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Income Tax Appellate Tribunal, CHANDIGARH
Before: SHRI A.D.JAIN & SHRI KRINWANT SAHAY
आदेश/ORDER PER A.D.JAIN, VICE PRESIDENT
These are Department’s appeal and assessee's Cross Objections for assessment year 2018-19 arising out of the order of the CIT(A) NFAC dated 14.02.2024.
ITA 347/CHD/2024 & C.O. 17/CHD/2024 A.Y.2018-19 2 2. In its appeal, the Department has taken the following grounds :
1. That the Ld, C!T(A) has erred in deleting the addition of Rs. 1,87,44,249/- without appreciating the facts of the case. 2. "That the Ld. OT(A) is not justified in not upholding disallowance of Rs. 1,87,44,249/-u/s I4A of the Income Tax Act on the ground that disallowance cannot be made where there is no exempt income without appreciating the fact that applicability of section 14 A or Rule 8D does not depend on earning of income. 3. That the Ld. C1T(A) has erred in ignoring the legislative intent expressed in clarificatory explanation inserted in section 14A as, "notwithstanding anything to the contrary contained in this Act. the provisions of this section shall apply and shall be deemed to haw always applied in a case where the income, not forming part of the total income under this Act, 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 income not forming part of the total income" 4. That the ld. CIT(A) Ld. GT(A) has erred in ignoring the legislative intent expressed in CBDT's Circular no. 5/2014 dated 11.02.2014, which explicitly states that expenses relatable to earning of exempt income have to be considered for disallowance irrespective of the fact whether any such income has been earned during the financial year or not as confirmed by Apex Court in Maxopp Investment Ltd. vs. CIT, 91 Taxman.com 154(SC). 5. That the Ld. CIT(A) has erred in holding that disallowance u/s 14A cannot be made where there is no exempt income, when Supreme Court has upheld the principles of apportionment and department is in SLP on the same issue in the case of Moderate Leasing and Capital Services Pvt. Ltd. in IT A No. 102/2018, A.Y. 2009-10 and Matrix Cellular Services (P) Ltd. in 1TA No. 484/2017 and SLP has also been approved against i he decision of Hon'ble Jurisdiction High Court in the case of M/s Vardhman Chemtech Pvt. Lid. in IT A No. 322/2016.
The assessee in its Cross Objections has raised the following grounds :
1. On the facts and circumstances of the case, the learned Commissioner of Income Tax (Appeals), Income Tax Department {CIT(A), ITD)} [NFAC] has erred both on facts and in law in restricting ITA 347/CHD/2024 & C.O. 17/CHD/2024 A.Y.2018-19 3 the disallowance under Section 14A to Rs. 3,25,000/- despite the fact that assessee has earned the exempt income of Rs. 38,359/- during the year under consideration.
2. On the facts and circumstances of the case, the above action of the learned CIT(A), ITD is contrary to the settled position of law that the disallowance under Section 14A cannot exceed the amount of exempt income earned by the assessee.
3. On the facts and circumstances of the case, the above action of the CIT(A), ITD is contrary to the settled position of law that Income Tax Authorities are duty bound to compute the correct income of the assessee.
That the respondent craves leave to add, amend or alter any of the grounds of appeal.
The ld. Counsel for the assessee has contended that there is one single issue involved in this case, i.e., the correctness or otherwise of the disallowance made under Section 14A of the Income Tax Act, as confirmed by the ld. CIT(A). It has been submitted that the matter stands squarely covered by the order (APB 112-132) dated 12.04.2024, passed by the Tribunal, for assessment year 2014-15, wherein the issue has been decided in favour of the assessee. It has been requested that the facts for the year under consideration remaining exactly similar to those for assessment year 2014- 15, the aforesaid Tribunal order be followed and for the year under consideration also, the disallowance under Section 14A of the Act be ordered to be restricted to the amount of exempt income earned by the assessee during the year under consideration, i.e., the amount of Rs.38,359/-.
ITA 347/CHD/2024 & C.O. 17/CHD/2024 A.Y.2018-19 4 5. The ld. DR, on the other hand, reiterating the grounds of appeal taken by the Department, contended that the ld.
CIT(A) has erred in deleting the addition of Rs.
