ACIT, CIRCLE, PANCHKULA vs. M/S JANAK GLOBAL RESOURCES PVT. LTD., PANCHKULA

आदेश/Order PER ANNAPURNA GUPTA, AM:

This appeal has been preferred by the Revenue against the order of learned Commissioner of Income Tax (Appeals), Panchkula (hereinafter referred to as CIT(Appeals) dated 21.2.2018 relating to assessment year 2014-15.

“1. Whether on the facts and circumstances of the case the Ld. CIT(A) has erred in allowing the appeal of the assessee and deleting the disallowance of Rs.18,44,482/-u/s 36(l)(iii) which is not correct because the assessee has given interest free advances of Rs.3,55,00,000/- to Shivaks Impex Limited, sister concern which is for non business purposes.”

ITA No.470/Chd/2018 2 A.Y. 2014-15

assessment proceedings, the Assessing Officer noted that the

assessee had given interest free advance of Rs.3,55,00,000/-

to Shivaks Impex Ltd., a sister concern. On the other hand,

the assessee had paid interest of Rs.33,40,780/- on loan

raised from banks but had not charged any interest on the

loans advanced to M/s Shivaks Impex Ltd. The Assessing

Officer asked the assessee as to why interest expenses

should not be disallowed u/s 36(l)(iii) of the Income Tax Act,

1961 (in short ‘the Act’) and added to the taxable income.

The assessee filed its reply, which is reproduced in para 2 of

the assessment order. Briefly put the assessee contended

that the impugned advances were business advances and

therefore no disallowance, of interest paid on funds utilized

if any for making the advances, was warranted. The assessee

also contended alternately that it had utilized its own

interest free funds for making the advances and therefore

also no disallowance of interest u/s.36(1)(iii) was warranted.

After considering the reply filed by the assessee, the AO

rejected the same and on the basis of reasons recorded in

para 2.1 of the assessment order interest amounting to

Rs.18,44,482/- was disallowed and added to the income of

the assessee. The AO held that the assessee had failed to

prove business exigency for making the advances, and

therefore, as per the decision of the Jurisdictional High

Court in the case of Abhishek Industries Ltd., reported in

286 ITR 1 and of the Apex court in the case of S.A. Builders,

ITA No.470/Chd/2018 3 A.Y. 2014-15

reported in 288 ITR 1, the disallowance of interest was

warranted .

that it had sufficient own funds for making the investment

and, therefore, no disallowance u/s.36(1)(iii) of the Act

warranted. Reliance was placed on a number of decisions of

the Hon'ble Jurisdictional High Court in this regard and also

on decisions of the ITAT Chandigarh Bench. The

Ld.CIT(Appeals) on appreciating the contention of the

assessee deleted the disallowance made following the

decision of the Hon'ble Jurisdictional in the case of CIT Vs.

Max India Ltd. in ITA No.210/Chd/2013 and CIT vs. Stock

Kapsons Associates, 381 ITR 204 (P&H). The relevant

findings of the CIT(A) at para 5.2 of the order is as under:

“5.2 I have gone through the facts of the case and written submission filed by the appellant. It is noted from the balance sheet from A.Y.2013-14 & A.Y.2014-15 respectively that appellant's share capital, free reserves and interest free current liabilities far exceeded the advance of Rs.3.55 Crores given to the sister concern Shivaks Impex Ltd. during Assessment Year 2013-14. The average free funds available in the A.Y.2013-14 are Rs.1560 lacs and in A.Y.2014-15 are Rs.1491 lacs. Thus the appellant has demonstrated the availability of enough surplus funds for making interest free advance to the sister concern. The Hon'ble jurisdictional High Court has held in the case of CIT vs Max India Ltd. ITA No.210/Chd/2013 dated 08.03.2017 that if an assessee establishes that its interest free funds were equal to or more than the interest bearing funds it would be open to it to contend that presumption arises that investments have been made out of the same. Similarly reliance placed by the appellant on CIT vs. Kapsons Associates, 381 ITR 204(P&H) is also found to be supporting the

