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Income Tax Appellate Tribunal, “SMC” BENCH : KOLKATA
Before: Hon’ble Sri N.V.Vasudevan, JM ]
IN THE INCOME TAX APPELLATE TRIBUNAL “SMC” BENCH : KOLKATA [Before Hon’ble Sri N.V.Vasudevan, JM ] I.T.A Nos.1983 & 1984/Kol/2014 Assessment Years : 2008-09 & 2009-10 Raniganj Co-operative Bank Ltd. -vs.- D.C.I.T., Circle-2 & JCIT Raniganj Range-2, Asansol (PAN:AAFFR 3315 J)) (Appellant) (Respondent) For the Appellant : Shri U.Dasgupta, Advocate For the Respondent : Shri Rajat Kumar Kureel, JCIT.Sr.DR
Date of Hearing : 12.08.2016. Date of Pronouncement : 02.09.2016.
ORDER These are appeals by the Assessee against two different orders both dated 27.8.2014 of CIT(A), Asansol, relating to AY 2008-09 & 2009-10 respectively. Since common issues are involved in these appeals they were heard together. We deem it convenient to pass a common order.
ITA No.1983/Kol/14: (AY 2008-09) 2. The Assessee is a Co-operative Bank. For AY 2008-09 the Assessee filed return of income declaring total income of RS.33,22,280/-. In the course of assessment proceedings u/s.143(3) of the Income Tax Act, 1961 (Act), the AO called noticed that the Assessee had earned dividend income of Rs.5,60,301/- which was exempt from taxation and did not form part of the total income under the Act. In accordance with the provisions of Sec.14-A of the Act which provides that any expenditure incurred in earning income which does not form part of the total income under the Act, should be excluded in arriving at the total income, the Assessee was bound to compute the disallowance of expenditure u/s.14A of the Act. The Assessee contended before the AO that it earned dividend from UTI Mutual Fund of Rs.5,60,301/- and no expenses were incurred for earning this dividend income.
ITA Nos.1983&1984/Kol/2014-Raniganj Co-operative Bank Ltd. A.Y.2008-09& 2009-10 1
The AO however held that the reply of the Assessee was not satisfactory and he computed the disallowance u/s.14A of the Act, as follows: “The reply of the assessee is not acceptable in as much as that no expenditure for the earning of exempted income has been incurred as because no income can be earned without any expenditure especially where monetary fund is involved. In the instant case about Rs. Seven crore have been invested to earn this exempted income. Hence there is every possibility that interest pertaining to investment can be considered as expenditure for earhing the exempted income. For the calculation of disallowance u/s 14A, Rule 8D has been brought on the statute. In the circumstances as per calculation under Rule 8D the amount Rs.6,48,411/- has been calculated as under and the same is being disallowed and added to the total income. 1) Rule 8D(2)(i) Nil 2) Rule 8D(2)(ii) 7,11,579x7,05,46,890/- Rs.2,95,677/- 16,97,78,721 3) Rule 8D(2)(iii) .5% of Rs.7,05,46,890/- Rs.3,52,734/- Total Rs.6,48,411/- Addition Rs..6,48,411/-“
Aggrieved by the order of the AO, the Assessee preferred appeal before CIT(A). Before CIT(A), the Assessee contended vide submission dated 21.5.2011 that
“1. The appellant is a 'Co-operative Bank. operating in and around the PS limits of Raniganj area under a banking license granted by the Reserve Bank of India. 2. The bank under instructions from the Reserve Rank of India Under section 24(i) of the Banking Regulation Act and Section 6 of the Banking Regulation Act. have to make investments of a certain percentage of its deposits in other financial institutions VIZ. Government securities/Mutual Fund. Accordmgly, the bank made investment in Government securities, Mutual fund and in State Government securities. During the beginning of the year the investment in Mutual Fund was Rs.56,33,712.76 while due to increase in its deposits it had to enhance the investment to Rs.1,05,99,750/- at the end of the year. The entire investments have been made out of compulsion because of the provisions of Banking Regulation Act. The revenue earned from investment in Mutual Fund during the year under appeal was Rs.5,60,301/-. 3 The total income earned from such investments in Mutual Fund during the year was Rs.5,60,301.73 while the total addition/disallwoance made under Rule 8D(2)(ii) and 8D(2)(iii) was Rs.6,48,411/- which is wholly absurd and as such the assessment should be cancelled.”
