure in project development expenditure account after netting of income earned. It was observed by the AO that during the year in question loan of assessee increased from Rs.1,98,59,15,716/- to Rs.2,87,17,00,000/- and assessee made investment in mutual fund and earned exempt dividend income of Rs.70,23,511/-. The assessee also incurred financial charges of Rs17,83,41,603/-. The assessee did not declare any expenditure for earning exempt income u/s 14A of the Act. The AO also noted that assessee made investment of Rs.80,00,00,000/- and earned capital gain of Rs.2,37,54,826/- and also Page | 2
M/s. Jhabua Power Ltd. Assessment Year: 2011-12 exempt income of Rs.70,23,511/-, therefore, the AO presumed that assessee must have incurred expenses to earn the exempt income, therefore, expenses incurred to earn exempt income should be computed u/s 14A r.w.r 8D. Accordingly, the AO computed the disallowance u/s 14A r.w.r 8D as follows: (i) Direct expenses Nil (ii) Proportionate interest expenses Rs.2,77,91,952/- (iii) 0.5% of average value of expenses Rs. 26,50,870/- (iv) Total disallowance as per s. 14A r.w.r 8D Rs.3,04,42,822/- Therefore, the AO made the disallowance u/s 14A r.w.r 8D to the tune of Rs.3,04,42,822/-.
4.Aggrieved by the addition made by the AO, the assessee filed an appeal before the ld CIT(A), who has deleted the addition made by the AO. During the appellate proceedings, the assessee submitted before the ld CIT(A) that assessee is not declaring any income in the profit and loss account, therefore, there is no question to disallow any expenditure. The assessee’s plant was under-construction; therefore, all the expenses incurred by the assessee had been capitalized to the project development expenditure account. The ld. CIT(A) based on the submissions of the assessee held that it was an admitted fact that in arriving at returned income, the assessee has not claimed deduction for any expenses and therefore, merely on presumption the AO could not make disallowance of hypothetical expenses for which no deduction was claimed. Hence, the ld. CIT(A) deleted the addition of Rs.3,04,42,822/-.
5.Not being satisfied with the order of the ld. CIT(A), the Revenue is in appeal before us. The ld. DR for the Revenue, has primarily reiterated the stand taken by the AO which we have already noted in our earlier para and is not being repeated for the sake of brevity.On the other hand, the ld. counsel for the assessee has defended the order passed by ld CIT(A).
M/s. Jhabua Power Ltd. Assessment Year: 2011-12 6.We have given a careful consideration to the rival submissions,and perused the materials available on record. The ld Counsel for the assessee submitted before us that the assessee company is engaged into development of a thermal power plant at Seoni, (M.P.) and project was at construction stage and assessee company had not started any commercial production therefore, all the expenses incurred were being capitalized under the head “project development expenditure”. We note that the assessee debited the expenditure after netting off income earned by way of dividend and interest, andsince, in this case earning of interest/dividend income, is an incidental and have direct nexus with the capital cost of the project and therefore, these income are being set off against the expenses of project development expenditure. We note that assessee has not prepared any profit and loss account and has not shown any income in the profit and loss account. It is also an admitted fact that assessee prepared only ‘project development expenditure account’, where he has capitalized the expenses after netting off of income earned by way of interest on fixed deposit, dividend on mutual fund/shares. We are of the view that since the project was at construction stage therefore, assessee can set off these incidental income by way of interest and dividend and since the assessee has neither debited any expenditure nor credited income in the profit and loss account therefore, disallowance under section 14A does not attract in the assessee`s case under consideration.
6.1 We note that the apportionment of pre-operative expenses between exempt income and expenditure incurred during construction period has not been specified u/s 14A r.w.r 8D of Chapter IV of the I.T. Act and it is evident by the provisions of section 14A (1) of the Act, which reads as under:
For the purpose of computing total income under this 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 this Act.
M/s. Jhabua Power Ltd. Assessment Year: 2011-12 Since, the assessee has not computed any total income and has not shown any income in the profit and loss account, therefore, the disallowance u/s 14A does not arise.
6.2 We also note that assessee prepared a profit and loss account where he debited administrative and miscellaneous expenses to the tune of Rs.13,788/-, except to this, there is no any income and expenditure have been shown in Profit& Lossaccount. It is an undisputable principle that when the assessee has not shown any income and expenditure in the profit and loss account the basis for invocation of section 14A disallowance does not arise. That is, the disallowance under section 14A is computed if there is income and expenditure, and in the assessee`s case under consideration there is no any income and expenditure hence no disallowance is required. For that we rely on the judgment of Coordinate Bench, Mumbai in the case of M/s. TAG Offshore Limited vs. ACIT-5(3), dated 08.08.2014 wherein it was held that interpretation of the AO that sub-section (3) of section 14A independently provides that in case no claim of expenditure has been made by the assessee then also the disallowance u/s 14A has to be made, is completely misplaced and is not legally tenable. Only when the precedent conditions of sub-section (1) are satisfied, then only provisions of sub-section (2) and (3) will come into play, for the purpose of determination of quantum of disallowance. Accordingly, no disallowance u/s 14A is warranted in this case when the assessee has admittedly not claimed any deduction of expenditure debited in the profit and loss account while computing the total income.Therefore, disallowance of hypothetical expense for which no deduction was claimed is not justified.
