ARTLINE FINANCIAL MANAGEMENT PVT. LTD.,KOLKATA vs I.T.O., WARD - 14(3), KOLKATA, KOLKATA

Income Tax Appellate Tribunal, KOLKATA ‘SMC’ BENCH, KOLKATA

Before: SRI SONJOY SARMA & SRI SANJAY AWASTHI

order

: September 10th, 2024 ORDER

Per Sanjay Awasthi, Accountant Member:

In this case, the appellant filed his return of income on 25.08.2014 showing an income of 8,72,340/-. The Assessing Officer (hereinafter referred to as ld. 'AO') found that there were investments to the tune of Rs. 29,95,83,000/- which had the potential to yield exempt income in the shape of dividends. Admittedly, during the year under consideration no exempt income was received by this assessee but the ld. AO relied on CBDT Circular No. 5/2014 dated 11.02.2014 to apply the provisions of Section 14A of the Income Tax Act, 1961 (in short the 'Act') read with Rule 8D of the Income Tax Rules, 1962 to make an addition of Rs. 12,39,765/- (impugned assessment).

I.T.A. No.: 1297/KOL/2024 Assessment Year: 2013-14 Artline Financial Management Pvt. Ltd. 1.1. Aggrieved with this action of ld. AO, the appellant approached the ld. Commissioner of Income Tax (Appeals)-NFAC, Delhi [hereinafter referred to as ld. 'CIT(A)'] who confirmed the action of the ld. AO by an additional line of argument based on the amendment to Section 14A of the Act by the Finance Act, 2022 through which even investments which have not yielded any exempt income would be subjected to treatment u/s 14A of the Act read with Rule 8D of the Rules. Some portions from the findings of ld. CIT(A) deserve to be extracted as under:

“6.3.1 The findings of the AO and the contention of the appellant have been perused. The decision relied upon by the appellant have also been perused. To take up the issue as to whether disallowance u/s 14A can be made wherein no exempt income has been actually received, it is pertinent to note that the Income Tax Act has been amended wherein the Parliament has brought in Explanation to Section 14A of the Income Tax Act. Further, sub- section (1) of section 14 has been amended so as to include a non-obstante clause to provide that no deduction shall be allowed in relation to exempt income, notwithstanding anything contrary contained in the Act. The amended section 14A is reproduced as under: ………………………………………………. ………………………………………………. 6.3.2 In the memorandum explaining the provision of Finance Act 2022, it has been explained as under: “Clarification in respect of disallowance under section 14A in absence of any exempt income during an assessment year: Section 14A of the Act provides that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income that does not form part of the total income as per the provisions of the Act (exempt income).

Over the years, disputes have arisen in respect of the issue whether disallowance under section 14A of the Act can be made in cases where no exempt income has accrued, arisen or received by the assessee during an assessment year.

CBDT issued Circular No. 5/2014, dated 11/02/2014, clarifying that Rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where tax payer in a particular year has not earned any exempt income. However, still some courts have taken a view that if there is no exempt income during a year, no 32 disallowance under section 14A of the Act can be made for that year. Such an interpretation is not in line with the intention of the legislature. To illustrate, if during a previous year, an Page 2 of 7 I.T.A. No.: 1297/KOL/2024 Assessment Year: 2013-14 Artline Financial Management Pvt. Ltd. assessee incurs an expense of Rs. 1 lakh to earn non-exempt income of Rs. 1.5 lakh and also incurs an expense of Rs. 20,000/- to earn exempt income which may or may not have accrued/received during the year. By holding that provisions of section 14A of the Act does not apply in this year as the exempt income was not accrued/received during the year, it amounts to holding that 720,000/- would be allowed as deduction against non-exempt income of Rs. 1.5 Lakh even though this expense was not incurred wholly and exclusively for the purpose of earning non-exempt income. Such an interpretation defeats the legislative intent of both section 14A as well as section 37 of the Act.

In order to make the intention of the legislation clear and to make it free from any misinterpretation, it is proposed to insert an Explanation to section 14A of the Act to clarify that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where exempt income has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such exempt income.

This amendment will take effect from 1st April, 2022.

It is also proposed to amend sub-section (1) of the said section, so as to include a non-obstante clause in respect of other provisions of the Income- tax Act and provide that no deduction shall be allowed in relation to exempt income, notwithstanding anything to the contrary contained in this Act.

This amendment will take effect from 1st April, 2022 and will accordingly apply in relation to the assessment year 2022-23 and subsequent assessment years. 6.3.3 It is to be noted here that though it has been specifically mentioned in respect of insertion of non-obstante clause in sub-section (1) that amendment will take effect from 1st April 2022 and will accordingly apply in relation to A.Y 2022-23 and subsequent assessment years, whereas in respect of explanation as noted vide para 5, it is simply written that the amendment will take effect on 1st April 2022.”