In another submission before the CIT(A) the Assessee contended that the provisions of Sec.14-A of the Act prescribes that the AO before making disallowance of expenses has to record satisfaction that the sum that is sought to be disallowed was
ITA Nos.1983&1984/Kol/2014-Raniganj Co-operative Bank Ltd. A.Y.2008-09& 2009-10 2
in fact incurred for earning exempt income. It was contended that such satisfaction is absence in the case of the Assessee because the AO himself has observed in the order of assessment that there is every possibility that interest pertaining to investment can be considered as expenditure for earning exempt income and doing so will not be in tune with the mandate laid down in Sec.14A of the Act. Reference was made to the decision of the Hon’ble Bombay High Court in the case of Godrej & Boyce 328 ITR 81 (Bom.). It was next contended that the Assessee had sufficient own funds out of which the investments that yielded the tax free income was made. The Assessee gave the following particulars before the CIT(A) in this regard:
“The total investment lying in Mutual Funds investment as at 31/03/2008 being Rs. 1,05,99,750/- ( as per audited accounts) , stands more than covered by the share capital and reserve funds balance available with the assessee as at 31/03/2008 , which totals to (Rs. 84.91 lacs plus Rs. 1.16 crores) ie. Rs.2,0l crores , which is more than adequate to cover the said investment in Mutual Fund. Secondly, the fresh investment of Rs. 49.661acs has been made in Mutual Funds during the year is also covered by the appellants own funds generated from following sources: Increase in Subscribed and Paid up Share Capital ( Sch-1) 6.36 Addition to Reserve Funds less Utilisation ( Sch-2 ) 21.83 Out of Bank Withdrawal from C/A (Sch-6) 40.00 Available Own Funds ( not related to borrowings) 68.19 So it is seen that the investment in Mutual Funds are more than covered by the appellants own funds and there is absolutely no nexus or linkage between the funds borrowed by assessee and the alleged disputed investments. The provisions of Sec 14A is not attracted in this case and Rule 8D cannot be invoked. The addition of Rs.6,48,411/- made by invoking the provisions of Rule 8D under on assumption and presumption may please be deleted.”
The AO filed a remand report dated 15.7.2014 on the above figures furnished by the Assessee before the CIT(A) in which the AO contended as follows: In this context, it is stated that the arguments taken by the assessee in its written submission before your honour is not acceptable for the following reasons: i) The assessee has compared the figure of investment in mutual fund of Rs. 1.16 crores with the total figure of Rs. 2,01 crores ( paid up capital of Rs.1.05 crore and Rs. 84.91 lacs under heading Reserve and other fund) as per audited balance sheet as on 31/03/2008 i.e. on the last day of the financial year 2007-08 relevant to A.Y. 2008-09 stating it to be more that adequate to cover the said investment in Mutual Fund. The above comparison rnocie by the assessee is without any basis because the assessee has not taken into account the opening figure of "paid up capital" and "the reserve and ITA Nos.1983&1984/Kol/2014-Raniganj Co-operative Bank Ltd. A.Y.2008-09& 2009-10 3
other fund" and thus failed to appreciate that there is an incease of Rs. 49.66 lacs in mutual fund investment during the F.Y. 2007-08 which is not covered by the the total increase of Rs. 28.19 lacs (increase of RS.6.36 in paid-up share capital and addition of Rs.21.83 in Reserve and other fund) even if for the sake of argument it is accepted that the investment in mutual fund preceeded the addition to share capital during the F.Y. 2007-08. Moreover, the assessee being a cooperative bank has to maintain some statutory reserve as per provision of banking rules and other fund which cannot be assumed to have been invested in mutual fund. (ii) The submission of the assessee that the increase in investment of Rs.49.66 lacs in mutual fund is is covered by the out of bank withdrawal of Rs. 40 lacs from C/a (sch -6. of balace sheet) is not tenable as the assessee fails to appreciate that there is simultaneous increase of Rs. 52.93 lacs as reflected in sch. 7 of the balace sheet. (Copy enclosed). (iii) Moreover, the administrative and other expenses incurred by the assessee Co- operative society, which has facilitated in earning the dividend income cannot be rules out. In this connection. Reliance is placed on the decision of Hon'ble ITAT, Mumbai in the case of M/s Gherzi Eastern Limited (ITA No. 6562/Bom/94 dated 23/09/2002). Reliance is also placed on the decision of the Hon;ble Supreme Court in the case of Distributors (Baroda) Pvt. Ltd. (155 ITR 120) and Bombay High Court in the case of Magganlal Chagganlal Pvt. Ltd. (236 ITR 456), which has expressed a similar view, that expenditure may be attributable to earning of dividend income.”
