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Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI D.S. SUNDER SINGH
आदेश /O R D E R
PER N.R.S. GANESAN, JUDICIAL MEMBER:
In all the appeals of the Revenue, the common issue arises for consideration is with regard to disallowance made by the Assessing Officer under Section 14A of the Income-tax Act, 1961 (in short 'the Act'). The assessee has filed cross-objections against the very same orders of the CIT(Appeals). Therefore, we heard appeals of the Revenue and cross-objections of the assessee together and disposing of the same by this common order.
There was a delay of 5 days in filing the appeals by the Revenue, for assessment years 2009-10, 2010-11 and 2012-13.
The Revenue has filed petitions for condonation of delay. We have heard the Ld. Departmental Representative and the Ld.counsel for the assessee. We find that there was sufficient cause for not filing these appeals before the stipulated time. Therefore, we condone the delay and admit the appeals.
Shri A.V. Sreekanth, the Ld. Departmental Representative, submitted that the CIT(Appeals) deleted the disallowance made by the Assessing Officer on the ground that no dividend income was received during the years under consideration. Referring to Section 14A of the Act and Rule 8D(2) of the Income-tax Rules, 1962, the Ld. D.R. submitted that the constitutional validity of Section 14A and Rule 8D was upheld by various High Courts, therefore, whenever there was an expenditure for earning exempted income or making investment with an intention to earn exempted income, the disallowance has to be computed under Rule 8D(2). According to the Ld. D.R., Rule 8D(2) does not restrict the expenditure with regard to income. Earning of income is immaterial for disallowing the expenditure under Section 14A read with Rule 8D(2). If the contention of the assessee is that there was no income, therefore, there cannot be any disallowance under Rule 8D(2), then the very object of including Rule 8D(2) would be defeated.
The Ld. Departmental Representative further submitted that when the assessee has invested money in shares and debentures, the income which is exempted under the provisions of Income-tax Act, irrespective of the fact whether the assessee has received any income or return from such investment during the year under consideration, in view of the fact that the assessee has invested the money, the expenditure for incurring such income has to be disallowed. The expenditure has to be computed by applying the principle provisions of Rule 8D(2) of Income-tax Rules. Therefore, according to the Ld. D.R., the CIT(Appeals) is not justified in allowing the claim of the assessee.
On the contrary, Sh. N. Devanathan, the Ld.counsel for the assessee, submitted that the assessee admittedly has not received any income during the years under consideration. Placing reliance on the judgment of Madras High Court in Redington (India) Ltd. v.
Addl. CIT in T.C.A. No.520 of 2016 dated 23.12.2016, the Ld.counsel submitted that on identical situation, the Madras High Court held that by applying the matching concept, in a year where there is no exempted income, there cannot be any disallowance in relation to such assumed income. Therefore, according to the Ld. counsel, the CIT(Appeals) has rightly deleted the addition made by the Assessing Officer.
We have considered the rival submissions on either side and perused the relevant material available on record. The Parliament in their wisdom included Section 14A of the Act which reads as follows:-
EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME (1)For the purposes of computing the 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. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act. Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.
In view of Section 14A of the Act, there cannot be any deduction in respect of expenditure incurred by the assessee in relation to income which does not form part of total income. For the purpose of computation of disallowance, the rule making authority, by virtue of power conferred on them, provided a method under Rule 8D(2) of Income-tax Rules, 1962. Whenever the Assessing Officer having regard to the account of the assessee, was not satisfied the correctness of claim that expenditure incurred by the assessee or the claim made by the assessee that no expenditure was incurred in relation to the income which does not form part of total income, he may determine the amount of expenditure in relation to such income in accordance with the method found in Rule 8D(2).
The constitutional validity of Section 14A of the Act and Rule 8D of Income-tax Rules, 1962 was upheld by various High Courts in the country. The Madras High Court in Redington (India) Ltd. (supra) found that by application of matching concept, where there is no exempt income, there cannot be any disallowance of expenditure. In fact, the Madras High Court at paragraphs 15 and 16 in their judgment has held as under:-
“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. v. 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.
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.”
In view of the above, this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed.
Now coming to the cross-objections filed by the assessee, On perusal of grounds of appeal, it is found that these cross- objections are only to support the orders of the CIT(Appeals). Therefore, this Tribunal is of the considered opinion that all the cross-objections of the assessee have become infructuous.
In the result, both, the appeals of the Revenue as well as the cross-objections of the assessee are dismissed.
Order pronounced on 20th April, 2017 at Chennai.