ACIT, CIRCLE 1(1), TRIVANDRUM, TRIVANDRUM vs. HLL LIFECARE LTD, TRIVANDRUM

The present appeal of the Revenue is arising from the order of the learned Commissioner of Income-tax (Appeals) dated 26th January, 2024 and relates to assessment year 2016-2017.

The short facts giving rise to the filing of the present appeal is that the assessee is a Government of India Undertaking and engaged in the manufacturing of condoms and blood bags. It has filed its return of income for the impugned year on 12th October, 2016. The return of income filed by the assessee has been picked up for scrutiny. During the course of assessment proceedings, the Assessing Officer . HLL Lifecare Limited. (AO) inter alia observed that the assessee has made huge investments in such securities, income thereunder is exempt from taxation. The A.O. sought reply of the assessee as to why the provisions of section 14A read with Rule 8D cannot be invoked in view of the fact that there are investments which will give tax free income. In response to the queries of the A.O., the assessee responded that during the year under consideration it has not earned any exempt income, and hence, no disallowance u/s.14A r.w.r 8D required to be made. However, the A.O. made a disallowance of Rs.3,99,57,000 by invoking the provisions of sec.14A.

Aggrieved with the order of the A.O., the assessee preferred an appeal before the learned CIT(A) and contended that the A.O. has erred in invoking the provisions of Rule 8D r.w.s 14A of the Act inasmuch as the assessee has not earned any tax free income during the year under consideration. The learned CIT(A) after examining the entire gamete of the facts observed that it is an admitted position that the assessee has not earned any tax free income during the year under consideration. The ld.CIT(A) placed reliance on the judgment of the Hon’ble Delhi High Court in the case of Era Infrastructure (India) Ltd. 448 ITR 674 and deleted that the addition made by the A.O.

Aggrieved with the order of the ld.CIT(A), the Revenue has come up in appeal before us and contended that the learned CIT(A) has failed to appreciate that recently there is an amendment in the provisions of sec.14A which clarified that

The learned AR appearing on behalf of the assessee relied upon the judgment of the Hon’ble Delhi High Court in the case of Era Infrastructure (India) Ltd.(supra).

We have heard the rival submissions and perused the material available on record. We observe that in assessee’s own case the co-ordinate bench of the Tribunal in vide its order dated 23.11.2017 has dismissed the appeal of the Revenue in the same set of facts. The relevant observations of the bench are reproduced as under:

Learned Counsel of the assessee submitted that disallowance u/s 14A of the Act, was made despite assessee having claimed no exempt income. Relying on the judgment of the Hon’ble Delhi High Court in the case of Pr.CIT v. IL&FS Energy Development Corporation Ltd. 297 CTR 452 and that of the Madras High Court in the case of Redington (India) Pvt. Ltd. V. CIT (2016) 97 CCH 219, learned AR submitted that there could not be a disallowance u/s 14A of the Act, when there was no exempt income claimed by an assessee. Per contra, learned Departmental Representative relying on CBDT Circular No.5/2014 dated 11th February, 2014, submitted that there could be disallowance u/s 14A of the Act, even when there was no exempt income.

We have heard the rival contentions. Claim of the assessee is that it had no exempt income during the year. Assessee had specifically mentioned this in the grounds taken by it before the CIT(A) as ground No.3(a). Learned DR has not rebutted the claim of the assessee that there was no exempt income. Learned CIT(A) had relied on the decision of the . HLL Lifecare Limited. Special Bench of the Tribunal in the case of Cheminvest Ltd. v. ITO (121 ITD 318) while holding that the disallowance us/ 14A could be made even in an year where there was no exempt income. Learned CIT(A) had also relied on the judgments of Hon’ble jurisdictional High Court in the case of CIT v. Catholic Syrian Bank (344 ITR 25). What we find is that in the case before the Hon’ble jurisdictional High Court there was a claim of exempt income. As against this, here assessee had not claimed any exempt income. Hon’ble Delhi High Court in the case of IL&FS Energy Development Corporation Ltd. (supra), held as under:- “11. At the outset, it requires to be noticed that we are concerned with the A.Y. 2011-12 and, therefore, the question of the applicability of Rule 8D, which was inserted with effect from 24th March 2008, is not in doubt.