The CIT(A) however confirmed the order of the AO by observing that disallowance u/s.14A of the Act can be made even if there is no exempt income and that if investments are made which can give raise to exempt income in future then expenditure incurred to make those investments can also be disallowed. From a reading of the CIT(A)’s order it is very clear that he has not addressed the issue raised by the Assessee before him and on which the AO has also given a remand report.
Aggrieved by the order of the CIT(A), the Assessee is in appeal before the Tribunal. The grounds of appeal raised by the Assessee reads as follows:
“1) For that the order of the Ld. CIT(Appeals) is arbitrary, excessive and hence bad in law, because the provisions of sec 14A of the Act' 61. is not applicable to the facts of the instant case. 2) For that on the facts of the case the Ld. CIT ( A ) , Asansol. was not legally justified in sustaining the addition of Rs. 6,48,411/- u/s 14A of the Act' 61, and the said addition is without any legal sanction and may please be deleted. 3) For that on the fact of the case neither the Ld. CIT(A) , nor the Ld. A.O. has made out a case, regarding applicability of provisions of sec 14A of the Act' 61, and additions sustained merely on presumptions and assumptions may please be deleted.
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4) For that the Ld. CIT(A) failed to give cognizance to the written submissions / arguments, filed by the appellant, in course of hearing, and has passed a very cryptic order, without any application of mind, and without any discussions, to the submissions of the ppellant, and the appeal order is legally erroneous on this count. 5) For that the appellant craves leave to add, alter, amend any further grounds of appeal efore or at the time of hearing.”
The Assessee has also sought to raise the following additional grounds: “Ground No.6) For that on the facts of this case, the C.l.T.( Appeal)was not justified in sustaining the disallowance uls 14A of the Act'61, when the AO has neither recorded any satisfaction as regards the incorrectness of the assesses claim, nor, has he established any nexus between the expenditure and exempted income, and the disallowance may please be deleted. Ground No. 7) For that the CIT(Appeal) was not justified in sustaining the disallowance under section 14A when interest income was more than interest expense, resulting in net positive interest income, the disallowance may please be deleted. Ground No. 8) For that computation of disallowance u. the assessment order made by the assessing officer, is technically erroneous and may please be modified.”
The additional grounds sought to be raised by the Assessee are nothing but an argument in support of the original grounds raised and therefore the same are admitted for adjudication.
I have heard the rival submissions. The learned counsel for the Assessee reiterated submissions as were made before the CIT(A) and submitted that the AO has not arrived at a satisfaction regarding the correctness or otherwise of the claim of the Assessee that there was no expenditure incurred in earning the exempt income and therefore the disallowance u/s.14A of the Act has to be held as bad in law. In this regard he drew our attention to the decision of the ITAT Kolkata in the case of DCIT Vs. REI Agro Ltd. ITA No.1811/Kol/2012 order dated 14.5.2013(which was confirmed by the Hon’ble Calcutta High Court in GA No.3022 of 2013 order dated 23.12.2013), wherein it has been held that the AO has to examine the accounts of the Assessee and thereafter indicate cogent reasons as to why the claim of the Assessee that no expenses were incurred is being rejected. In the absence of such recording of
ITA Nos.1983&1984/Kol/2014-Raniganj Co-operative Bank Ltd. A.Y.2008-09& 2009-10 5
satisfaction, the disallowance u/s.14A of the Act was held to be not sustainable. The learned counsel also drew our attention to the profit and loss account of Assessee at page-12 of the Paper Book and highlighted that interest received by the Assessee was a sum of Rs.1,41,33,573.58 whereas the interest paid only Rs.71,15,579. He drew our attention to decision of ITAT Kolkata Bench in the case of DCIT Vs. M/S.Trade Apartments Ltd. ITA No.1277/Kol/2011 dated 30.3.2012 and the decision of ITAT Ahmedabad Bench in the case of ITO Vs. Karnavati Petrochem Pvt.Ltd. ITA No.2228/Ahd/2012 dated 5.7.2013. In both the aforesaid decisions it has been held that if there is no net interest expenses after setting off the interest expenses with the interest income, then there can be no disallowance of interest expenses u/s.14A of the Act, as in such a situation, it cannot be said that expenditure by way of interest has been claimed by the Assessee.