ITA No.470/Chd/2018 4 A.Y. 2014-15

facts of its case. Therefore, no portion of the interest paid on borrowed funds is required to be disallowed in the case of the appellant and addition made on this account for both the years under appeal are ordered to be deleted. This ground of appeal is allowed.”

appeal before us.

contended that the proposition laid down by the Hon'ble

Jurisdictional High Court in the decision relied upon by he

CIT(Appeals) while deleting the disallowance was no longer

good law. It was pointed out that the Hon'ble Jurisdictional

High Court in various decisions had laid down that where

the assessee could demonstrate sufficiency of own funds, the

presumption that would arise was that it had used its own

funds for the purpose of making interest free non business

advances, calling for no disallowance of interest u/s.

36(1)(iii) of the Act. The Ld. DR pointed out that this

presumption theory had now been overruled by the Hon'ble

Apex Court in its decision in group of cases with the lead

case being Maxopp Investment Ltd. Vs. CIT (2018) 402 ITR

640 (SC), wherein in the context of section 14A the decision

of the Hon'ble Jurisdictional High Court in the case of Avon

Cycles Ltd. Vs. CIT in ITA No.277 of 2013 was also under

consideration. The Ld. DR pointed out from the order of the

Hon'ble Apex Court that in the said case the Hon'ble

Jurisdictional High Court had upheld the disallowance of

interest u/s 14A where mixed funds were deployed by the

assessee, and this proposition was affirmed by the Hon'ble

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Apex Court also in the aforementioned appeal before it. Our

attention was drawn to para 42 of the order of the Hon'ble

Apex Court in this regard as under:

Taking note of the aforesaid finding of fact, the High Court has dismissed the appeal of the assessee observing as under:

"In the present case, after examining the balance-sheet of the assessee, a finding of fact has been recorded that the funds utilized by the assessee being mixed funds, therefore, the interest paid by the assessee is also an interest on the investments made. Such being a finding of fact, we do not find that any substantial question of law arises for consideration of this Court.

After going through the records and applying the principle of apportionment, which is held to be applicable in such cases, we do not find any merit in Civil Appeal No. 1423 of 2015, which is accordingly dismissed.”

The Ld. DR stated that it was clearly evident from the

above order of the Hon'ble Apex Court that the presumption

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theory laid down by the Hon'ble Jurisdictional High Court in

various decisions, now stood overruled and where mixed

funds were deployed by the assessee, disallowance of

interest on proportionate basis was to be made to the extent

of interest free non business advances made by the assessee.

In sum and substance, the Ld. DR contended that the mixed

funds theory had been confirmed to be the Law of the Land

as opposed to the presumption theory laid down by the

Hon'ble Jurisdictional High Court.

vehemently opposed this contention of the Ld. DR. The Ld.

counsel for assessee pointed out that the decision rendered

in the case of Avon Cycles Ltd. (supra) was on a different set

of facts and the proposition laid down therein was to be read

in the context of the facts relating to it. It was contended

that before the Hon'ble Supreme Court the only fact before

the Hon’ble Court was that there were mixed funds available

with the assessee and in the light of this limited fact, the

Hon'ble Supreme Court upheld the disallowance of interest

u/s 14A of the Act after holding in the lead case i.e. Maxopp

Investment Ltd. (supra) that the apportionment rule was to

be applied for the purpose of making disallowance of

expenses incurred in relation to earning exempt income,as

per section 14A of the Act. The contention of the Ld. counsel

for assessee was that it was neither submitted to the court

that sufficient own interest free funds were available, nor

were any arguments made raising the presumption that

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would arise in such case. It was pointed out that even the

question before the Hon’ble Court was not relating to the

correctness of the presumption theory and therefore, also

the disallowance u/s 14A was not dealt with by the Hon'ble

Supreme Court in this context. It was contended therefore,

that the decision rendered in the case of Avon Cycles Ltd.