6.3We note that from the plain meaning of section 14A itself,it is clear that, “for the purposes of computing the total income”, which makes it clear that Page | 5
M/s. Jhabua Power Ltd. Assessment Year: 2011-12 various heads of income as prescribed under Chapter IV would fall within section 14A. The section 14A also explain that “in relation to income which does not form part of total income under the Act",it means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A and no disallowance should be made. We note that in the assessee`s case under consideration there is no any total income and no any related expenditure therefore no any disallowance under section 14A r.w.r 8D is warranted. For that we rely on the judgment of hon`ble supreme court in the case of WALFORT SHARE & STOCK BROKERS (P) LTD. 326 ITR 0001 (SC) wherein it was held that:
“The insertion of s. 14A with retrospective effect is the serious attempt on the part of the Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income (see Circular No. 14 of 2001, dt. 22nd Nov., 2001). In other words, s. 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. 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 the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure. On the same analogy the exemption is also in respect of net income. Expenses allowed can only be in respect of earning of taxable income. This is the purport of s. 14A. In s. 14A, the first phrase is "for the purposes of computing the total income under this Chapter" which makes it clear that various heads of income as prescribed under Chapter IV would fall within s. 14A. The next phrase is, "in relation to income which does not form part of total income under the Act". It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of s. 14A. Further, s. 14 specifies five heads of income which are chargeable to tax. In order to be chargeable, an income has to be brought under one of the five heads. If an income like dividend income is not a part of the total income, the expenditure/deduction though of the nature specified in ss. 15 to 59 but related to the income not forming part of total income could not be allowed against other income includible in the total income for the purpose of chargeability to tax. The theory of apportionment of expenditures between taxable and non-taxable has, in principle, been now widened under s. 14A. Reading s. 14 in juxtaposition with ss. 15 to 59, it is clear that the words "expenditure incurred" in s. 14A refers to expenditure on rent, taxes, Page | 6
M/s. Jhabua Power Ltd. Assessment Year: 2011-12 salaries, interest, etc. in respect of which allowances are provided for (see ss. 30 to 37). Every payout is not entitled to allowance for deduction. These allowances are admissible to qualified deductions. These deductions are for debits in the real sense. A pay-back does not constitute an "expenditure incurred" in terms of s. 14A. Even applying the principles of accountancy, a pay-back in the strict sense does not constitute an "expenditure" as it does not impact the P&L a/c. Pay-back or return of investment will impact the balance sheet whereas return on investment will impact the P&L a/c. Cost of acquisition of an asset impacts the balance sheet. Return of investment brings down the cost. It will not increase the expenditure. Hence, expenditure, return on investment, return of investment and cost of acquisition are distinct concepts. Therefore, one needs to read the words "expenditure incurred" in s. 14A in the context of the scheme of the Act and, if so read, it is clear that it disallows certain expenditures incurred to earn exempt income from being deducted from other income which is includible in the "total income" for the purpose of chargeability to tax. The scheme of ss. 30 to 37 is that profits and gains must be computed subject to certain allowances for deductions/expenditure. The charge is not on gross receipts, it is on profits and gains. Profits have to be computed after deducting losses and expenses incurred for business. A deduction for expenditure or loss which is not within the prohibition must be allowed if it is on the facts of the case a proper debit item to be charged against the incomings of the business in ascertaining the true profits. A return of investment or a pay- back is not such a debit item as explained above, hence, it is not "expenditure incurred" in terms of s. 14A. Expenditure is a pay-out. It relates to disbursement. A pay-back is not an expenditure in the scheme of s. 14A. For attracting s. 14A, there has to be a proximate cause for disallowance, which is its relationship with the tax exempt income. Pay-back or return of investment is not such proximate cause, hence, s. 14A is not applicable in the present case. Thus, in the absence of such proximate cause for disallowance, s. 14A cannot be invoked. Return of investment cannot be construed to mean "expenditure" and if it is construed to mean "expenditure" in the sense of physical spending still the expenditure was not such as could be claimed as an "allowance" against the profits of the relevant accounting year under ss. 30 to 37 and, therefore, s. 14A cannot be invoked. Hence, the two asset theory is not applicable in this case as there is no expenditure incurred in terms of s. 14A.”
Hence, it is abundantly clear from the above judgment of the Hon`ble Supreme Court that net income of the assessee is computed provided there is income and expenditure and in the assessee`s case under consideration there is no any income and expenditure therefore disallowance of expenditure ( which related to the exempt income) is not required. That being so, we decline to interfere in the order of ld CIT(A), his Page | 7
M/s. Jhabua Power Ltd. Assessment Year: 2011-12 order on this issue is hereby upheld and grounds of appeal raised by the Revenue is dismissed.
6.4 In the result, the appeal filed by the Revenue is dismissed.
Order is pronounced in the open court on 23/03/2018.