1,87,44,249/- without appreciating the facts of the case; that the ld. CIT(A) was not justified in not upholding disallowance of Rs. 1,87,44,249/-under Section I4A of the Income Tax Act on the ground that disallowance cannot be made where there is no exempt income without appreciating the fact that applicability of section 14A or Rule 8D does not depend on earning of income; that the ld. CIT(A) has erred expressed in ignoring the legislative intent in the clarificatory explanation inserted in Section 14A as, "notwithstanding anything to the contrary contained in the Act, the provisions of this Section shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, 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 income not forming part of the total income”.
Having heard the parties in the light of the material brought on record, it is seen that all the grounds in this ITA 347/CHD/2024 & C.O. 17/CHD/2024 A.Y.2018-19 5 appeal are exactly similar to Ground Nos. (iii) to (vi) in the Department’s appeal before the ITAT, filed for assessment and the assessee's Cross Objections in the corresponding C.O.No.
08/CHD/2024. For that year, the Grounds taken by the Department were as follows :
(iii) That the Ld. CIT(A.) has erred in deleting the disallowance made of Rs. 2,09,78,997/- u/s 14A r.w. Rule 8D by the AO without appreciating the facts of the case. (iv) That the Id. CIT(A), on the facts and circumstances of the case has erred in deleting the disallowance made of Rs. 2,09,78,997/- without considered the fact mat the assessee has not taken interest component into its account as required under role 8D of the l.T.Rules, 1962. (v) That the Ld. CTT(A) has erred in ignoring the legislative intent expressed in clarificatory explanation inserted vide Finance Act, 2022 in Section 14A as, "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 the income, not forming part of the total income under this Act, has not a 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 income not forming part of the total income." (vi) That the Ld. CIT(A) has erred in ignoring the legislative intent expressed in CBDT's Circular no. 5/2014 dated 11.02.2014, which explicitly states that expenses relatable to earning of exempt income have to be considered for disallowance irrespective of the fact whether any such income has been earned during the financial year or not; as confirmed by Apex Court in Maxopp Investment Ltd. vs. CIT, 91 Taxman.com 154(SC).
The assessee's Cross Objections (supra) for assessment year 2014-15 read as under :
ITA 347/CHD/2024 & C.O. 17/CHD/2024 A.Y.2018-19 6 (i) On the facts and circumstances of the case, the learned Commissioner of Income Tax (Appeals), Income Tax Department {CIT(A), ITD)} [NFAC] has erred both on facts and in law in restricting the disallowance under Section 14A to Rs. 48,48,000/- despite the fact that assessee has earned the exempt income of Rs. 7,12,442/- during the year under consideration.
(ii) On the facts and circumstances of the case, the above action of the Ld. CIT(A), ITD is contrary to the settled position of law that the disallowance under Section 14A cannot exceed the amount of exempt income earned by the assessee. (iii) On the facts and circumstances of the case, the above action of the CIT(A), ITD is contrary to the settled position of law that Income Tax Authorities are duty bound to compute the correct income of the assessee.
The sole issue involved in the Department’s appeal and the assessee's corresponding Cross Objection is with regard to the correctness or otherwise of disallowance under Section 14A of the Act as made by the AO and as sustained by the ld.
CIT(A). The facts, mutatis-mutandis, are admittedly exactly similar for the year under consideration to those present in assessment year 2014-15, decided by the Tribunal in favour of the assessee vide order (supra) dated 12.04.2024, a copy whereof has been filed at APB 112-132.
For assessment year 2014-15, the Tribunal has held as under :
“14. Coming to Ground Nos. 5 to 6, the assessee had earned dividend income of Rs.7,12,442/-, as is available from APB- 50, i.e., Note No. 26 to the assessee's account, Non Operating Income. The same was exempt u/s 10(34) of ITA 347/CHD/2024 & C.O. 17/CHD/2024 A.Y.2018-19 7 the Act. As per APB-2, which is a copy of the computation of income at APB 87, i.e., the details of expenditure disallowed, the assessee had made a suo- moto disallowance of Rs.48,48,048/-(98,64,65,171+95,27,54,300/-/2* 0.5%). The AO made a further disallowance of Rs.2,09,78,997/- u/s 14A of the Act over and above the said disallowance of Rs.48,48,048/- made suo-moto by the assessee. While doing so, the AO observed that disallowance u/s 14A of the Act read with Rule 8D of the Rules was being made; that the assessee had made disallowance of Rs.48,48,048/- in its return of income, being 0.5% of the average investments, while totally ignoring the interest element, which was being considered in computing the disallowance as per Rule 8D.