Section 14A of the Act, which was inserted with retrospective effect from 1st April 1962, provided for disallowance of the expenditure incurred in relation to income exempted from tax. From 11th May 2001, a proviso was inserted in Section 14A to clarify that it could not be used to reopen or rectify a completed assessment. Sub-section (2) and (3) of Section 14A were inserted with effect from 1st April, 2007 to provide for methodology for computing of disallowance u/s. 14A. However, the actual methodology was provided in terms of Rule 8D only from 24th March 2008. There was a further amendment to Rule 8D with effect from 2nd June 2016 limiting the disallowance the aggregate of the amount of expenditure directly relating to income which does not form part of total income and an amount equal to one per cent of the annual average of the monthly average of the opening and closing balances of the value of investment, income from which does not form part of the total income. It is also provided that the amount shall not exceed the total expenditure claimed by the Assessee.

In the above background, the key question in the present case is whether the disallowance of the expenditure will be made even where the investment has not resulted in any exempt income during the A.Y. in question but where potential exists for exempt income being earned in later A.Y.s.

In the Explanatory Memorandum to the Finance Act 2001, by which Section 14A was inserted with effect from 1st April 1962, it was clarified that “expenses incurred can be allowed only to the extent they are relatable to the earned income of taxable income”. The object behind Section 14A was to provide that “no deduction shall be made in respect of any expenditure . HLL Lifecare Limited. incurred by the Assessee in relation to income which does not form part of the total income under the Income Tax Act.”

What is taxable u/s. 5 of the Act is the “total income” which is neither notional nor speculative. It has to be ‘real income’. The subsequent amendment to Section 14A does not particularly clarify whether the disallowance of the expenditure would apply even where no exempt income is earned in the A.Y. in question from investments made, not in that A.Y., but earlier A.Y.s.

Rule 8D(1) of the Rules is helpful, to some extent, in understanding the above issue. It reads as under: “8D(1) Where the Assessing Officer having regard to the accounts of the assessee of a previous year, is not satisfied with – (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2).”

The words “in relation to income which does not form part of the total income under the Act for such previous year” in the above Rule 8D(1) indicates a correlation between the exempt income earned in the A.Y. and the expenditure incurred to earn it. In other words, the expenditure as claimed by the Assessee has to be in relation to the income earned in ‘such previous year’. This implies that if there is no exempt income earned in the A.Y. in question, the question of disallowance of the expenditure incurred to earn exempt income in terms of Section 14A read with Rule 8D would not arise.

The CBDT Circular upon which extensive reliance is placed by Mr. Hossain does not refer to Rule 8D(1) of the Rules at all but only refers to the word “includable” occurring in the title to Rule 8D as well as the title to Section 14A. The Circular concludes that it is not necessary that exempt income should necessarily be included in a particular year’s income for the disallowance to be triggered.

In the considered view of the Court, this will be a truncated reading of Section 14A and Rule 8D particularly when Rule 8D(1) uses the expression ‘such previous year’. Further, it does . HLL Lifecare Limited. not account for the concept of ‘real income’. It does not note that u/s. 5 of the Act, the question of taxation of ‘notional income’ does not arise. As explained in CIT v. Walfort Share & Stock Brokers (P) Ltd. (2010) 326 ITR 1/192 Taxman 211 (SC), the mandate of Section 14A of the Act is to curb the practice of claiming deduction of expenses incurred in relation to exempt income being taxable income and at the same time avail of the tax incentives by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. Consequently, the Court is not persuaded that in view of the Circular of the CBDT dated 14th May, the decision of this Court in Cheminvest Ltd. (supra) requires reconsideration.

In Redington (India) Ltd. v. Addl. CIT (2017) 392 ITR 633/77 taxmann.com 257 (Mad.), a similar contention of the Revenue was negated. The Court there declined to apply the CBDT Circular by explaining that Section 14A is “clearly relatable to the earning of the actual income and not notional income or anticipated income.” It was further explained that, “The computation of total income 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 computation on notional and assumed income. We believe this would be carrying the artifice too far”.