Before us, ld. Counsel for the assessee placed a short paperbook in which the audited accounts of the appellant were placed and vehemently argued that in the absence of any exempt income there could not be any disallowance u/s 14A of the Act. The ld. D/R was content to rely on the orders of the authorities below and also on CBDT Circular (supra).

We have considered the arguments of ld. AR/DR and the documents before us. In another matter dealt with by a Coordinate Bench of Kolkata ITAT,

Page 3 of 7 I.T.A. No.: 1297/KOL/2024 Assessment Year: 2013-14 Artline Financial Management Pvt. Ltd. in the case of Elegant Dealmark Pvt. Ltd. vs. ITO in order dated 21.08.2024 an identical issue came up for adjudication. The findings therein may be reproduced to decide this case: “3. Regarding the addition of Rs. 9,647/- made u/s 14A of the Act read with Rule 8D of the Rules, it is evident that the appellant has not earned any exempt income this year and thus, relying on the findings in the case of (i) Eveready Industries India Ltd. vs. PCIT reported in [2020] 114 taxmann.com 610 (Kolkata - Trib.), (ii) PCIT vs. Vardhman Chemtech (P.) Ltd. reported in [2020] 423 ITR 241 (Punjab & Haryana) and in the case of (iii) ERA Infrastructure (India) Ltd. reported in 448 ITR 674 (Delhi)[20-07-2022], the appellant deserves relief. The relevant extracts from the three authorities are as under: (i) Eveready Industries India Ltd.: “33. From the assessment order as also from the facts on record it appeared that during the relevant year the appellant did not earn any dividend from its investments made in shares of other bodies corporate. We also note that barring investment of about Rs.5 lacs, the investments held by the appellant were in foreign subsidiaries from which no exempt dividend could have been earned. We also note that in the course of assessment the AO had specifically required the assessee to explain why disallowance u/s 14A of the Act should not be made. The assessee vide its letter dated 14.12.2016 had explained before the AO that no disallowance u/s 14A was warranted since during the relevant year it did not earn any tax free dividend. The relevant letter is available at Page 23 of the paper book. After considering the submissions of the assessee, the assessment order was passed u/s 143(3) of the Act in which no disallowance u/s 14A was made. We thus find that it was not a case where the aspect of disallowance u/s 14A was not enquired into by the AO prior to completion of assessment. We also find that the view entertained by the AO for not making disallowance u/s 14Aof the Act, in absence of earning of tax free dividend, was in consonance with the judicial view expressed by the High Courts at Calcutta, Delhi, Gujarat, Madras& Allahabad. The relevant citations are as follows: - CIT v. Ashika Global Securities Ltd. [GA No. 2122 of 2014, dated 11-6- 2018] - Cheminvest Ltd. v. CIT [2015] 61 taxmann.com 118/234 Taxman 761/378 ITR 33 (Delhi) - Pr. CIT v. IL & FS Energy Development Co. (P.) Ltd. [2017] 84 taxmann.com 186/250 Taxman 174/399 ITR 483 (Delhi) - CIT v. Corrtech Energy (P.) Ltd. [2014] 45 taxmann.com 116/223 Taxman 130/[2015] 372 ITR 97 (Guj.)

