IL&FS MARITIME INFRASTRUCTURE COMPANY LIMITED,MUMBAI vs. THE DEPUTY COMMISSIONER OF INCOME TAX-14(1)(1), MUMBAI

P a g e | 1 ITA No.3558/Mum/2023 IL & FS Maritime Infrastructure Company Ltd. Vs. The DCIT, 14(1)(1) IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, MUMBAI BEFORE SHRI VIKAS AWASTHY, JUDICIAL MEMBER & SHRI AMARJIT SINGH, ACCOUNTANT MEMBER ITA No.3558/Mum/2023 (A.Y. 2013-14)

IL & FS Maritime Vs. The DCIT, 14(1)(1) Infrastructure Company Room No. 432, 4 th Floor, Ltd, Plot, C-22, G Block, Aayakar Bhawan, the IL & FS Financial M.K. Road, Churchgate, Centre, Bandra Kurla Mumbai - 400020 Complex, Bandra East, Mumbai – 400051 स्थायी लेखा सं./जीआइआर सं./PAN/GIR No:AABCI7029R Appellant .. Respondent Appellant by : Ms. Hetal Vora & Darshit Jain Respondent by : H.M. Bhatt Date of Hearing 03.04.2024 Date of Pronouncement 08.04.2024 आदेश / O R D E R Per Amarjit Singh (AM): This appeal filed by the assessee in electronic mode is directed against the order passed by the ld. CIT(A)-56 for A.Y. 2013-14. The assessee has raised the following grounds before us: “1. Withdrawal of suo-moto disallowance of Rs. 25,02,86,066 made u/s 14A of the Income Tax Act ('the Act'): 1.1. On the facts and circumstances of the case and in law, the Learned Commissioner of Income tax ('Ld. CIT(A)') has erred by not allowing the appellant to withdraw the suo moto disallowance of Rs. 25,02,86,066 made u/s 14A of the Act based on the fact the appellant had not earned any exempt income during the year under consideration,

P a g e | 2 ITA No.3558/Mum/2023 IL & FS Maritime Infrastructure Company Ltd. Vs. The DCIT, 14(1)(1) 1.2. The appellant states that the disallowance u/s 14A of the Act can fall below suo-moto disallowance made in the return of income under a wrong belief. 1.3. The Appellant prays before Your Honour to consider the above ground and allow the appellant to withdraw the suo moto disallowance of Rs.25,02,86,066 made u/s 14A of the Act. The Appellant craves leave to add, alter, supplement, vary, amend, withdraw, or otherwise modify the Ground of Appeal mentioned herein and to submit such statements documents and papers as may be considered necessary either at or before the appeal hearing.”

P a g e | 3 ITA No.3558/Mum/2023 IL & FS Maritime Infrastructure Company Ltd. Vs. The DCIT, 14(1)(1) consideration. In his finding the ld. CIT(A) accepted that it is undisputed fact that there was no exempt income earned by the assessee during the year. The ld. CIT(A) also mentioned the decision of Hon’ble Delhi High Court in the case of M/s Era Infrastructure (P) Ltd. (2022) 141 taxmann.com 289/288 Taxman 384/448 ITR 674 wherein it is held that the explanation of Sec. 14A inserted by the Finance Act 2022 cannot be treated to be retrospective. The CIT(A) also referred in his finding that disallowance u/s 14A of the Act cannot exceed exempt income as per the judicial precedence which are binding in nature. However, the ld. CIT(A) has rejected the claim of the assessee holding that suo moto disallowance at Rs.25,02,86,066/- cannot be disturbed. 4. During the course of appellate proceedings before us the ld. Counsel submitted paper book comprising copies of document furnished before the lower authorities. The ld. Counsel submitted that as per the copy of profit and loss account placed in the paper book there was no exempt income earned during the year under consideration and also referred the decision of Hon’ble Delhi High Court in the case of Cheminvest Ltd. Vs. CIT (2015) 61 taxman.com 118 (Delhi) that Sec. 14A will not apply if no exempt income is received or receivable during the relevant previous years. On the other hand, the ld. D.R supported the order of lower authorities. 5. Heard both the sides and perused the material on record. The assessee is a public limited company engaged in the business of marine infrastructure development work and providing marine infrastructure facilities. Before the assessing officer vide letter dated 07.12.2016 the assessee made a claim that no disallowance could be made u/s 14A since it has not earned any exempt income during the year under consideration. The assessee has also placed reliance on the decision of

