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Income Tax Appellate Tribunal, DIVISION BENCH’B’, CHANDIGARH
Before: SMT. DIVA SINGH & DR. B.R.R. KUMAR
IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH’B’, CHANDIGARH BEFORE SMT. DIVA SINGH, JUDICIAL MEMBER AND DR. B.R.R. KUMAR, ACCOUNTANT MEMBER ITA No.1320/Chd/2017 Assessment Year: 2013-14
The DCIT Vs. M/s Pujab Agro Industries Circle 4(1) Corp. Ltd. # 2A, Chandigarh Sector-28A, Madhya Marg Chandigarh
PAN No. AAACP9905G
(Appellant) (Respondent)
Assessee By : Shri. Satish Bansal Revenue By : Shri. Yoginder Mittal
Date of hearing : 16/07/2018 Date of Pronouncement : 23/07/2018 ORDER PER DR. B.R.R. KUMAR, A.M:
The present appeal has been filed by the Revenue against the order of
the Ld. CIT(A)-2, Chandigarh dt. 21/06/2017.
In the present appeal Revenue has raised the following grounds:
On the facts and in the circumstances of the case and in law, the CIT(A) has erred in allowing appeal of the assessee without appreciating the facts of the case. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in allowing the appeal of the assessee by deleting the addition of Rs. 1,07,00,000/- despite the fact that the CBDT has clarified vide Circular No. 5/2014 dt. 11/02/2014 and Rule 8D r.w.s 14A of the Act provides for disallowance of the expenditure even where tax payer in a particular year has not earned any exempt income.
The effective grounds raised by the assessee in all the appeals relates to
addition under section 14A.
The dividend income received by the assessee and the addition made
by the Assessing Officer invoking the provisions of Section 14A read with rule 8D
(2)are as under :
Assessment Year Dividend Received by the Disallowance made by Assessee (in Rs.) Assessing Officer under section 14A (in Rs.) 2013-14 220000 10700000
The Ld. CIT(A) confirmed the addition on the grounds that the assessee
has failed to establish that the investments have been made out of surplus funds
in the earlier years.
Before us, the Ld. AR has submitted that the funds invested are to the tune
of Rs. 48.53 Crores out of which an amount of Rs. 43.03 Crores have been out of
own funds.
The Ld. AR submitted that the assessee has not generated any non
exempt income from these investments. It was further submitted that the
dividend income earned by the assessee from KRIBHCO of Rs. 2,20,000/- is out
of the investment made from non interest bearing funds and argued that in
fairness of things the disallowance may be restricted to the exempt income.
He relied on the following judgments:
"Maxopp Investment Ltd. & Others vs. CIT (2011) 347 ITR 272 (Delhi HC) and CIT vs Hero Management Services Ltd (2014) 360 ITR 68 (Delhi HC). CIT vs. Hero Cycles Ltd (2010) 323 ITR 518 (P & H HC) ACIT vs. Iqbal M. Chagla (Mumbai Tribunal). CIT vs. Winsome Textile Industries Ltd. (2009) (P & H) (HC)
CIT vs. Lakhani Marketing (P & H) (HC), CIT vs. Corrtech Energy Pvt. Ltd (2014) 45 taxman 116 (Gujrat) (HC), CIT vs. Shivam Motors (Allahabad) (HC).
Daga Global Chemicals P vt. Ltd. vs. ACIT (ITAT Mumbai) ITA No. 5592/MUM/2012 Dated 01.01.2015.
Joint Investment Pvt. Ltd. vs. CIT (Delhi HC) and CIT vs. Taikisha Engineering India Ltd. (Delhi HC) and ACIT vs. Iqbal M. Chagla (Mumbai Tribunal).