The learned DR relied on the order of the CIT(A) and the remand report filed by the AO before the CIT(A). He submitted that the very fact that the AO has invoked Sec.14A of the Act to make the impugned disallowance can only lead to an inference that the AO was not satisfied with the claim of the Assessee that no expenditure was incurred to earn exempt income.
I have given a very careful consideration to the rival submissions. By the Finance Act of 2001, Parliament enacted section 14A with retrospective effect from April 1, 1962. Section 14-A of the Act so enacted provided that in computing the total income of an assessee, 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."
The Memorandum Explaining the Provisions in the Finance Bill of 2001 provided the following rationale for the insertion of section 14A ([2001] 248 ITR (St.) 192, 195, 196) :
"Certain incomes are not includible while computing the total income as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such ITA Nos.1983&1984/Kol/2014-Raniganj Co-operative Bank Ltd. A.Y.2008-09& 2009-10 6
exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i.e., gross income minus the expenditure is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income.
It is proposed to insert a new section 14A so as to clarify the intention of the Legislature since the inception of the Income-tax Act, 1961, that no deduction shall be made in respect of any expenditure incurred by the assessee in relation to income which does not form part of the total income under the Income-tax Act.
The proposed amendment will take effect retrospectively from April 1, 1962 and will accordingly, apply in relation to the assessment year 1962-63 and subsequent assessment years."
Sub-sections (2) and (3) of section 14A were inserted by an amendment brought about by the Finance Act of 2006 with effect from April 1, 2007. Sub-sections (2) and (3) provide as follows :
"14A.(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."
The circumstances in which the provisions of sub-sections (2) and (3) were introduced by an amendment have been adverted to in a circular of the Central Board ITA Nos.1983&1984/Kol/2014-Raniganj Co-operative Bank Ltd. A.Y.2008-09& 2009-10 7
of Direct Taxes dated December 28, 2006 (Circular No. 14 of 2006-[2006] 288 ITR (St.) 9). The circular notes that in the existing provisions of section 14A no method for computing the expenditure incurred in relation to income which does not form part of the total income had been provided. As a result there was a considerable dispute between taxpayers and the Revenue on the method of determining such expenditure. In this background, sub-section (2) was inserted so as to make it mandatory for the Assessing Officer to determine the amount of expenditure incurred in relation to income which does not form part of the total income in accordance with the method that may be prescribed. The circular, however, reiterates that the Assessing Officer has to follow the prescribed method if he is not satisfied with the correctness of the claim of the assessee having regard to the accounts of the assessee.
Rule 8D was inserted by the Income-tax Act (Fifth Amendment) Rules, 2008, which were published in the Gazette on March 24, 2008. The rules specifically provide that they shall come into force from the date of their publication in the Official Gazette.
The provisions of section 14A as originally introduced and as amended from time to time as well as the insertion of Rule 8D was subject-matter of several decisions rendered by various Benches of the ITAT as well as the Hon’ble High Courts. The Hon’ble Delhi High Court in the case of Maxopp Investments Ltd. v. CIT 2011) 203 Taxman 364 (Del) and the Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. 328 ITR 81 (Bom) have taken a view that Rule 8D of the I.T. Rules will apply only for A.Ys. 2008-09 and subsequent assessment years. It has also been laid down that the assessee has to make a claim (including a claim that no expenditure was incurred) with regard to expenditure incurred for earning income which is not chargeable to tax. Such a claim has to be examined by the AO and only if on an objective satisfaction arrived at by the AO that the claim made by the assessee is not correct, can the AO proceed to apply the computation mode as specified in Rule 8D(2) of the Rules.