P a g e | 4 ITA No.3558/Mum/2023 IL & FS Maritime Infrastructure Company Ltd. Vs. The DCIT, 14(1)(1) Hon’ble Delhi High Court in the case of Cheminvest Ltd. Vs. CIT-IV (2015) 61 taxmann.com 118 (Delhi) and various other decisions of Mumbai ITAT and Hon’ble Delhi High Court. The assessee also explained that it has made investment into various subsidiaries/associate companies and has not earned any dividend income. This fact has also been acknowledged by the assessing officer in his assessment order that assessee has made investment in compulsory convertible debentures and preference shares with a lock in period and after expiry of such lock in period the investments are convertible into equity shares. The assessing officer was of the view that these investment were in the nature of long term strategic investment to earn exempt income, therefore, these were covered in the category of investment capable of earning exempt income as per Rule 8D of the I.T. Rule. Further we find the ld. CIT(A) has acknowledged this material fact that assessee has not earned any exempt income during the year. The ld. CIT(A) has also mentioned the decision of Hon’ble Delhi High Court in the case of ERA Infrastructure (India) Ltd. holding that the explanation of Sec. 14A inserted by the Finance Act 2022 cannot be applied retrospectively. During the course of assessment the assessee has categorically submitted before the assessing officer that no disallowance can be made as it has not earned any dividend income and placed reliance upon the following judicial pronouncements: “a. Cheminvest Limited Vs. CIT-VI (ITA No.749/2014, Delhi High Court. b. Cox & Kings Limited Vs. DCIT-1(1) (Mumbai ITAT) c. Commissioner of Income Tax Faridabad Vs. Lakhani Marketing Inc. (Punjab and Haryana High Court) d. Delite Enterprises Pvt. Ltd. reported in 22 SOT pg. 245 (Delhi High Court ) e. CIT Vs. Shivam Motors Pvt. Ltd. (ITA No. 17/Lkw/2012) (Allahabad High Court)” Before the ld. CIT(A) the assessee has also referred that it is settled issued that no disallowance u/s 14A of the Act to be made if no exempt income is earned during the year. The relevant part of the submission

P a g e | 5 ITA No.3558/Mum/2023 IL & FS Maritime Infrastructure Company Ltd. Vs. The DCIT, 14(1)(1) based on judicial pronouncements made before the ld. CIT(A) is reproduced as under: “2.5. With this regard, the appellant has placed its reliance on the following apex court rulings:  The Hon'ble Supreme Court in April 2019 dismissed the Revenue's Special Leave Petition (SLP) in case of Cheminvest Ltd. v. CIT [2015] 378 ITR 33 (Delhi HC), against the decision of the Delhi High Court holding that no question of law arose from the order of the Income-tax Appellate Tribunal (Tribunal), thereby deleting the disallowance under section 14A of the Act in absence of any exempt income during the year  In 2018, the Hon'ble Supreme Court had previously dismissed SLP in case of CIT v. Chettinad Logistics (P) Ltd filed by the Revenue and thus, deleting the disallowance of expense under section 14A of the Act in the absence of exempt income. The provisions of section 14A itself are not applicable to the appellant in the absence of exempt income earned by the assessee 2.6 Further, your Honour will appreciate that the rule cannot go beyond the main parent provision Accordingly, Rule 8D cannot travel beyond the root sphere of section 14A of the Act. Thus, in case of non- applicability of provisions of section 14A to the appellant, provisions of Rule 8D shall also remain inapplicable Accordingly, in the absence of any exempt income being earned by the appellant, no disallowance under section 14A is applicable during the year under consideration 2.7 The appellant further relies on the decision of the Hon'ble Delhi High Court in the case of IL&FS Energy Development company Ltd (2017) 399 ITR 483 (Delhi) (subsidiary of the IL&FS Group and accordingly associate of the appellant) wherein it was held that there will be no disallowance under Section 14A of the Act if no exempt income is earned during the year. 2.8 Similar view was taken by Hon'ble Mumbai Tribunal in the case of Piramal Enterprises v. ACIT 97 taxmann.com 352. The relevant extract has been reproduced below. “We find merit in the aforesaid submissions of the learned Sr. Counsel The Tribunal, Delhi Special Bench, in Vireet Investment Pvt. Ltd (supra) has observed that only those investment which yielded income during the relevant previous year are to be considered for computing average value of investment for the purpose of rule 8D(2)(l). In view of the aforesaid, we direct the Assessing Officer to exclude the investments which have not yielded any exempt income during the relevant previous year for computing disallowance under rule BD(2)(x) r/w section 14A of the Act 2.9 The appellant further places reliance on the judgement of ITAT MUMBAI BENCH 'C' in the case of Deputy Commissioner of Income tax v Lodha Developers Lid in which the order is supported by The Finance Act 2022