Against these arguments, the Ld. DR Shri Yogendra Mittal submitted his
arguments in written form which are as under:
Written Submission in the case of M/s Punjab aqro Inds Corporation, in ITA No. 1320/Chd/2017 for AY 2013-14 1. The only point of Appeal of the Revenue is with reference to the Ld CIT (A) restricting the disallowance u/s 14A to the extent of the exempt income earned during the relevant year. In Para 3.4 of the assessment order, the assessing officer has clearly proved that the assessee had utilized the entire interest bearing funds in the shares of various companies. Thus, one to one relationship has been established between the borrowed funds and the investments made by the AO. 2. In this regard, kind attention is invited to the decision of the H'ble Supreme Court in the case of Walfort Share and Stock Brokers (P) Limited 326 ITR 1 (SC) wherein it was held that the Section 14A clarifies that expenses incurred can be allowed only to the extent they are "relatable to the earning of taxable income". The relevant observation of the H'ble Supreme Court is apparent from the relant extract as reproduced below: "17. The. insertion of S.14A with retrospective effect is the serious attempt on the part of the Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income (Circular No 14 of2001 dt. 22nd November., 2001). In other words, s. 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of S.14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. 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 the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income.."(Emphasis Supplied). In this regard, kind attention is invited to the decision of H'ble Delhi High Court dated 18.11.2011 in the case of Maxopp Investment Ltd vs Commissioner Of Income Tax. In this judgement, the H'ble High Court has discussed in detail the objective behind the introduction of Section 14A and relied upon th Judgement og H'ble Supreme Court in the case of CIT v. Walfort Share and Stock Brokers P Ltd. The relevant portion of the Judgment is quoted below:
"15. The object behind the insertion of section 14A in the said Act is apparent from the Memorandum explaining the provisions of the Finance Bill 2001 which is to the following effect- "Certain incomes are not includable 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 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."
As observed by the Supreme Court in the case of CIT v. Walfort Share and Stock Brokers P Ltd: 326 ITR 1 (SC). the insertion of section 14 A with retrospective effect reflects the serious attempt on the part of Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the said act against the taxable income. The Supreme Court further observed as under:-
In other words, section 14 A clarifies that expenses incurred can be allowed only to the extent that they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of section 14 A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of section 14 A 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..." "..Expenses allowed can only he in respect of earning taxable income. This is the purport of section 14A. In section 14A. the first phrase is "for the purposes of computing the total income under this Chapter" which makes it clear that various heads of income as prescribed in the Chapter IV would fall within section 14 A. The next phrase is, "in relation to income which does not form part of total income under the Act". It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14 A.."
(Fmphasis supplied) 17. The Supreme Court also clearly held that in the case of an income like dividend income which does not form part of the total income, any expenditure/deduction relatahle to such (exempt or non-taxable) income, even if it is of the nature specified in sections 15 to 59 of the said Act, cannot be allowed against any other income which is includable in the total income. The exact words used by the Supreme Court are as under:- "Further, section 14 specifies five heads of income which are chargeable to tax. In order to be chargeable, an income has to be brought under one of the Jive heads. Sections 15 to 591 ay down the rules for computing income for the purpose of changeability to tax under those heads. Sections 15 to 59 quantify the total income chargeable to tax. The permissible deductions enumerated in sections 15 to 59 are now to be allowed only with reference to income which is brought under one of the above heads and is chargeable to tax. If an income like dividend income is not a part of the total income, the expenditure/deduction though of the nature specified in sections .15 to 59 but related to the income not forming part of the total income could not be allowed against other income includable in the total income for the purpose of changeability to tax. The theory of apportionment of expenditure between taxable and non- taxable has, in principle, been now widened under section 14 A."
We do not agree with the submission of the learned counsel appearing on behalf of the assessees that a narrow meaning ought to be ascribed to the expression "in relation to" appearing in section 14Aof the said act. The context does not suggest that a narrow meaning ought to be given to the said expression. It is pertinent to note that the provision was inserted by virtue of the Finance Act. 2001 with retrospective effect from 01/04/1962. In other words, it was the intention of Parliament that it should appear in the statute book, from its inception, that expenditure incurred in connection with income which does not form part of total income ought not to be allowed as a deduction. The factum of making the said provision retrospective makes it clear that Parliament wanted
that it should be understood by all that from the very beginning, such expenditure was not allowable as a deduction. Of course, by introducing the proviso it made it clear that there was no intention to reopen finalised assessments prior to the assessment year beginning on 01/04/2001. Furthermore, as observed by the Supreme Court in Walfort (supra), the basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure and on the same analogy the exemption is also in respect of net income. In other words, where the gross income would not form part of total income, it's associated or related expenditure would also not be permitted to he debited against other taxable income.
We are of the view that the expression "in relation to" appearing in Section 14 A of the said act cannot be ascribed a narrow or constricted meaning. If we were to accept the submission made on behalf of the assessees then sub-section (1) would have to be read as follows:-
"For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee with the main object of earning income which does not form part of the total income under this Act."