ITA Nos.1983&1984/Kol/2014-Raniganj Co-operative Bank Ltd. A.Y.2008-09& 2009-10 8
In the present case, the assessee has taken a stand that no expenditure was incurred to earn exempt income and therefore no expenditure can be disallowed as expenditure incurred in earning exempt dividend income. As per the provisions of Sec.14A(3) of the Act, even in such a situation, the AO has to follow the mandate laid down in Sec.14A(2) of the Act, i.e., he has to examine the claim of the Assessee in the light of the books of accounts of the Assessee. If the AO does not agree with the claim of the Assessee having regard to the books of accounts of the Assessee, then is it mandatory for him to resort to Rule 8D of the Income Tax Rules, 1962 to quantify the disallowance u/s.14A of the Act? A plain reading of Sec.14A(2) of the Act shows that the legislature has used the words “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” and therefore the AO has to resort to the provisions of Rule 8D of the Rules, if the claim of the Assessee regarding expenditure incurred in earning exempt income is not accepted by the AO. If such an interpretation is adopted than that would result absurd results, as in the present case, the exempt income is a sum of Rs.5,60,301/- and the disallowance u/s.14A of the Act is a sum of Rs.6,48,411/-. We are of the view that even in a case where the AO rejects the claim of the assessee that no expenses were incurred to earn the exempt income, it is not mandatory for him to invoke the method of calculation prescribed by Rule 8D(2) of the Rules and is free to make the disallowance on any reasonable basis. If Rule 8D of the Rules is blindly by the AO sometimes it will lead to absurd results. The AO examining the claim of the assessee regarding expenditure incurred in earning the exempt income, is bound to take note of such absurdities and refrain from invoking the method of disallowance of expenses as prescribed by Rule 8D(2) of the Rules. It is for this reason that the second part of Sec.14A(2) of the Act provides as follows, “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”. In other words, it is only when no reasonable and proper parameters for making disallowance can be arrived at, that resort to Rule ITA Nos.1983&1984/Kol/2014-Raniganj Co-operative Bank Ltd. A.Y.2008-09& 2009-10 9
8D(2) can be had by the AO. Rule 8D(2) will thus be a last resort when it becomes impossible to arrive at a just conclusion on the amount of expenses that has to be disallowed as attributable or incurred in earning exempt income. Therefore the expression “shall” occurring in Sec.14A(2) of the Act, viz., “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”, should be read as may. The AO, u/s 14A of the Act has the discretion to substitute the computation of disallowance u/s 14A as made by the assessee is under estimation. The satisfaction contemplated u/.s 14A (2) of the Act is not merely restricted to rejecting the claim made by the assessee and the disallowance to be made u/s 14A of the Act but also includes substituting the claim made by the assessee on any other reasonable basis as the AO deems it fit. In such circumstances the correctness of the AO’s judgment can be reviewed but it cannot be said that the AO had no jurisdiction to do so and AO ought to resort only to the provision of Rule 8D of the Rules. In other words Rule 8D is not automatic and can be resorted to by the AO only as a measure of last resort.
In the present case the only investment that yielded tax exempt income was investiment in UTI mutual fund. As on 31.3.2007 the investment in UTI mutual fund was Rs.56,33,712.76 Ps. which increased to Rs.1,05,99,750/- as on 31.3.2008. Therefore during the previous year there was an increase in investment in UTI mutual fund of Rs.49.66 Lacs. From the submissions made by the Assessee before CIT(A), it has been claimed by the Assessee that the availability of own funds of the Assessee was Rs.68.19 lacs. This has not been rebutted on a proper basis by the CIT(A). Therefore it can safely be concluded that there was sufficient availability of own funds from and out which investments in UTI mutual funds were made by the Assessee and therefore disallowance of interest expenses by applying Rule 8D(2)(ii) of the rules of Rs.2,95,677/- is deleted. I am also of the view that the argument that interest income is more than the interest expenses debited in the profit and loss account and therefore no interest expenses can be disallowed, does not require any adjudication, in view of the above conclusion. ITA Nos.1983&1984/Kol/2014-Raniganj Co-operative Bank Ltd. A.Y.2008-09& 2009-10 10
As far as disallowance of other expenses u/r 8D(2)(iii) of the rules is concerned, shows expenditure on account of staff and office expenses of Rs.14,97,132 and Rs.28,22,543.16 Ps. respectively. A look at Schedule-14 and 15 of schedules to profit and loss account (a copy of which is given as an annexure to this order), ……..shows that except salary of Rs.11,72,889, no other expenditure can be said to be attributable to earning of exempt income. In applying the formula prescribed u/r 8D(2)(iii) of the Rules, the AO has included all investments, whether it yielding tax free income or not. It is not in dispute before us that it is only the investments which yield tax free income that has to be considered for applying the formula prescribed in Rule 8D(2)(ii) & (iii) of the rules as has been view held by this Tribunal in several cases. If the formula prescribed by rule 8D(2)(iii) of the Rules is applied by considering the average value of investments of only UTI mutual fund which yielded tax free income then the calculation of disallowance u/r.8D(2)(iii) of the rules would be as follows:
“Average value of Investment, income from which does not form part of total income First day of the previous year 5,633,712.00(Schedule-7(3)of audited Balance Sheet) Last day previous year 10,599,750.00(Schedule-7(3)of audited Balance Sheet) Average of the same (B) 8,116,731.00 8D(2)(iii) One half percent of the average of the value of investment ½% of Rs.8116731/- 40,583.66” 21. I am of the view that the claim of the Assessee that no other expenses were incurred to earn the tax free income cannot be accepted. There is no other basis on which the disallowance can be quantified. Having regard to the books of accounts of the Assessee, the disallowance as worked out above of Rs.40,583.66 Ps., in my view would be just and appropriate, in the facts and circumstances of the present case. I accordingly, restrict the disallowance u/s.14A of the Act to a sum of Rs.40,583.66 Ps.