14.1 The ld. CIT(A) agreed with the assessee's contention that the disallowance u/s 14A of the Act cannot exceed the amount of exempt income earned by the assessee. The Department is aggrieved of this action of the ld. CIT(A). The ld. CIT(A), however, restricted the disallowance u/s 14A of the Act to the amount of suo-moto disallowance made by the assessee, i.e., Rs.48,48,048/-. The Cross Objection of the assessee is aimed against this. The ld. CIT(A) held that reliance was being placed on various judicial decisions including that of the jurisdictional High Court, that disallowance u/s 14A read with Rule 8D cannot exceed the exempt income, but since the assessee itself had suo-moto disallowed an amount of Rs.48,48,000/- u/s 14A, the AO was being directed to restrict the disallowance u/s 14A to Rs.48,48,000/-.
14.2 The Department, thus, prays that the entire disallowance, amounting to Rs.2,09,78,999/- be restored, whereas it is the request of the assessee that the entire disallowance be ordered to be done away with in place of the restriction to the amount of Rs.48,48,000/- as ordered by the ld. CIT(A).
14.3 The ld. DR has drawn our attention to para 4.1 of the assessment order, wherein the AO has observed that investment to the tune of Rs.95,27,54,3000/- in quoted and unquoted shares was made by the AO and dividend income of Rs.7,12,442/- was claimed as exempt u/s 10(34) of the Act. It has been contended that the AO has made the disallowance by applying the provisions of ITA 347/CHD/2024 & C.O. 17/CHD/2024 A.Y.2018-19 8 Rule 8D(ii) and (iii). It has also been averred that CBDT Circular No.5 of 2014, dated 11.02.2014 is relevant in this regard. Further, mention has been made of the amendment brought in by the Finance Act of 2022, whereby, Explanation to Section 14A was added. It has been contended that by virtue of this position, the interest component qua the investments had been rightly considered by the AO, which had not been taken into account by the assessee, in violation of Rule 8D of the Rules. It has been contended that CBDT Circular No. 5 of 2014 clearly states that expenses relatable to earning of exempt income have to be considered for disallowance, irrespective of the fact whether any such income has been earned during the Financial Year or not. It has further been submitted that the Explanation inserted in Section 14A by the Finance Act, 2022 is a clarificatory provision, which states that notwithstanding anything to the contrary contained in the Act, the provisions of Section 14A shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under the Act, 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 income not forming part of the total income. It has been stated that so, the ld. CIT(A) has erred in not sustaining the entire disallowance correctly made by the AO u/s 14A of the Act read with Rule 8D of the Rules.
Laying stress on the proposition that disallowance u/s 14A of the Income Tax Act, 1961 cannot exceed the exempt income earned during the relevant assessment year, irrespective of whether a larger amount was disallowed by the assessee u/s 14A of the Act, the ld. Counsel for the assessee has sought to place reliance on the decision of the Hon'ble Madras High Court in the case of “M/s Marg Ltd. Vs CIT, Chennai”, [2020] (10) TMI 102 (Madras High Court). Further, reliance has also been placed on the following decisions :
i) Ansal Buildwell Limited Versus ACIT, Circle-2 (2) New, Delhi
ITA 347/CHD/2024 & C.O. 17/CHD/2024 A.Y.2018-19 9 ii) GMR Enterprises Pvt. Ltd. (successor to GMR Holdings Pvt. Ltd. Versus The Dy. Commissioner of Income-tax, Central Circle 2 (2) Bangalore., 2021 (11) TMI 565 – ITAT Bangalore iii) Dy. CIT, Circle-13 (2) , New Delhi Versus M/s JITF Shipyard Ltd. and M/s JITF Shipyard Ltd. versus Asstt. CIT, Circle-13 (2) , Central Revenue New Delhi, 2023 (4) TMI 144 – ITAT Delhi.