The decision in CIT v. Lakhani Marketing Inc. (2014) 49 taxmann.com 257/226 Taxman 45 (Mag.), CIT v. Winsome Textile Industries Ltd. (2009) 319 ITR 204, CIT v. Shivam Motors (P) Ltd. (2015) 230 Taxman 63/55 taxmann.com 262 (All.) have all taken a similar view. The decision in Taikisha Engineering India (P) Ltd. (supra) does not specifically deal with this issue.

It was suggested by Mr. Hossain that, in the context of Section 57(iii), the Supreme Court in CIT v. Rajendra Prasad Moody (1978) 115 ITR 519 explained that deduction is allowable even where income was not actually earned in the A.Y. in question. This aspect of the matter was dealt with by this Court in Cheminvest Ltd. (supra) where it reversed the decision of the Special Bench of the ITAT by observing as under: “20. Since the Special Bench has relied upon the decision of the Supreme Court in Rajendra Prasad Moody (supra), it is considered necessary to discuss the true purport of the said decision. It is noticed to begin with that the issue before the . HLL Lifecare Limited. Supreme Court in the said case was whether the expenditure under Section 57(iii) of the Act could be allowed as a deduction against dividend income assessable under the head “income from other sources”. Under Section 57(iii) of the Act deduction is allowed in respect of any expenditure laid out or expended wholly or exclusively for the purpose of making or earning such income. The Supreme Court explained that the expression “incurred for making or earning such income”, did not mean that any income should in fact have been earned as a condition precedent for claiming the expenditure. The Court explained: “What s.57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of s.57(iii) and that purpose must be making or earning of income. s.57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There is in fact nothing in the language of s.57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the language of s.57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure.”

There is merit in the contention of Mr. Vohra that the decision of the Supreme Court in Rajendra Prasad Moody (supra) was rendered in the context of allowability of deduction under Section 57(iii) of the Act, where the expression used is ‘for the purpose of making or earning such income.” Section14A of the Act on the other hand contains the expression “in relation to income which does not form part of the total income.” The decision in Rajendra Prasad Moody (supra) cannot be used in the reverse to contend that even if no income has been received, the expenditure incurred can be disallowed under Section 14A of the Act.”

The decision of the ITAT in Ratan Housing Development Ltd. (supra) and Relaxo Footwears Ltd. (supra), to the extent that they are inconsistent with what has been held hereinbefore do not merit acceptance. Further, the mere that in the audit report for the A.Y. in question, the auditors may have suggested that there should be a disallowance cannot be determinative of the legal position That would not preclude the Assessee from taking a stand that no disallowance under . HLL Lifecare Limited. Section 14A of the Act was called for in the A.Y. in question because no exempt income was earned.” Hon’ble Madras High Court in the case of Redington (India) Pvt. Ltd. (supra) had also held similar view after considering Circular No.5/2014 dated 11.02.2014. In the result, the Special Bench decision in the case of Cheminvest Ltd. (supra) pales into insignificance. Therefore, we are of the opinion that there could be no disallowance u/s 14A of the Act, when there was no exempt income claimed by the assessee. Such disallowance stands deleted. Ground No.2 of the assessee stands allowed.”

The sole contention of the Revenue is that the SLP before the Hon’ble Supreme Court has been pending is of no use inasmuch as it is evident from the judgment of the Hon’ble Delhi High Court in the case of Pr.CIT v. IL & FS Energy Development Corporation Limited 297 CTR 452, the operation of the judgment of the Era Infrastructure (India) Ltd. (supra)has not been stayed by the Hon’ble Apex Court. Therefore, respectfully following the view of the co-ordinate bench, we dismiss the appeal of the Revenue. Before parting, we would like to state that the assessee being a Government of India Undertaking and its accounts are to be subject to CAG audit, and therefore, there is no chance of any misrepresentation of the expenditure. As evident from the fact that the A.O. has not commented upon the aspect of CAG audit while completing the assessment proceedings.

In the result, the appeal filed by the Revenue is dismissed.