ITA No. 1983/Ko/2014 is accordingly partly allowed.
ITA No.1984/Kol/2014: (A.Y. 2009-10)
As far as AY 2009-10 is concerned, there was no exempt dividend income. Nevertheless, the AO invoked provisions of Sec.14A of the Act and made a disallowance of Rs.5,77,220 by applying the formula prescribed in Rule 8D(2)(ii) and ITA Nos.1983&1984/Kol/2014-Raniganj Co-operative Bank Ltd. A.Y.2008-09& 2009-10 11
(iii) of the rules. The revenue authorities held that even in the absence of exempt income disallowance u/s.14A of the Act can be made and in coming to the above conclusion, the revenue authorities relied on the decision of the Special Bench of the ITAT in the case of Cheminvest Vs. ITO 121 ITD 318 (Del)(SB).
The learned counsel for the Assessee filed before us a copy of the decision of the Hon’ble ITAT Chennai Bench in the case of ACIT Vs. Mr.M.Baskaran ITA No.1717/Mds.2013 order dated 31.7.2014 wherein the Chennai Bench held that there can be no disallowance of expenses u/s.14A of the Act when there is no exempt income earned in the previous year. In coming to the above conclusion, the Chennai Bench has relied on several High Court decisions in which a view contrary to the view expressed by the Special Bench in the case of Cheminvest (supra) has been taken. The following are the relevant observations of the Chennai Bench of the ITAT:
“5. Heard both sides. Perused orders of lower authorities and submissions made by the assessee and the decisions in relied on. No doubt in the decision of the Special Bench of Delhi Tribunal in the case of Cheminvest Ltd. Vs. ITO (supra), the Special Bench held that disallowance' under section 14A can be made even in the year in which no exempt income has been earned or received by the assessee. This decision of Special Bench of the Tribunal has been impliedly overruled by the decisions of High Courts in the following cases: 6. In the case of M/s. Shivam Motors P.Ltd. (supra), before the Hon'ble Allahabad High Court, the Revenue raised the following question of law:- "Whether on the facts and in the circumstances of the case and in law, the Income Tax Appellate Tribunal was justified in upholding the decision of CIT(A) in deleting the disallowance of Rs.2,03,752/- u/s. 14A ignoring the fact that there is difference of opinion of various courts on the view taken by the ITAT that in the absence of tax free income, no disallowance u/s. 14A is permissible. " 7. The High Court while answering the. said question held as under:- ':As regards the second question, Section 14A of the Act provides that for the purposes of computing the total income under the 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 the Act. Hence, what Section 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year inquestion, the finding of fact is that the assessee had not earned any tax free income. Hence, in the absence of any tax free income, the corresponding expenditure couid not be worked out for disallowance. The view of the CIT(A), which has been affirmed by the Tribunal, hence does not give rise to ITA Nos.1983&1984/Kol/2014-Raniganj Co-operative Bank Ltd. A.Y.2008-09& 2009-10 12
any substantial question of law. Hence, the deletion of the disallowance of Rs.2, 03,752/- made by the Assessing Officer was in order. "
The Gujarat High Court in the case of CIT Vs. Corrtech Energy Pvt.Ltd.(supra) : held as under:- "We have given our thoughtful consideration to the facts and the decision relied upon by the Id AA. The Hon'ble Punjab & Haryana High Court in the case of CIT vs. Winsome Textile Industries Ltd. reported at (2009) 319 ITR 204(P&H) has held that in the present case, admittedly, the assessee did not make any claim for exemption. In such a situation, section 14A could have no epplicetion. In this case also, the assessee has not claimed any exempt income in this year. Therefore, respectfully following the judgement of Hon 'ble High Court of Punjab & Haryana in the case of CIT vs. Winsome Textile Industries Ltd. (supra), we hereby allow this ground and direct the AO to delete the addition. Therefore, ground Nos 1 to 1.2 raised by the assessee in its cross objection are allowed. " 4. Counsel for the Revenue submitted that the Assessing Officer as well as CIT(Appeals) had applied formula