Having considered the matter in the light of the rival contentions and the material brought on record, we find that, shorn of the undisputed facts, in “M/s Marg Ltd.” (supra), the Hon'ble Madras High Court held that even the large disallowance proposed by the assessee himself in the computation of disallowance under Rule 8D made by him, cannot be approved. Relying on “Pragati Krishna Gramin Bank” [2018] (6) TMI 1283 – (Karnataka High Court), it was held that the legal position, as interpreted by various judgements, remains that the disallowance of expenditure incurred to earn exempt income cannot exceed the exempted income itself and neither the assessee, nor the Revenue are entitled to take a deviated view of the matter; that the indicative figure of disallowance cannot amount to hypothetical taxable income in the hands of the assessee; that the disallowance of expenditure incurred to earn exempted income has to be a smaller part of such income and should have a reasonable proportion to the exempted income earned by the assessee in that year, which can be computed as per Rule 8D only after recording of the satisfaction by the assessing authority that the apportionment of such disallowable expenditure u/s 14A made by the assessee, or his claim that no expenditure was incurred is validly rejected by the assessing authority by recording reasonable and cogent reasons conveyed to the assessee and after giving opportunity of hearing to the assessee in this regard. It was, thus, held that the disallowance under Rule 8D of the IT Rules read with Section 14A of the Act can never exceed the exempted income earned by the assessee during the particular assessment year and, further, without the recording of the satisfaction by the assessing authority that the ITA 347/CHD/2024 & C.O. 17/CHD/2024 A.Y.2018-19 10 apportionment of such disallowable expenditure made by the assessee with respect to the exempted income is not acceptable for reasons to be assigned by the assessing authority, he cannot resort to the computation method under Rule 8D of the Rules.
16.1 “M/s Marg Ltd.” (supra) has been followed in “M/s GMR Enterprises Pvt. Ltd.” (supra).
16.2 “M/s Marg Ltd.” (supra) and ‘M/s GMR Enterprises Pvt.Ltd.” (supra) have been followed in “Ansal Buildwell Pvt. Ltd.” (supra).
16.3 ‘M/s GMR Enterprises Pvt. Ltd.” (supra) has been followed in “JITF Shipyard Ltd.” (supra).
Then, in “M/s SEL Manufacturing Co. Ltd. Vs DCIT, Central Circle-III, Ludhiana” vide order dated 28.02.2019, passed in ITA 157/CHD/2018, a Co- ordinate Bench of the Tribunal, at Chandigarh, has held that disallowance u/s 14A cannot exceed the total exempt income earned by the assessee during the year.
17.1 No contrary decision has been brought to our notice.
In keeping with the above decisions, we direct that the disallowance u/s 14A of the Act should be restricted to Rs.7,12,442/-, which is the amount of dividend income earned by the assessee during the year under consideration.
Accordingly, Ground Nos. 3 to 6 of the Department’s appeal are rejected and the Cross Objection filed by the assessee is accepted.” 10. The Tribunal, thus, decided the matter in favour of the assessee and directed the disallowance under Section 14A of the Act to be restricted to the amount of dividend income earned by the assessee during the year.
ITA 347/CHD/2024 & C.O. 17/CHD/2024 A.Y.2018-19 11 11. Since undisputedly, the facts for the year under consideration, i.e., assessment year 2018-19, have not undergone any change from those present for assessment year 2014-15 and since the Tribunal order (supra) dated 12.04.2024 for assessment year 2014-15 has not been shown to have been upset on appeal or otherwise, or even stayed, we see no reason to take any view different from that taken by the Tribunal for assessment year 2014-15.
Therefore, respectfully following the order (supra)
dated 12.04.2024 passed by the Tribunal in the assessee's case for assessment year 2014-15, we direct that the disallowance under Section 14A of the Act be restricted to the amount of exempt income earned by the assessee during the year.
Ordered accordingly.
In the result, the appeal is dismissed and the Cross Objections are allowed.
Order pronounced on 09.09.2024.
Sd/- Sd/-
(KRINWANT SAHAY) (A.D.JAIN ) ACCOUNTANT MEMBER VICE PRESIDENT “Poonam”
ITA 347/CHD/2024 & C.O. 17/CHD/2024 A.Y.2018-19 12