(supra) had to be read in the restricted sense, of meaning

that where the fact situation revealed the limited fact of

mixed funds available with the assessee, disallowance u/s

14A was warranted. The Ld. counsel for assessee thereafter

contended that in fact the Hon'ble Apex Court, in the case of

Hero Cycles Pvt. Ltd. Vs. CIT, 379 ITR 347(SC), had upheld

the presumption theory of utilization of own interest free

funds for making non business advances where sufficiency of

such funds is adequately demonstrated. It was pointed out

that the Hon’ble Supreme Court in the said case ,on the

issue of disallowance of interest u/s 36(1)(iii) on advances

made to directors had held that where the assessee had

sufficient surpluses it could have utilized those funds for

giving advances to its directors.

evident from the above that the Hon'ble Apex Court had

upheld the proposition that where sufficient own interest

free funds are available no disallowance of interest u/s

36(1)(iii) of the Act was warranted. Our attention was also

drawn to various decisions of the Hon'ble Jurisdictional High

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Court which had also upheld the presumption theory as

under:

“1. Bright Enterprises P. Ltd. vs. CIT, (2016) 381 ITR 107 (P&H) 2. CIT vs. Kapsons Associates, (2015) 381 ITR 204 (P&H) 3. Gurdas Garg vs. CIT, ITA No.413/2014 dated 16.7.2015 (P&H), 4. Pr.CIT vs. M/s. Malhotra Book Depot, ITA No.31 of 2017 dated 23.02.2017 (P&H) 5. Pr.CIT vs. M/s. Holy Faith International Pvt. Ltd., ITA No.87 of 2017 dated 24.07.2017 (P&H) 6. Trident Infotech Corporation Ltd. vs. CIT & Anr, (2016) 385 ITR 335 (P&H) 7. CIT vs. Max India Ltd., (2017) 398 ITR 209 (P&H) ” 9. We have carefully considered the contentions of both

the parties and have also gone through various case laws

referred to before us. The issue to be adjudicated,as

narrowed down from the arguments made before us by both

the parties, is whether in relation to disallowance of

interest made u/s.36(1)(iii) of the Act, the proposition laid

down by the Hon'ble Jurisdictional High Court in a number

of decisions, that where the assessee had sufficient own

interest free funds along with interest bearing funds and had

made or advanced sums for non business purposes without

charging any interest, the presumption that would arise is

that the investment had been made out of interest free funds

generated or available with the assessee, is still a good law

in the light of the decision of the Hon'ble Apex Court in the

case of Hero Cycles Ltd. (supra).

ITA No.470/Chd/2018 9 A.Y. 2014-15

counsel for assessee. Undoubtedly, proposition of law laid

down by courts have to be read in the context of the facts

before them and the issue dealt with by them. Reliance

should not be placed on a decision without discussing how

the factual situation fits in with the factual situation of the

decision on which reliance is placed. The Hon’ble High Court

of Bombay in the case of CIT vs Sudhir, 214 ITR 154 (Bom)

has observed that a case is an authority for what it actually

decides and not what may come to follow from some

observation which may find place therein. The Hon’ble High

court observed as under:

“It is well-settled that the ratio of a decision alone is binding, because a case is only an authority for what it actually decides and not what may come to follow from some observations which find place therein. The ratio of the decision has to be distinguished from propositions assumed by the Court to be correct for the purpose of disposing of the particular case, because it is the ratio and not the propositions which are relevant and binding. It is, therefore, not proper to regard every word, clause or sentence occurring in a judgment of the Court as containing a full exposition of the law. Judgments of the Courts should not be construed as statutes. They must be read as a whole and observations made therein should be considered in the light of the facts and circumstances of that case and the questions before the Court. A decision of the Court takes its colour from the questions involved in the case in which it is rendered.”

In the case of CIT vs Sun Engineering Works Pvt. Ltd.