of rule 8D of the Income Tax Rules, since this case arose after the assessment year 2009-2010 Since in the present case, we are concerned with the assessment year 2009-2010, such formula was correctly applied by the Revenue. We however, notice that subsection (1) of section 14A provides that for the purpose of computing total income under chapter IV of the Act, 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 the Act.' In the present case, the tribunal has recorded the finding of fact that the assessee did not make any claim for exemption of any income from payment of tax. It was on this basis that the tribunal held that disallowance under section 14A of the Act could not be made. In the process tribunal relied on the decision of Division Bench of Punjab and Haryana High Court in cese of Commissioner of Income Tax v Winsome Textile Industries Ltd reported in (2009) 319 ITR 204 (Punj & Har) in which also the Court had observed as under: "7. We do not find any merit in this submission. The judgement of this court in Abhishek Industries Ltd (2006) 286 ITR 1 was on the issue of allowability of interest paid on loans given to sister concerns, without interest. It was held that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. The observations made therein have to be read in that context. In the present case, admittedly the assesse did not make any claim for exemption. In such a situation section 14A could have no application. " 5. We do not find any question of law arising, Tax appeal is therefore dismissed. "
The Hon'ble Bombay High Court in the case of CIT Vs.Delite Enterprises(supra) held as under:- "The Revenue is in appeal on the following questions:- "Whether on the facts and in the circumstance of the case and in law the Hon 'ble Tribunal was right in deleting the disallowance made by the Assessing Officer of interest paid by the Assessee Company on borrowed funds amounting to Rs.241. 10 lakhs overlooking the fact that the borrowed funds were used by. the Assessee Company to invest in the Capital of another Partnership Firm and since profits derived by the Assessee Company from a Partnership firm were exempt from tax u/s. ITA Nos.1983&1984/Kol/2014-Raniganj Co-operative Bank Ltd. A.Y.2008-09& 2009-10 13
10(2A) of the Income-tax Act. the interest expense related to such tax free profits is to be disallowed u/s. 14A of the Income Tax Act? (B) Whether on the facts and in the circumstance of the case and in law the Hon'ble Tribunal was right in. holding that the Assessing Officer cannot consider notional interest on deposit received by the Assessee Company while arriving at the fair market value uls.23(1) (a) of the Income-tax Act?" 2. In so far as Question (A) is concerned, on facts we find that there is no profit for the relevant assessment year. Hence the question as framed would not arise. " 10. Similar view has been taken by the Hon'be Punjab & Haryana High Court in the case of CIT Vs. M/s. Lakhani Marketing Incl. in ITA NO.970 of 2008 dated 2.4.2014. The Hon'ble High Court while affirming the decisions of CIT(A) as well as the Tribunal in deleting the disallowance made under section 14A observed as under:- "7. After hearing learned counsel for the parties, we do not find any merit in :the appeals. 8. The primary -issue that arises for consideration in these apepals is whether the CfT(A) as well as the Tribunal were right in allowing deduction of interest liability out of other income and the claim of the revenue to disallow the same under section 14A of the Act was justified. . 9. The CIT(A) vide order dated 24.6.2004 annexure A. 11 recorded as under:- 7.2 Keeping in view the above facts and circumstances of the case it is held that the AO was not correct in applying section 14A of the IT Act in disallowing the expenditure on account of interest amounting to Rs.46,91,684,-. It was incumbent on the AO to establish a nexus between the 'expenditure incurred and the income which was exempt under the Act. Facts clearly do not support the action of the AD. Disallowance is accordingly deleted. The AO is directed to recompute the income accordingly. " 10 Vide order dated 16.5.2008. Annexure A. III the Tribunal on appeal by the revenue while upholding the finding recorded by the