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Income Tax Appellate Tribunal, ‘ B’ BENCH : CHENNAI
Before: SHRI ABRAHAM P.GEORGE & SHRI GEORGE MATHAN
आदेश / O R D E R
PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER:
This appeal filed by the assessee is directed against an order dated 29.12.2016 of the Commissioner of Income-tax (Appeals)- 11, Chennai.
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Assessee has filed this appeal with a delay of thirty days.
Condonation petition has been filed. Reason shown for the delay seems to be justified. Ld. Departmental Representative did not raise any serious objection. Delay is condoned. Appeal is admitted.
Assessee through its grounds assails disallowance made 3. u/s.14A of the Income Tax Act, 1961 (in short ‘’the Act’’) r.w.r. 8D of the Income Tax Rules, 1962 (in short ‘’the Rules’’) for the impugned assessment year.
Ld. Counsel for the assessee submitted that assessee had 4. not claimed any exempt income during the relevant previous year and by virtue of judgment of Hon’ble Jurisdictional High Court in the case of Redington India Ltd vs. Addl. CIT (2016) 97 CCH 0219, there could be no disallowance u/s.14A of the Act when there was no claim for exempt income.
Per contra, ld. Departmental Representative placed reliance 5.
in Circular No.5/2014, dated 11.02.2014.
We have considered the rival contentions and perused the orders of the authorities below. It is not disputed by the Revenue that assessee had not claimed any exempt income in the impugned
ITA No. 932/Mds/2017 :- 3 -: assessment year. Their lordships in the case of Redington India Ltd (supra) held in paras 5 to 16 of its judgment is reproduced hereunder:-
‘’5. Whether the Tribunal erred in not appreciating that the Rule 8 D was inserted by Income Tax (fifth amendment) Rules, 2008 with effect from 24th March 2008 and accordingly can have prospective � application? Though several questions have been raised in the Appeal, only substantial questions 1 and 2 have been pursued at the time of hearing and consequently, answered by us.
2. The assessment year involved is 2007-2008. The assessee had investments in Indian Companies to the tune of Rs.177.56 crores that had not yielded any returns in the previous year relevant to the present assessment year. An order of draft assessment in terms of s.143(3) r.w.s.144C of the Income Tax Act 1960 (hereinafter referred to as 'Act') was issued by the assessing officer, interalia proposing a disallowance in terms of s. 14A of the Act read with Rule 8D of the Income Tax Rules of an amount of Rs.1,88,245/-. The proposal was confirmed despite objections that the provisions of s.14A and Rule 8D would not be attracted in a case where no exempt income had, in fact, been earned. The matter was carried before the Dispute Resolution Panel, which confirmed the disallowance. In appeal before the Income tax Appellate tribunal, (in short 'Tribunal') the directions of the DRP were confirmed relying on a decision of the Special Bench of the Tribunal in the case of Cheminvest Limited vs Commissioner of Income Tax. The order of the Tribunal dated 26.6.2015 is assailed in appeal before us.
We have heard the submissions of Sri.Vijayaraghavan, learned counsel appearing for the assessee and Sri.T.Ravikumar, learned Senior Standing Counsel appearing for the Income Tax Department.
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 ITA No. 932/Mds/2017 :- 4 -:
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.
The submissions on behalf of the assessee are as follows; S.14A has been inserted by Finance Act 2001 with retrospective effect from 1.4.1962 to provide that no deduction of expenditure shall be allowed in respect of income earned by an assessee not forming part of total income under the Act. Thus, any assessment where the computation of total income in respect of a relevant financial year does not include income falling under Chapter III of the Act, viz. incomes not forming part of total income, would stand excluded from the application of s. 14 A of the Act.