P a g e | 6 ITA No.3558/Mum/2023 IL & FS Maritime Infrastructure Company Ltd. Vs. The DCIT, 14(1)(1) amendment made in Section 14A of the Act. The relevant extract has been reproduced below: “16. We have carefully considered the rival contention and perused the orders of the lower authorities. Undisputed fact shows that there is no exempt income and during the year by the assessee if there is no exempt, income naturally there cannot be any disallowance u/s 14 A of the act because no expenditure has been incurred on any exempt income during the year. Further the reliance placed by the learned departmental representative on the amendment made by the finance act 2022 applies prospectively as held by the honourable Delhi High Court in CIT Era Infrastructure (P) Ltd [2022] 141 taxmann.com 289/288 Taxman 384/448 ITR 674 In view of this we do not find any infirmity in the order of the learned CIT-A in deleting the disallowance u/s 14 A of the act Accordingly, ground number 3 of the appeal of the learned AO is dismissed.” 2.10 The Hon'ble Mumbai Tribunal in the case of Kamal Hotels (India) Ltd. is DCIT [2018] 89 faxmann.com 225 (Mumbai)/14-12-2017] also held that section 144 cannot be invoked where no exempt income was earned by assessee in relevant assessment year 2.11 Thus, the Appellant submits that the investments which have not yielded any exempt income during the year cannot be considered for computation of disallowance under section 14A of the Act. 2.12 Therefore, on the facts and in the circumstances of the case and in law, the Ld AO has erred in disallowing expenses under section 14A of the Act when such provisions are not applicable to the appellant since no exempt income is earned by the appellant during the year under consideration. Subsequently, the Ld AO has erred in determining the direct and indirect expenses attributable to the activity of investment by applying the provisions of Rule BD of the Rules and thereby making disallowance under section 144 of the Act 2.13 Based on above rulings, the Appellant hereby submit before Your Honours to withdraw the suo-moto disallowance made u/s 14A of Rs25,02,86,066. The claim is based on the Supreme Court rulings and the favourable ruling in the group company of the Appellant Le. IL&FS Energy Development Company Ltd (supra) 2.14 The appellant further places its reliance on the Bombay High Court ruling in case of Everest Kento Cylinder Ltd (378 ITR 57) Considering the above judicial precedents and facts of the present case, the Appellant hereby request Your Honours to direct the Learned AO to allow the claim made during the assessment stage and delete the disallowance made u/s 14A in the returned income. 2.15 The Learned AO may please be directed to re-compute the assessed income after deleting the entire disallowance made u/s 14A of Rs25,84,85,592 2.16 Without prejudice to the above, the appellant relies on the following judgement of The High Court of Bombay in the case of Principal Commissioner of Income Tax, Panaji, Goa v Ajit Ramakant Phatarpekar:

P a g e | 7 ITA No.3558/Mum/2023 IL & FS Maritime Infrastructure Company Ltd. Vs. The DCIT, 14(1)(1) “(9) There is no perversity in the orders passed by the Commissioner (Appeals) and the ITAT on this issue. Besides in Nirved Traders (P) Ltd. (supra), this Court has held that disallowance under section 14A of the IT Act cannot be more than the exempt income earned by the Assessee during the assessment year in question in this case, there is no dispute that the dividend in the exempt income earned by the Assessee’s during the relevant Assessment Year, was only Rs.45.371/- Accordingly, the disallowance in this case could not have exceeded Rs. 45,371/- It is only because the Assessees voluntarily offered a disallowance to the extent of Rs.65,000/-, that the Commissioner (Appeals) made a disallowance to the extent of Rs. 65,000/- Thus, the first substantial question of law is required to be answered against the Revenue and in favour of the Assessees” CBDT Circular No. 5 of 2014 exceeds the legislative intent of section 14A of the Act: 2.17 The appellant also submits that the Ld. AG has erred in relying on CBDT Circular No. 05 of 2014 in the impugned assessment order. The said CBDT circular is attributable to the fact that the heading to section 14A provides that expenditure incurred in relation to income not includible in the total income will be not deductible. The very expression Includible has been so stressed to work out cases where arbitrary disallowances can be made by having recourse to the provisions of section 14A without considering the legislative effect of the expression expenditure Incurred 2.18 Adopting such recourse by taking inference of selective expressions is an attempt to defeat the literal understanding of the provisions which stems on disallowance of booking the expenditure incurred in relation to income included/includible while computing total income under the Act. The ambiguous interpretation of the expression includible translates that the Circular issued merely represents understanding of the Board/Government and do not represent the understanding of the writ courts on the issue at large 2.19 The appellant states that in numerous decisions the High Courts and ITAT have held that the Circular No. 5 of 2014 and Rule 8D exceeds the legislative intent behind insertion for section 14A of the Act. 2.20 The Madras High Court in the case of Redington (India) Ltd (2017) 392 ITR 633 (Madras) [23-12- 2016) had held as follows: 10. The provision thus 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 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. 11. The computation of disallowance in terms of Rule BD is by way of a determination involving direct as well as indirect attribution. Thus,

P a g e | 8 ITA No.3558/Mum/2023 IL & FS Maritime Infrastructure Company Ltd. Vs. The DCIT, 14(1)(1) 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. 15. The exemption extended to dividend income would relate only to the previous year when the income was earned and none other and consequently the expenditure incurred in connection therewith should also be dealt with in the same previous year. Thus, by application of the matching concept, in a year where there is no exempt income, there cannot be a disallowance of expenditure in relation to such assumed income." 2.21 The aforesaid decision and principle have been followed by subsequent division bench of Hon'ble Madras High Court in the case of Chettinad Logistics (P) Ltd. [2017] 248 Taxman 55 (Madras). The Hon'ble Supreme Court in the case of Chettinad Logistics (P) Ltd. 95 taxmann.com 250 has dismissed the SLP filed by the tax department against the aforesaid decision of Madras High Court even on ground of merits 2.22 The Hon'ble Delhi High Court in the case of IL&FS Energy Development company Ltd (2017) 399 ITR 483 (Delhi) (subsidiary of the IL&FS Group and accordingly associate of the appellant) (supra) has expressly held that that the CBDT Circular dated 11 February 2014 cannot override the expressed provisions of Section 14A read with Rule BD and accordingly there will be no disallowance under Section 14A of the Act if no exempt income is earned during the year. 2.23 The appellant also has placed its reliance on the recent pronouncement of the Hon'ble Madras High Court in the case of Marg Limited vs. Commissioner of Income Tax (2020) 195 DTR (Mad) 409 (Madras) provides impressive, appreciable and notable understanding of the impugned issue vis-A-vis the Circular No 5/2014 issued by the CBDT along with the statutory mandate of section 14A read with Rule BD. The Hon'ble High Court considered the impact of the pronouncement of the Hon'ble Supreme Court of India in Maxopp Investments Limited vs. Commissioner of Income Tax (2018) 301 CTR (SC) 489 (2018) 164 DTR (SC) to empathize that any purported disallowance sought to be made qua section 14A has to be restricted to the extent of exempt income earned by the assessee during the relevant assessment year The Hon'ble Madras High Court in Marg Limited also rejected Circular No 5/2014 issued by the CBDT wherein it was provided that disallowance is warranted even where the taxpayer has not earned any exempt income during the year under consideration. 2.24 As such disallowance u/s 14A cannot be made on hypothetical income or future income as the same was not the legislative intent as per section 14A of the Act Disallowance u/s. 14A read with Rule BD should be restricted to only such investment which have yielded exempt income and not otherwise as mentioned in CBDT circular, The computation of total income in terms of section 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 disallowance in connection therewith.