CIT(A) noticed as under.: "We have heard rival submissions and have perused the material on record. From the reading of section 14A of the Act it is clear that before making any disallowance the following conditions are to exist:- a) That there :must be income taxable under the Act and b) That this 'income must not form part of the total income under the Act, and c) That there must be an expenditure incurred by the assessee and d) That the expenditure must have a relation to the income which does not form part of the total income under the Act. 9. Therefore, unless and until. there is receipt of exempted income for the concerned assessment years (dividend from shares), we are of the view. Section 14A of the Act cannot be invoked. In this appeal. the revenue has not dispelled the findings of the CIT(A). nor the statement of the assessee before AO that assessee is not in receipt of any dividend income and hence according to us, the Assessing Officer has erred in invoking Section 14A of theAct, to disallow various interest payments on capital account. security deposits and unsecured loans. This conclusion of ours finds support in the decision of Bombay Bench of the Tribunal in the case of Joint Commissioner of Income Tax v. Holland Equipment Co. B. V. reported in (2005) 3 SOT 810 (Mumbai) and the relevant portion of the order of the Bombay Bench of the Tribunal is reproduced below: ITA Nos.1983&1984/Kol/2014-Raniganj Co-operative Bank Ltd. A.Y.2008-09& 2009-10 14
Regarding application of Section 14A of the Act. the contention of the learned Department Representative has to be rejected on the face of it inasmuch as the entire income of the assessee is taxable under the Act. Section 14A is applicable only when any part of the income is not to be included in the total income of the assessee and the expenditure relating to that part of income is claimed by the assessee as deduction. In such cases only, the expenditure relating to the exempted income can be disallowed and not otherwise. Since in the present case the entire income is found to be taxable, no disallowance can be made under section 14A of the Act .' 10. Moreover. the AO has not established the nexus between invested funds and the interest bearing funds. since the investments in shares are in the years 1995-96, 1998- 99 and 1999-2000 and the interest disallowance is for the assessment years 2000-01 and 2001 -02. On the contrary perusal of the balance sheet for the year ending 31.3.1995, 31.3.1998 and 31.3.1999. it is clear that interest bearing funds have not been utilized for investment for purchase of shares. 11. For the aforesaid reasons, we see no reason to interfere with the order of CIT(A) concerning assessment year 2000-01 and 2001-02 and hence the decision of CIT (A) in deleting the disallowance of interest by invoking section 14A of the Act is correct and in' accordance with law." 11. In view of the aforesaid findings, which could not be shown to be erroneous, the plea of the revenue cannot be accepted." 11. In the case of CIT Vs. Winsome Textiles Industries Ltd. (319 ITR 204) the Hon'ble Punjab & Haryana High Court held that when there is no claim for exemption of income in such situation section 14A has no application. Respectfully following the above decisions, we delete the disallowance made under section 14A as the assessee has not earned /received for exempt income during the previous year relevant to the assessment year under appeal. Thus, we sustain the order of the Commissioner of Income Tax (Appeals) on this issue.
Following the said order, I hold that there can be no disallowance of expenses u/s.14A of the Act for AY 2009-10, as the Assessee has not earned any tax free income in the said AY. I accordingly allow the appeal for AY 2009-10.
In the result, ITA No.1983/Kol/2014 is partly allowed while ITA No.1984/Kol/2014 is allowed.
Order pronounced in the Court on 02.09.2016. Sd/- [ N.V.Vasudevan ] Judicial Member Dated : 02.09.2016.P
[RG PS]
ITA Nos.1983&1984/Kol/2014-Raniganj Co-operative Bank Ltd. A.Y.2008-09& 2009-10 15
Copy of the order forwarded to: 1.Raniganj Co-operative Bank Ltd., 67, C.R.Road, Raniganj – 713347. 2. D.C.I.T., Circle-2, Asansol. 3. CIT(A)-Asansol. 4. CIT-Asansol. 5. CIT(DR), Kolkata Benches, Kolkata.