198 ITR 297(SC), the Hon’ble Supreme Court observed that

Judgements must be read as a whole and observations in

judgements should be considered in the context in which

ITA No.470/Chd/2018 10 A.Y. 2014-15

they are made and in the light of the question that were

before the court:

“It is neither desirable nor permissible to pick out a word or a sentence from the judgement of the Supreme Court divorced from the context of the question under consideration and treat it to be the complete law declared by the court. The judgement must be read as a whole and the observation from the judgement have to be considered in the light of the questions which were before the court.A decision of the Supreme Court takes its colour from the question involved in the case in which it is rendered and while applying the decision to a later case,courts must carefully try to ascertain the true principle laid down by the decision.”

Ltd & Ors vs State of Haryana & Another and State of

Maharashtra & Another reported in 188 ITR 402(1991) have

held that a decision on a question that has not been argued

cannot be treated as a precedent. The Hon’ble Kerala High

Court in the case of CIT vs K. Ramakrishnan (1993) 202 ITR

997 held that a precedent is an authority only for what it

actually decides and not for what may remotely or even

logically follow from it.

Having said so we find that in the case of Avon Cycles

Ltd. (supra) the issue was relating to disallowance of

expenditure u/s 14A of the Act. The Hon'ble Apex Court

dealing with the bunch of cases relating to said issue, took

up the case of Maxopp Investment Ltd. (supra) as the lead

case and proceeded to answer the question which arose

under various circumstances before them that whether the

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investment made in shares and stocks for the purpose of

retaining the control over the company or as stock-in-trade

and from which exempt income by way of dividend was

generated would attract the provisions of section 14A of the

Act, calling for disallowance of expenditure incurred in

relation to earning the said dividend income and the

question arose for the reason that it was the contention of

the assessee, which had been upheld by various High

Courts, that the dominant purpose for making the

investment in the shares not being earning of dividend

income, it called for no disallowance of expenditure u/s 14A

of the Act. Answering this question the Hon'ble Supreme

Court held that the dominant purpose test was irrelevant

and the fact remaining that the exempt income had been

earned which was attributable to the dividend income had to

be disallowed and could not be treated as business

expenditure. The Hon'ble Apex Court reaffirmed the theory of

apportionment of expenditure between taxable and non

taxable income laid down by it in the case of CIT Vs. Walfort

Share & Stock Brokers Pvt. Ltd., 326 ITR 1. After holding so,

the Hon'ble Apex Court dealt with the appeal filed in the

case of Avon Cycles Ltd. (supra) and taking note that the

fact in that case was that the funds utilized by the assessee

were mixed funds, the Hon'ble Apex Court held that the

principle of apportionment was to be applied and, therefore,

dismissed the appeal of the assessee. The same is evident

from a bare reading in the case of Maxopp Investment Ltd.

(supra) and more specifically para 42 of the said order

ITA No.470/Chd/2018 12 A.Y. 2014-15

wherein the case of Avon Cycles Ltd. (supra) has been dealt

with and which is reproduced again hereunder:

Taking note of the aforesaid finding of fact, the High Court has dismissed the appeal of the assessee observing as under:

"In the present case, after examining the balance-sheet of the assessee, a finding of fact has been recorded that the funds utilized by the assessee being mixed funds, therefore, the interest paid by the assessee is also an interest on the investments made. Such being a finding of fact, we do not find that any substantial question of law arises for consideration of this Court.

After going through the records and applying the principle of apportionment, which is held to be applicable in such cases, we do not find any merit in Civil Appeal No. 1423 of 2015, which is accordingly dismissed.”

