SHIV NADAR AND SANJAY KALRA ASSOCIATES LLP,BENGALURU vs. ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE 1(2)(2), BANGALORE, BENGALURU

That on the facts and circumstances of the case and in law, the CIT(A) erred in confirming disallowance of Rs.83,54,360/- under section 14A of the Act, by holding the same to be expenditure incurred for earning exempt income.

That the CIT(A) erred in confirming the levy of interest under section 234A, section 234B and section 234C of the Act. The appellant craves leave to add, alter, amend or vary from the aforesaid grounds of appeal

The learned CIT(A) was not justified in passing the order on an entity, which was non existent and the order suffers from an incurable defect and is required to be set aside as bad in law and on facts, on the facts and circumstances of the case.

The learned Assessing Officer is not justified in law in charging the interest under section 234A, 234B and 234C of the Act and further the calculation of interest under section 234A, 234B and 234C of the Act is not in accordance with law since the rate, method of calculation, quantum is not discernable from the order of assessment on the facts and circumstance of the case. 4. The Appellant craves leave to add, alter, amend, substitute, change and delete any of the grounds of appeal

The CIT(Appeals) after considering written submissions and relying on various case laws upheld the order of the AO. Aggrieved, the assessee is in appeal before the ITAT.

The ld. AR also argued on the legal issue in the additional grounds of appeal challenging the validity of the order passed in the name of non-existing entity and referred to paperbook in this regard.

The ld. AR further submitted that the AO has wrongly disallowed a sum of Rs.83,54,360 u/s. 14A whereas there was no exempt income received by the assessee. He further contended that the action of the AO in treating the income as exempt income that too notional, which was never earned/accrued since incorporation of LLC and during the AY 2017-18 the appellant had offered taxable income of Rs.9.33 crores on such investments, hence the question of exempt income does not arise. The company had not invested in securities which was tax free, but invested only in debt oriented mutual funds (without dividend) model and always offered tax on gain on such securities. Therefore, both the revenue authorities are not justified in making disallowance u/s. 14A. In support of his arguments he relied on various judgments relied before the ld. CIT(Appeals).

The ld. AR has filed compilation of case laws containing pages 1 to 68 which is placed on record.

The ld. DR further submitted that assessee has earned lot of exempt income which form part of total income and he further submitted that Board has issued Circular in this regard. He further submitted that investments cannot be managed without inherent expenses since no investments can be made without market analysis and expertise and the appellant has no such market expertise and necessary staff for investments in tax free income and therefore the assessee has to incur necessarily expenditure. It is not possible to invest and manage such huge investments without the expertise for selection of security and timely swaps necessitating cost for managing and supervising all the securities i.e., conveyance, travel, telephone, mobile bills, stationery, etc. He also relied on the Apex Court decision in the case of Maxopp Investments Ltd. v. CIT in Civil Appeal No.104-109/2015. As per Board Circular No.5 of 2014 even if the assessee has no exempt income, expenses are liable to be disallowed in relation to investment which have potential to earn exempt income. He also referred to judgments relied by the CIT(Appeals).

Further in respect of disallowance u/s. 14A of Rs.83,54,360, we noted that during the impugned assessment year from the financial statements , computation of income and schedule of Exempt Income in the ITR Form the assessee has not earned any exempt income on its investments. As per the financial statements the assessee has earned short term capital gain on mutual funds of Rs.9,92,89,092 which is evident from the Profit & Loss account placed at page 52 of PB and details are available at paper book page No. 4 & 5 . The short term capital gain reported in financial statements have not been disputed by the lower authorities. We also note from the financial statements that assessee has loan of Rs.30 crores from HCL Corporation P. Ltd. And in the previous financial year it was Rs. 80.00 crore. We found substance on the submission of the ld. AR that no disallowance u/s 14A of the Income Tax Act can be made if the assesse has not received any exempt income. However the AO has made disallowance under Rule 8D which is 1% of monthly average investments. Before the CIT(Appeals) as well as before us the ld. AR relied on the various judgments. Recently the coordinate Bench of Tribunal has decided similar issue in for AY 2014-15 in the case of Subramanya Constructions & Development Co. Ltd. by relying on the judgment of jurisdictional High Court in the case of PCIT v. Delhi International Airport P. ltd. [2022] 138 taxmann.com 112 (Kar) dated 25.05.2021 in which it has been held as under:-