P a g e | 9 ITA No.3558/Mum/2023 IL & FS Maritime Infrastructure Company Ltd. Vs. The DCIT, 14(1)(1) 2.25 Therefore, based on the above provisions of the Act and relevant judgment, the appellant states that the Ld AO had erred in relying on the CBDT Circular no 05 of 2014while making the disallowance u/s 14A of the Act. Hence the appellant pleads before your Honour to accept our contention for withdrawing the suo-moto disallowance made u/s 14A of Rs.25,02,86,066 made in the return of income.” Further we have noticed that Hon’ble Gujarat High Court in the case of Korrtech Energy (P) Ltd. Vs. CIT-1 (2014) 45 taxmann.com 116 (Gujarat) held that where assessee has not sought any income exemption there cannot be any expenses there against to be disallowed. Further we find that Hon’ble Gujarat High Court in the case of Milton Laminates Ltd. Vs. CIT (2014) 37 taxmann.com 249 (Gujarat) held that while giving effect to order of commissioner of appeal assessing officer can compute income lower than that returned. The Hon’ble Gujarat High Court in the case of Gujarat Gas Co. Ltd. Vs. JCIT (2000) 111 Taxman 144 (Gujarat) wherein held as under: “5. Had this been the only basis of the Tribunal's order, we would have considered the matter further. However, in the present case, the central issue is whether the assessee having filed a return of income and disclosed certain income in such return, while giving effect to the Commissioner of Income-tax (Appeals) order in favour of the assessee, computation of assessed income can go below the returned income or not. In this regard, the decision of our court in the case of Gujarat Gas Co. Ltd. (supra) is amply clear. A Division Bench of this court was of the opinion that the Central Board of Direct Taxes's Circular which provided that the assessed income of an assessee should not be below the returned income, was invalid.” Further we find that on similar issue and identical fact coordinate bench of the ITAT in the case of DCIT Vs. Godrej Properties Ltd. vide ITA 655/Mum/2023. The relevant extract of the decision is reproduced as under: “12. When we examine the computation made by the AO for the purpose of disallowance under section 14A it is apparent that the AO has made disallowance to the tune of Rs.2,10,42,002/- under rule 8D2(ii) of the rules. The Ld. A.R. for the assessee stated that Ld. CIT(A) has rightly deleted the disallowance made by the AO under rule 8D2(ii) because assessee has never consumed interest bearing funds to earn the dividend income and drew our attention towards balance sheet available at page 5 of the paper book, which shows that the assessee is having share capital and reserve and surplus to the tune of Rs.1790,15,44,047/- as against the total investment of