Hon'ble Apex Court was not whether the presumption theory

would apply or not where there are mixed funds and the

assessee had demonstrated availability of sufficient own

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funds for making the investments . No discussion on this

aspect has also been done by the Hon'ble Apex Court and

merely noting that the assessee had utilized mixed funds,

the Hon'ble Apex Court held that the principle of

apportionment would apply. Without any discussion or

deliberation on the presumption theory, the proposition laid

down in the case of Avon Cycles Ltd. (supra) by the Hon'ble

Apex Court has to be restricted to the extent of the issue

before the Hon'ble Apex Court and facts before it and not

beyond that. And on that basis the decision of the Hon'ble

Supreme Court in the case of Avon Cycles Ltd. (supra) can

be read only to the extent of upholding the principle of

apportionment of expenses incurred in the context of the

limited fact of mixed funds available with assessee and no

further. The proposition laid down cannot be stretched even

logically to address the fact situation where sufficient own

interest free funds are available with assessee, which fact

was not there before the Hon’ble Apex court in the case of

Avon Cycles (supra), and to negate the presumption that the

own funds were used for making the investment, which was

neither the question raised before the apex court and

therefore not addressed by it also.

theoory was upheld by the Hon'ble Supreme Court in the

case of Hero Cycles Pvt. Ltd. (supra) wherein on the issue of

disallowance of expenditure u/s.36(1)(iii) of the Act on

interest free advance made to Directors, the Hon'ble Apex

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Court held that in view of the findings of fact that the

assessee had sufficient credit balance in its bank account

for making the impugned advances and had sufficient own

interest free funds, the assessee company could in any case

utilize those funds for giving advances to its Directors. The

findings of the Hon'ble Apex Court at para 16 of this order to

this effect are as under:

“16. Insofar as the loans to directors are concerned, it could not be disputed by the Revenue that the assessee had a credit balance in the bank account when the said advance of Rs.34 lakhs was given. Remarkably, as observed by the CIT(A) in his order, the company had reserve/surplus to the tune of almost Rs.15 crores and, therefore, the assessee company could in any case, utilise those funds for giving advance to its directors.”

had in very clear terms held that where sufficient own

interest free funds are available with the assessee, the

presumption arises that the assessee had utilised those

funds for the purpose of making interest free non business

advances. Thus in very clear terms the Hon'ble Apex Court

in the case of Hero Cycles Pvt. Ltd. (supra) have upheld he

presumption theory.

Court and reading and interpreting them in the light of facts

and the issue before the Hon'ble Apex Court we find that the

judgments compliment each other. In the case of Avon

Cycles Ltd. (supra) the Hon'ble Apex Court held that in the

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fact situation where mixed funds are utilized by the

assessee, the disallowance of interest to the extent the funds

are utilized for the purpose of non business advance is

warranted. Going forward from there, the presumption

theory would come into operation if in the case of mixed

funds, the assessee is able to demonstrate/ establish

availability of interest free funds equal to or more than

interest free non business advances/investments thus

raising the presumption that the same have been made out

of the interest free funds of the assessee.

Hon'ble Apex Court in the case of Avon Cycles Ltd. (supra)

does not displace the presumption theory which has been

upheld by the Hon'ble Apex Court in the case of Hero Cycles

Pvt. Ltd. (supra) and the same still holds. In view of the

above, since the Ld.CIT(Appeals), we find, has allowed the

assessee’s appeal deleting the disallowance of interest made

on finding that it had sufficient own interest free funds for

making the investment, which fact has not been controverted

by the Revenue, we see no reason to interfere in the order of

the Ld.CIT(Appeals) and the ground raised by the Revenue,

therefore, is dismissed.

contention before us that the advance made was for business

purpose. In this regard, the Ld. counsel for assessee

contended that the advance was made to Shivaks Impex Ltd.

which was a step down subsidiary of the assessee company.