Page 4 of 7 I.T.A. No.: 1297/KOL/2024 Assessment Year: 2013-14 Artline Financial Management Pvt. Ltd. - CIT v. Shivam Motors (P.) Ltd. [2015] 55 taxmann.com 262/230 Taxman 63 (All.) - Redington India Ltd. v. Addl. CIT [2017] 77 taxmann.com 257/392 ITR 633 (Mad.) 34. For the reasons set out above we therefore hold that the assessment order passed by the AO in which no disallowance u/s 14Aof the Act was made, could not said to be unsustainable in law because the course adopted by the AO while passing the order u/s 143(3) of the Act was not only permissible in law but the said course was in conformity with the view expressed by the jurisdictional high court. Accordingly the impugned order of the Ld. Pr. CIT with reference to the reasons set out in clause (c) of the SCN is held to be unsustainable and accordingly set aside. Ground Nos. 8 & 9 are therefore allowed.” (ii) Vardhman Chemtech (P.) Ltd.: “■ Section 14A provides for disallowance of expenditure in relation to income not 'includible' in total income. [Para 7] ■ The Tribunal while relying upon the judgment of this Court in CIT v. Lakhani Marketing Inc. [2014] 49 taxmann.com 257/226 Taxman 48 (Punj. & Har.) (Mag.) had held that section 14A cannot be restored to in the year in which no exempt income had been earned. However, the revenue relied upon the CBDT Circular dated 11-2-2014 to contend that section 14A can be invoked even in the year in which no exempt income had been earned. Accordingly, the Tribunal had dismissed the appeal of the revenue holding that unless and until there is receipt of exempted income for the concerned assessment year, section 14A is not attracted. [Para 11] ■ The Tribunal had, regarding the ground of deletion of disallowance amounting to Rs. 40.29 lakhs under section 14A, recorded that there was no infirmity in the order of the Commissioner (Appeals), who deleted the disallowance made following the decision of the jurisdictional High Court in the case of Lakhani Marketing Inc. (supra). The argument of the revenue that the CBDT Circular No. 5/2014, dated 11-2-2014 stating that even in the absence of any exempt income disallowance under section 14A had to be made, is binding on the revenue authority, had no merit. [Para 12] ■ No illegality or perversity could be demonstrated by the Revenue in the aforesaid findings recorded by the Tribunal. [Para 13] ■ Thus, the substantial question of law as claimed is to be answered accordingly and the appeal is to be dismissed. [Para 15]” (iii) ERA Infrastructure (India) Ltd.: Section 14A of the Income-tax Act, 1961, read with rule 8D of the Income- tax Rules, 1962 - Expenditure incurred in relation to income not includible in total income (Computation of disallowance) - Assessment year 2013-14 -

Page 5 of 7 I.T.A. No.: 1297/KOL/2024 Assessment Year: 2013-14 Artline Financial Management Pvt. Ltd. Whether in relevant assessment year, no disallowance could be made under section 14A if no exempt income was earned by assessee - Held, yes [Paras 9 and 10] [The Hon’ble High Court relied on the order in the case of IL & FS Energy Development Co. Ltd. and Cheminvest Ltd. v. CIT [2015] 378 ITR 33 (Delhi).] 3.1. Accordingly, the appellant gets relief on this point and the addition of Rs. 9,647/- is directed to be deleted.” 3.1. Furthermore, the prospective operation of the clarificatory amendment vide Finance Act, 2022 has been dealt with in the case of Pr. CIT vs. Avantha Realty Ltd. reported in [2024] 164 taxmann.com 376 (Calcutta). Some portions from the head notes may be extracted as under:

“■ The Tribunal took note of the decision of the High Court of Delhi in Pr. CIT (Central) v. Era Infrastructure (India) Ltd. [2022] 141 taxmann.com 289/288 Taxman 384/448 ITR 674, which had taken note of the decision in the case of Cheminvest Ltd. v. CIT-IV [2015] 61 taxmann.com 118/234 Taxman 761/378 ITR 33 (Delhi), wherein it was held that amendment by the Finance Act, 2022 of Section 14A by inserting a non-obstante clause and explanation would take effect from 01.04.22 and could not be presumed to have retrospective effect and, therefore, on facts the amendment could not be applied to the assessment year under consideration. There was find no error in such conclusion arrived at by the Tribunal. [Para 9] ■ Accordingly, the appeal is decided against the revenue. [Para 10]” 3.2. Considering the discussions above, the addition made by the ld. AO is directed to be deleted. In light of this, the appellant succeeds on all the substantive grounds of appeal pertaining to disallowance u/s 14A of the Act read with Rule 8D of the Rules.

4. In the result, appeal filed by the assessee is allowed. Order pronounced in the open Court on 10th September, 2024.

Sd/- Sd/- [Sonjoy Sarma] [Sanjay Awasthi] Judicial Member Accountant Member Dated: 10.09.2024 Bidhan (P.S.)

Page 6 of 7 I.T.A. No.: 1297/KOL/2024 Assessment Year: 2013-14 Artline Financial Management Pvt. Ltd. Copy of the order forwarded to:

1. 1. Artline Financial Management Pvt. Ltd., C/o. P.K. Himmatsinghka & Co., 41, B.B. Ganguly Street, Central Plaza, 2nd Floor, Kolkata, West Bengal, 700012.

2. ITO, Ward-14(3), Kolkata.

3. CIT(A)-NFAC, Delhi.

4. CIT- 5. CIT(DR), Kolkata Benches, Kolkata. //True copy // By order Assistant Registrar ITAT, Kolkata Benches Kolkata

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ARTLINE FINANCIAL MANAGEMENT PVT. LTD.,KOLKATA vs. I.T.O., WARD - 14(3), KOLKATA, KOLKATA