6. Reliance was placed on the following decisions: Commissioner of Income Tax Vs. Corrtech Energy Private Limited (372 ITR 97) (Gujarath High Court) CIT (iv) Holcim India Ltd., Vs. Commissioner of Tax (Delhi High Court) ( 90 CCH 81), Commissioner of Income Tax Vs. Shivam Motors Private Limited (Allahabad High Court) (230 Taxmann 63), Principal Commissioner of Income Tax Vs. Gujarath State Petronet Limited (Gujarath High Court) and Commissioner of Income Tax, Vs. Lakhani Marketinng Incl (272 CTR 265); Chem Investments Limited vs Commissioner of Income Tax (94CCH (2)) Delhi High Court (reversing the decision of the Special Bench of Income tax Appellate tribunal relied on by the assessing officer in this case) 7. 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 would apply not only where � � ex empted 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 ITA No. 932/Mds/2017 :- 5 -:
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 Vs. Maharashtra Sugar Mills Limited (1971) (82 ITR 452) and Rajasthan State Ware Housing Corporation Vs. Commissioner of Income Tax ((2002) 242 ITR 450) in terms of which, expenditure incurred by an assesee 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 vs. 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.' 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.
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 ITA No. 932/Mds/2017 :- 6 -:
computation on notional and assumed income. We believe this would be carrying the artifice too far.
The learned Standing Counsel relies on the decisions of the Division Bench of the Kerala High Court in South Indian bank Limited Vs. Commissioner of Income Tax (2014) (49 taxmann.com 100) and Commissioner of Income Tax Vs. Catholic Syrian Bank Limited and others (2012) (344 ITR 0259) as well as the decision of the Division Bench of the Calcutta High Court in Dhanuka and Sons Vs. Commissioner of Income Tax, (2011) (12 Taxmann.com 227) in all of which the assessee did, as a matter of fact, earn dividend income. The aforesaid decisions are thus factually distinguishable and do not advance this proposition of the revenue.
Reliance is also placed on a decision of the jurisdictional High Court in the case of Beach Minerals Company Pvt. Ltd. Vs. Assistant Commissioner of Income Tax in TCA No.681 of 2013, dated 2.12.2013. In that case, payments of interest by the assessee were sought to be disallowed invoking the provisions of s.14A on the premise that the same related to borrowings that had been invested and would yield exempt returns. The assessee contested the disallowance u/s 14A on multiple grounds. It was contended that there were sufficient reserves and surpluses available for the purpose of investments, and borrowed funds, for which the payment of interest had been incurred, had not been invested. The assessee sought to draw a nexus between the borrowed funds and the interest payments, highlighting the position that the quantum of available free funds was far in excess of the investments made. The Bench, in the light of the above submissions, remanded the issue to the file of the assessing officer to be considered de novo and after conducting a proper enquiry. Inter alia a direction was issued to the assessee to tender a proper explanation for the interest payments. The open remand was made in the facts and circumstances of that case and no conclusion was drawn by the Bench on the position of law involved. In fact, the substantial question of law raised in that case for the consideration of the � Court was couched in general terms as follows Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in confirming the disallowance under Section 14A of the Income Tax Act, of an amount of Rs.55,00,000/- in relation to assessment year 2007- � 2008? � � 14. Nothing much tur ns on the use of the word includable � � and the phrase under the act ins. 14A and we are not ITA No. 932/Mds/2017 :- 7 -:
persuaded to accept the emphasis laid or the interpretation of the same by the Revenue. An assessment in terms of the Income tax Act is specific to an assessment year and the related previous year. S.4 of the Act, which imposes the charge to tax reads thus: Charge of income-tax 4. (1) Where any Central Act enacts that income �tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person: Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income tax shall be charged accordingly. Thus, where the statute indented that income shall be recognized for taxation in respect of any previous other than that immediately preceding the relevant assessment year, the provision shall expressly state so. The provisions of s.10 in � Chapter III of the Act dealing with Incomes not � included in total income commences with the � phrase In computing the total income of a previous year, any income falling within any of the following clauses shall not be included .....' 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. (Madras Industrial Investment Corporation Ltd vs. CIT (225 ITR 802)). The language of s.14A (1) should be read in that context and such that it advances the scheme of the Act rather than distort it.
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In conclusion, we are of the view that the provisions of s. 14A read with Rule 8D of the Rules cannot be made applicable in a vacuum i.e. in the absence of exempt income. The questions of law are answered in favour of the assessee and against the department and the appeal allowed. No costs.
Accordingly, we are of the opinion that there can be no disallowance when there is no exempt income claimed by the assessee.
Disallowance stands deleted. In the result, the appeal of the assessee is allowed. 7. Order pronounced on Tuesday, the 28th day of November, 2017, at Chennai.