P a g e | 10 ITA No.3558/Mum/2023 IL & FS Maritime Infrastructure Company Ltd. Vs. The DCIT, 14(1)(1) Rs.911,84,47,535/-. So it is proved that since the assessee has not incurred any interested bearing funds to earn the dividend income and as such disallowance made by the AO to the tune of Rs.2,10,42,002/- is liable to be deleted which includes an amount of Rs.49,85,912/- suo-moto disallowed by the assessee. Eventually it will reduce the returned income of the assessee. So when the assessee was having sufficient own interest free funds in the form of share capital and reserves and surplus at the beginning and closing of the years. as against the total investment edition made under rule 8D2(ii) is not sustainable as has been held by Honourable Bombay High Court in case of HDFC Bank Limited vs. CIT (supra) and decision rendered by Honourable Supreme Court in case of South Indian Bank (supra) wherein it is held as under: “Section 14A. read with section 263, of the Income-tax Act, 1961 Expenditure Incurred in relation to income not includible in total income (Computation of Assessment year 2010-11 In course of assessment, Assessing Officer made addition on account of apportionment of expenses against exempted income under section 14A Commissioner passed a revisional order directing Assessing Officer to enhance amount of addition under section 14A-Tribunal set aside revisional order as well as consequent assessment order passed by Assessing Officer enhancing addition made under section 14A -High Court upheld order of Tribunal holding that amount of disallowance under section 14A could be restricted to amount of exempt income only and not a higher figure-Whether on facts, SLP filed against decision of High Court was to be dismissed-Held, yes [Para 1)[in favour of Assessee]" 13. It is also undisputed fact on record that initially at the time of filing the return of income assessee has itself made suo-moto disallowance of Rs.83,82,742/- as per comparative table extracted in preceding para number 11. However now the assessee by filing the cross objections contended that the Ld. CIT(A) has erred in not restricting the disallowance under section 14A of the Act to the amount of exempt income earned during the year under consideration. It is settled principle of law that disallowance under section 14A cannot be more than the exact income earned by the assessee during the year under consideration as has been held by Honourable High Court of Punjab and Haryana in case of PCIT, Patiala vs. State Bank of Patiala (2018) 99 taxmann.com 285 which is confirmed by Honourable Supreme Court in case cited as PCIT vs. State Bank of Patiala PCIT vs. State Bank of Patiala (2018) 99 taxmann.com 286 (SC) (supra) by returning following findings: “Section 14A, read with section 263, of the Income-tax Act, 1961 Expenditure Incurred in relation to income not includible in total income (Computation of Assessment year 2010-11 In course of assessment, Assessing Officer made addition on account of apportionment of expenses against exempted income under section 14A Commissioner passed a revisional order directing Assessing Officer to enhance amount of addition under section 14A-Tribunal set aside revisional order as well as consequent assessment order passed by Assessing Officer enhancing addition made under section 14A -High Court upheld order of Tribunal holding that amount of disallowance under section 14A could be restricted to amount of exempt income only and not a higher figure-Whether on facts, SLP filed against decision of High Court was to be dismissed-Held, yes [Para 1)[in favour of Assessee]” 14. In the backdrop of the aforesaid discussion now the question arises for determination in this case is: "As to whether assessee is entitled to relief sought for by way of filing cross abjection that disallowance under section 14A cannot be more than the exempt

P a g e | 11 ITA No.3558/Mum/2023 IL & FS Maritime Infrastructure Company Ltd. Vs. The DCIT, 14(1)(1) income i.e. Rs.6,54,331/- in the face of the fact that the assessee itself has made suo-moto disallowance of Rs.83,82,742/-"? 15. The contention raised by the Ld. D.R for the Revenue that the income returned by the assessee itself cannot be reduced is not sustainable because under Article 265 of the constitution of India the revenue is entitled to collect the taxes in accordance with the law and not on the basis of consent or acceptance of the assessee. In other words there is no estoppel against the statute. So in view of the matter we direct the AO to delete the disallowance of the interest made under rule 8D2(ii) of the rules. In the light of the above facts and judicial findings as discussed supra in this order we consider that it is undisputed fact that assessee has not earned any exempt income during the year under consideration, therefore, we allow the ground of appeal of the assessee that no disallowance u/s 14A is required to be made in the case of the assessee. 6. In the result, the appeal of the assessee is allowed. Order pronounced in the open court on 08.04.2024 Sd/- Sd/- (Vikas Awasthy) (Amarjit Singh) Judicial Member Accountant Member Place: Mumbai Date 08.04.2024 Rohit: PS आदेश की प्रतितिति अग्रेतिि/Copy of the Order forwarded to : अपीलाथी / The Appellant 1. प्रत्यथी / The Respondent. 2. 3. आयकर आयुक्त / CIT 4. विभागीय प्रविविवि, आयकर अपीलीय अविकरण DR, ITAT, Mumbai 5. गार्ड फाईल / Guard file. सत्यावपि प्रवि //True Copy// आदेशानुसार/ BY ORDER, उि/सहायक िंजीकार (Dy./Asstt. Registrar) आयकर अिीिीय अतिकरण/ ITAT, Bench, Mumbai.