That is certainly not the purport of the said provision. The expression "in relation to" does not have any embedded object. It simply means "in connection with" or "pertaining to". If the expenditure in question has a relation or connection with or pertains to exempt income, it cannot be allowed as a deduction even if it otherwise qualifies under the other provisions of the said Act. In Walfort (supra), the Supreme Court made it very clear that the permissible deductions enumerated in sections 15 to 59are now to be allowed only with reference to income which is brought under one of the heads of income and is chargeable to tax. The Supreme Court further clarified that if an income like dividend income is not part of the total income, the expenditure/deduction related to such income, though of the nature specified in sections 15 to 59. cannot be allowed against other income which is includable in the total income for the purpose ofchargeability to tax." (Emphasis Supplied)
It is important to mention here that the aforesaid decision was has been affirmed by the H'ble Supreme Court vide judgement dated 12.02.2018. Thus, the observations of the H'ble Supreme Court, in respect of Section 14A, made in the case of Walfort Share and Stock Brokers (P) Limited 326 ITR 1 (SC) has again been confirmed by the H'ble Supreme Court in Maxopp Investment Ltd.. vs Commr.Of I.T New Delhi. In this case, the H'ble Supreme Court has observed the following in respect of Section 14 A.
"Though, it is clear from the plain language of the aforesaid provision that no deduction is to be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part o f the total income under the Act, the ef f ect whereof is that if certain income is earned which is not t o be included while computing total income, any expenditure incurred to earn ihat income is also not allowed as a deduction. It is well known that tax is leviable on the net income. Net income is arrived at after deducting the expenditures incurred in earning that income. Therefore, from the gross income, expenditure incurred to earn that income is allowed as a deduction and thereafter tax is levied on the net income. The purpose behind Section 14A o f the Act, b y not permitting deduction of {he expenditure incurred in relation to income, which does not form part of total income, is to ensure that the assessee does not get double benefit. Once a particular income itself is not to be included in the total income and is exempted from tax, there is no reasonable basis for giving benefit of deduction of the expenditure incurred in earning such an income. For example, income in the form of dividend earned on shares held in a company is not taxable. If a person takes interest bearing loan from the Bank and invests that loan in shares/stocks, dividend earned there from is not taxable. Normally, interest paid on the loan would be expenditure incurred for earning dividend income. Such an interest would not be allowed as deduction as it is an expenditure
incurred in relation to dividend income which itself is spared from tax net. There is no guarrel upto this extent." (Emphasis Supplied) 5. From the observations of the H'ble Supreme Court in respect of Section 14A, it can be seen that it was not the intention of the legislature to restrict the amount of disallowance under 14A only to the extent of exempt income earned during an assessment . The intention of the legislature is that the entire expenditure incurred "in relation to" earning a non exempt income has to be disallowed and that this disallowance does not depend upon the actual exempt income earned by the assessee in a particular assessment year. Even if the exempt income earned by the assessee is Nil or less than the actual relatable expenditure during an assessment year, the entire relatable expenditure has to be disallowed while computing the net taxable income. Thus, as per Section 14A. a disallowance of the relatable expenditure is required to be made even in cases where the investment has not resulted in any exempt income during the AY in question. Lets take an example in this regard. An assessee. apart from having business income, is also having agricultural income. In order to earn an agricultural income, the assessee spends Rs 10 lakhs. In such a scenario will the assessee be allowed to claim extra expenditure of Rs 5 lakhs against business Income as per the interpretation of Section 14A? The answer is definitely no.
In the instant case, the assessee had invested Rs 5.5 crorcs in the shares of different companies and the assessee would be getting tax free income by way of dividends. In this case, the AO has not applied the formula given in Rule 8D 2(ii) for apportioning the expenses pertaining to the tax free income. But the AO has applied Rule 8D(2)(i) as there was a direct evidence on record which proved that the assessee had utilized the entire interest bearing funds in the shares of various companies from which the assessee would be earning tax free income. (Para no 3.4 of the assessment order). Dividend income is tax free income and if any expenditure is incurred in the process of earning this income, the same cannot be claimed as business expenditure. This is similar to the case that the expenses relating to agricultural operations (even if there is no agricultural income) cannot be allowed as expenditure in computing the business income for the simple reason that agricultural income does not form part of the total income under the IT Act………… 7. The case laws relied upon by the assesee are different on facts as in these cases AO has applied Rule 81) [2](ii] for calculating the disallowance u/s 14A whereas in the present case the Ao has applied Rule 8D(2][i) in this case.
Therefore, the AO has rightly disallowed the interest expenditure of Rs 1,04,25,000 as the expenditure was incurred in relation to investments which would generate tax free/exempt incomes in the form of dividends.