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The Ld. counsel for assessee stated that the assessee had

invested in a wholly owned subsidiary which in turn was the

holding company of Shivaks Impex Ltd. and which made

Shivaks Impex Ltd. a step down subsidiary of the assessee

company, meaning thereby that the assessee had a indirect

interest and control over the Shivaks Impex Ltd.. The Ld.

counsel for assessee further stated that the advances made

to Shivaks Impex Ltd., who was in the same line of business

as was the assessee, was utilized for the purpose purchasing

raw material.In this regard our attention was drawn to the

copy of bank account of Shivaks Impex Ltd. reflecting the

deposit of advance made by the assessee of Rs.3.55 crores in

the same and the utilization of the same for the purpose of

releasing a letter of credit issued in the regular course of its

business. The Ld. counsel for assessee, therefore, stated

that the advance had been made for the purpose business of

Shivaks Impex Ltd. which being a step down subsidiary of

the assessee, it was contended that the assessee company

would have been severely impacted if the said advance would

not have been made. Our attention was drawn to the

following documents placed in the paper book filed on 06-07-

18, to substantiate its aforesaid contention:

(i) copy of ledger account of Shivaks Impex Ltd. in

the books of appellant for Assessment Year 2013-

14.

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(ii) Copy of Ledger account of Shivaks Impex Ltd.

in the books of appellant for Assessment Year 2014-

15.

(iii) Copy of relevant Bank statements of Shivaks

Impex Ltd.

(iv) Shareholder list of various Group Companies.”

the Assessing Officer rejecting this contention of the

assessee and stated that no business exigency for making

the advance had been established by the assessee.

commercial expediency of the said advance had been

adequately established by the assessee. The facts relating to

the impugned transaction have not been controverted by the

Revenue. That Shivaks Impex Ltd. was a step down

subsidiary of the assessee company, has not been disputed

by the Revenue. The fact that the assessee, its subsidiary

and Shivaks Impex Ltd. were all in the same line of business

has also not been disputed by the Revenue. It is also not

disputed that the advance made has been utilized for the

purpose of making purchases. It is evident that had the said

advance not been made it would have seriously affected the

business of Shivaks Impex Ltd., which in turn would have

affected the assessee also since the value of its investment

in its subsidiary would have been affected on account of the

poor results shown by Shivaks Impex Ltd.. Therefore, the

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commercial expediency of the advance has been established

and for this reason also, no disallowance u/s 36(1)(iii) of the

Act could have been made.

availability of sufficient own funds and on account of the

advances having been made for business purpose ,no

disallowance of interest pertaining to funds utilized for

making the same was warranted. We therefore uphold the

order of the CIT(A) deleting the disallowance of interest u/s

36(1)(iii) of the Act, amounting to Rs.18,44,482/-.

therefore dismissed.

ITA No.470/Chd/2018 19 A.Y. 2014-15

“6.2 I have gone through the facts of the case and written submission filed by the appellant. As no exempt income has been earned during the year on the impugned investments made in shares of sister concern in the earlier year and there is no claim of any other exempt income in the computation of income, therefore placing reliance on the ratio of CIT vs. M/s Lakhani Marketing Inc. [2014] 272 CTR 265 (P&H) and jurisdictional ITAT Chandigarh decision in the case of Swami Automobiles (P) Ltd. ITA No.74/Chd/2015 dated 10.02.2016, it is held that no disallowance u/s 40A read with rule 8D of the Income tax Rules was warranted in this case . Therefore addition of Rs.25,43,299/- made by the AO on this account for A.Y.2014-15 is ordered to be deleted. This ground of appeal is allowed.”

Our decision is forfeited by the order of the Hon’ble Apex Court in the case of Commissioner of Income Tax,(Central),1 vs Chettinad Logistics (P) Ltd dated 2nd July 2018,.reported in 257 Taxman 2, in which the Hon’ble apex court has, we find, dismissed on merits the SLP filed by the Revenue against order of the Hon’ble Madras High Court holding that where no exempt income was earned no disallowance u/s 14A was warranted. The Hon’ble High Court had in its order, reported in 248 Taxman 55, held as under:

ITA No.470/Chd/2018 20 A.Y. 2014-15

“6.The record shows that during the course of arguments before the Tribunal, the Assessee advanced a submission, to the effect, that in cases, where, investments are made in sister concern(s), out of interest free funds, for strategic purposes, the provisions of Section 14 A of the Act, could not be invoked. In support of this submission, the Assessee relied upon the judgment of the Tribunal in the case of: Rane Holdings Ltd., Vs. ACIT, passed in ITA No.115/Mds/2015, dated 06.01.2016.