Now we may advert to the second substantial question of law. It is pertinent to note that for Assessment Year 2009-10 the assessee has not earned dividend income. The aforesaid fact has not been disputed by the revenue. It is also relevant to mention that Circular No. 5/2014 dated 11-2-2014 is not applicable in the instant case as the instant case pertains to Assessment Year 2009-10. The aforesaid Circular has no retrospective operation. It is noteworthy that aforesaid Circular was not even relied by the parties. This court in Commissioner of Income Tax v. Kingfisher Investment India Ltd. vide judgment dated 29-9-2020 inter alia held that disallowance under section 14A read with rule 8D has to be made even when taxpayer in a particular year has not earned any exempt income. This court relied on the decision of the Supreme Court in Maxopp Investment Ltd. (supra) which was reproduced in Paragraph 5 of the decision and reliance was also placed on Circular dated 11-2-2014 issued by Central Board of Direct Taxes (CBDT). However, the aforesaid decision was subsequently considered by this court in judgment dated 16-1-2021 passed in I.T.A.No.271/2017 (Principal Commissioner of Income Tax v. Novel Software Development) in which it was held that decision of this court in Kingfisher Finvest Ltd. was distinguishable as the basis of the aforesaid decision of this court was the decision of the Supreme Court in Maxopp Investments Ltd. supra and it was held that the aforesaid decision does not deal with applicability of section 14A of the Act. However, eventually this court agreed with the view taken by High Court of Madras in CIT v. Chettinad Logistics (P.) Ltd., (2017) 80 taxmann.com 221 (Mad.) and Kem Invest Ltd. v. CIT, (2015) 16 taxmann.com 118 (Delhi) and held that since no exempt income has accrued to the assessee therefore, the provisions of section 14A of the Act do not apply to the fact situation of the case. Therefore, it has become necessary for us to clarify the view taken in the two decisions viz., Kingfisher Finvest India Ltd. and Novel Software India (P) Ltd. supra. At this stage, we may refer to Paragraph 40 of the decision of the Supreme Court in Maxopp supra, the relevant extract of which reads as under: It is to be kept in mind that in those cases where shares are held as 'stock-in-trade', it becomes a business activity of the assessee to the deal in those shares as a business proposition. Whether dividend is earned or not becomes immaterial. In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. The situation here is therefore, different from the case like Maxopp Investment Ltd. where the assessee would continue to hold those shares as it wants to retain control over the investee company. In that case, whenever dividend is declared by the investee company that would necessarily be earned by the assessee and the assessee alone. Therefore, even that the time of investing into those shares, the assessee knows that it may generate dividend income as well and as and when such dividend income is generated that would be earned by the assessee. In contrast, where the shares are held as stock-in-trade, this may not be necessarily a situation. The main purpose is to liquidate those shares whenever the share price goes upon order to earn profits. In the result, the appeals filed by the revenue challenging the judgment of the Punjab and Haryana High Court in State Bank of Patiala also fail, though law in this respect has been clarified hereinabove.

From perusal of the relevant extract of the Supreme Court, it is evident that the decision in Maxopp Investment Ltd. supra deals with applicability of Section 14A of the Act. Therefore, the observations made with regard to applicability of section 14A in M/S. Novel Software India (P.) Ltd. are factually incorrect and we hasten to clarify the same. However, from relevant extract of Paragraph 40, it is evident that only expenses proportionate to earning of exempt income could be disallowed under section 14A of the Act and the decision of Maxopp Investment Ltd. is an authority for the aforesaid proposition that the provision is relatable to earning of actual income. The object of section 14A is 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 exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The High Court of Madras has relied on the decision of the Supreme Court in Commissioner of Income Tax v. Walfort Share and Stock Brokers (2010) 326 ITR 1 wherein it has been held that Section 14A is relatable to income of actual income or not notional or anticipated income. Therefore, the conclusion arrived at by us in Novel Software India (P.) Ltd. is affirmed but for different reasons. It is also clarified by us that while recording the conclusion in Kingfisher Finvest Ltd. that disallowance under section 14A has to be made even taxpayer has not earned any exempt income, this court has misread the ratio of the decision of the Supreme Court in Maxopp Investment Ltd. supra and therefore, the aforesaid view being contrary to the law laid down by the Supreme Court is not a binding precedent. In view of preceding analysis, the second substantial question of law is also answered against the revenue and in favour of the assessee. In the result, we don to find any merit in this appeal, the same fails and is hereby dismissed.' 7. In light of the aforesaid judgment passed in the question of law is answered in favour of the assessee and against the revenue. Resultantly, the appeal stands dismissed. ”

Against the above judgment, the revenue preferred SLP before the Hon’ble Apex Court and Hon’ble Apex Court has issued notice, reported in [2022] 138 taxmann.com 113 (SC) & in another case reported [2022] 142 taxmann.com 328 (SC). Since both the parties could not bring the status of the case before the Hon’ble Apex Court, therefore, respectfully following the judgement of the jurisdictional High Court PCIT v. Delhi International Airport P. Ltd. noted supra we allow the appeal of the assessee.”

Respectfully following the above judgment, we allow this ground of appeal in above terms. The findings recorded by both the authorities below and submissions made by the ld. DR has no relevance regarding disallowance of administrative expenses, since the similar issue has been settled by the jurisdictional High Court in favour of the assessee.

Since we have allowed the appeal of the assessee on merits, the legal issue raised by the assessee challenging the validity of assessment order is left open.

In the result, the appeal by the assessee is allowed.