It is further submitted that the order of the Ld CIT (A) is against the principle of "Tax Neutrality" which is one of the core principles of tax policy. Tax neutrality means that the tax system should strive to be neutral so that decisions are made on their economic merits and not for tax reasons. The various decisions relied upon by Ld CIT (A) have interpreted section 14A in a manner that takes away the "tax neutrality" of Section 14A. This is demonstrated by way of following examples: E x : Let us assume there are two tax payers 'A' and 'B' running the same business and having gross receipts of Rs 10 Lakh which includes dividend income. The total expenditure of the assessee is Rs 8 Lakhs which also includes interest expenditure. Lets assume that each of them have taken loan of Rs 20 Lakhs @ same rate of interest which has been invested for earning dividend income and the interest expenditure comes to Rs 1,00,000 per annum. Scenario 1: Both tax payers earn same dividend income of Rs 1,00,000
Particulars Taxpayer ‘A’ Taxpayer ‘B’ Total Receipts (Incl Dividend) 10,00,000 10,00,000 Total Expenditure (Incl Interest 8,00,000 8,00,000 Net Profit 2,00,000 2,00,000 Add: Interest paid u/s 14A 1,00,000 1,00,000 Adjusted Net Profit 3,00,000 3,00,000 Less: Dividend Income which is 1,00,000 1,00,000 exempt Taxable net Profit 2,00,000 2,00,000 Tax @ 30% 60,000 60,000
Scenario: A receives dividend income of Rs. 1,00,000 but B receives Nil Dividend.
As can be seen above, the scenarios 1 and 2 are tax neutral whereas scenario 3 is not tax neutral.
It is further submitted that the interpretation of Section 14A, as has been taken by Ld CIT (A), will result in misuse of the provisions especially in the case of closely held companies/businesses. For example 'ABC Ltd' is a profit making company. This company holds a substantial stake in another company 'XYZ Ltd' which is loss making and does not have sufficient funds for expansion. If Section 14A is not interpreted as clarified by the CBDT Circular, the company ABC Ltd will take unintended advantage of Section 14 A as explained below: A) The company ABC Ltd will borrow from market (for use by other company XYZ Ltd] and further invest the same in the shareholding of XYZ Ltd.
B) Since, XYZ is a loss making company, it will not be declaring any dividend. Lven otherwise, since ABC Ltd will be holding a controlling stake in XYZ Ltd, it will be up to the former if any dividend is required to be declared or not. Not declaring any dividend will be useful for ABC Ltd in a scenario when the clarification of CBDT is not accepted. C) Now ABC Limited will claim the interest paid on the capital borrowed, though the capital was being used by XYZ Ltd, against the profits earned during a relevant AY. Thus, the amounts will be used by XYZ Ltd whereas the expenditure will be claimed by ABC Ltd. This not only against the intention of legislature but also against the "Matching Concept Principle of Accounting" according to which income made by a business can be measured only with the revenue earned during a period is compared with the expenditure for earning that income.
The above example shows that if the Section 14A is interpreted in the manner as held by various judicial pronouncements and relied upon by the assessee, then this section will become a tool in the hands of a the business houses to evade taxes which is not the intention of the Legislature. 13. In view of the above, it is humbly submitted that Section 14A may kindly be interpreted in the manner as laid out by the H'ble Supreme Court in the case of Walfort Share and Stock Brokers (P) Limited 326 ITR 1 (SC) which has been affirmed in the case of Maxopp Investment Ltd.. vs Commr.Of I.T New Delhi and also on the touch stone of the principles of "tax neutrality".
We have perused the submissions of both the parties.
Hon’ble Delhi High Court in the case of Joint Investments Pvt. Ltd. Vs. CIT and in case of Daba Global Chemical Pvt. Ltd. Coordinate Bench of ITAT Mumbai, held that disallowance under section 14A r.w.r 8D of the Rules cannot exceed the exempt income. If any disallowance could be made that is to be restricted to the tax exempt income. Similar view has been taken by the Hon’ble Delhi High Court in the case of Cheminvest Ltd. similar view was taken by the Hon’ble High court of Punjab and Haryana in the case of Mascot fooware on which Ld.CIT(A) relied upon. The matter stands settled with the judgement of Apex Court in the case of Maxopp Investment Ltd. dt. February 12, 2018
Hence, keeping in view the judicial pronouncement on the issue, the fact that the assessee has not borrowed any funds or loans for investment purpose
which yielded the dividend and the investments has been done out of the surplus funds and based on the arguments of the Ld. AR , we hereby direct the disallowance be restricted to the dividend income earned.
In the result, appeal of the Revenue is hereby dismissed
Order pronounced in the open Court.
Sd/- Sd/- (DIVA SINGH) (DR. B.R.R. KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated : 23/07/2018 AG Copy to: 1. The Assessee 2. The Respondent 3. The CIT 4. The CIT(A) The DR 5.