9.1. The legislature, in order to do away with the pernicious practice adopted by the Assessees', to claim expenditure, against income exempt from tax, introduced the said provision.

10.1. Therefore, to our minds, the addition made by the Assessing Officer by relying upon Section 14 A of the Act, was completely contrary to the provisions of the said Section.

10.2. Mr.Senthil Kumar, who appears for the Revenue, submitted that the Revenue could disallow the expenditure even in such a circumstance by taking recourse to Rule 8D.

10.3. According to us, Rule 8D, only provides for a method to determine the amount of expenditure incurred in relation to income, which does not form part of the total income of the Assessee.

ITA No.470/Chd/2018 21 A.Y. 2014-15

10.4. Rule 8 D, in our view, cannot go beyond what is provided in Section 14 A of the Act.

11.1. A Co-ordinate Bench of this Court, vide judgment dated 23.12.2016, rejected the plea of the Revenue advanced in that behalf.

11.2. As a matter of fact, a perusal of the judgment would show that the Revenue had sought to argue that because exempt income could be earned in future years, therefore, recourse could be taken to the provisions of Section 14A of the Act, to disallow expenditure. In other words the stand taken by the Revenue was irrespective of the fact whether or not income was earned in the concerned assessment year expenditure under Section 14A could be disallowed against anticipated income.

11.3. Pertinently, the Division Bench in M/s.Redington (India) Limited case has repelled this precise argument.

12.1. The Division Bench went on to hold that Section 4 of the Act brings to tax, that income, which is relatable to the assessment year in issue. The Division Bench, thus, held that where no exempt income is earned in the previous year, relevant to the assessment year in issue, provisions of Section 14 A of the Act, read with Rule 8 D could not be invoked.

12.2. While coming to this conclusion, the Division Bench also took note of the aforementioned Circular, issued by the Board.

12.3. The reasoning of the Division Bench is contained in the following part of the judgment: “4. 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 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

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can be contemplated even in a situation where no exempt income has admittedly been earned by the assessee in the relevant financial year. 7. Per contra, Sri T. Ravi kumar 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 exempted income is 'included' in the total income, but also where exempt income is 'includable' in total income. 8. 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 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. 9. 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 assessee 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 this 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

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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 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.

(emphasis is ours)”

14.1. Mr. Ravi kumar, who appeared for the Revenue, in that matter and who is present in this Court, informs us that he had in fact argued that the Rule was clarificatory in nature and would apply retrospectively, and that, the Division Bench, therefore, discussed the impact of Rule 8D of the Rules.

15.1. Therefore, as adverted to above, Rule 8D, cannot come to the rescue of the Revenue.”

SLP filed against the said judgment was dismissed by the apex court both on merits as well as on the ground of delay.

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Order pronounced in the Open Court.

संजय गग� अ�नपणा� ग�ता (ANNAPURNA GUPTA) (SANJAY GARG ) लेखा सद�य/ Accountant Member �याय�क सद�य/ Judicial Member *रती./Pkk* आदेश क� ��त�ल�प अ�े�षत/ Copy of the order forwarded to : 1. अपीलाथ�/ The Appellant 2. ��यथ�/ The Respondent 3. आयकर आय�त / CIT 4. आयकर आय�त (अपील)/ The CIT(A) 5. �वभागीय ��त�न�ध, आयकर अपील�य आ�धकरण, च�डीगढ़/ DR, ITAT, CHANDIGARH 6. गाड� फाईल/ Guard File

आदेशानसार / By order, सहायक पंजीकार/ Assistant Registrar