Income Tax Appellate Tribunal - Mumbai
Dcit Cen Cir 5(4), Mumbai vs Rkw Developers P. Ltd, Mumbai on 19 December, 2017
आयकर अपीऱीय अधिकरण "D" न्यायपीठ मब
ुं ई में ।
IN THE INCOME TAX APPELLATE TRIBUNAL "D" BENCH, MUMBAI
BEFORE SHRI C.N PRASAD JUDICIAL MEMBER
AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER
आयकर अपीऱ सं./I.T.A. No. 6267/ Mum/2016
(नििाारण वर्ा / Assessment Year: 2012-13)
DCIT-CC-5(4), बिाम/ M/s. RKW Developers P.
R.No. 1927, 19 t h Floor, Air Ltd, 4 t h floor, HDIL Tower,
India Building, Nariman Anant Kandetkar Marg,
v.
Point, Mumbai -400021
Bandra (E), Mumbai -
400051
स्थायी ऱेखा सं ./ PAN : AAECR1357C
(अपीऱाथी /Appellant) .. (प्रत्यथी / Respondent)
Assessee by: None
Revenue by : Shri. Purushottam Kumar
सन
ु वाई की तारीख /Date of Hearin g : 14.12.2017
घोषणा की तारीख /Date of Pronouncement : 19.12.2017
आदे श / ORDER
PER RAMIT KOCHAR, Accountant Member
This appeal, filed by the Revenue, being ITA No. 6267/Mum/2016 for assessment year 2012-13, is directed against the appellate order dated 29- 07-2016 passed by learned Commissioner of Income-tax (Appeals)-53, Mumbai (hereinafter called "the CIT(A)") for assessment year 2012-13, appellate proceedings had arisen before learned CIT(A) from the assessment order dated 09-03-2015 passed by learned Assessing Officer (hereinafter called "the AO") u/s 143(3) of the Income-tax Act, 1961 (hereinafter called "the Act").
2. The grounds of appeal raised by the Revenue in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called "the tribunal") read as under:-
1. "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition u/s 14A of the ITA no. 6267/Mum/2016 Income Tax Act, 1961 by ignoring the fact that the provisions of Section 14A apply even if no exempt income is actually earned or received during the year in any form whatsoever?
2. "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the additions 14A of the Income Tax Act, 1961 by ignoring the provisions of CBDT Circular No. 5/2014 dated 11.02.2014 whereby it has been clarified that Rule 8D r.w.s. 14A provides for the disallowance of expenditure even where the assessee in particular has not earned exempt income? "
3. The appellant prays that the order of Commissioner of Income Tax (Appeal) on the above grounds be set aside and that DC1T be restored. "
4. "The appellant craves leave to amend or alter any ground or add a new ground. which may be necessary."
3. The brief facts of the case that assessee is in business of property development . The assessee has investments which are capable of yielding exempt income. The A.O asked the assessee to explain why the provision of section 14A of the 1961 Act r.w.r. 8D of Income-tax Act,1961 should not be applied in this case for making disallowance. The assessee submitted before the AO as under:-
"In the instant case, the assessee company has made investment in the equity share of its subsidiaries companies to the tune of Rs. 2499.03 Lakhs. These are passive investments made for the purpose of holding controlling interest/stake in the group concern and not for the purpose of earning any dividend or active investment. It is further submitted that most of these companies are loss making and hence the question of earning income exempted from tax does not arise ... Reliance is place on the decision of the Hon'ble ITAT- Mumbai in case of Garware Wall Ropes Ltd. Vs. ACIT (ITA No. 5408/Mum/2012), where in it was held that:
" ..... the investment has been made by the assessee in the group concern and not in the shares of any un-related party, Therefore, the primary object of investment is holding controlling stake in the group concern and not earning any income out of investment. Further the investments were made long back and not in the year under consideration. Therefore, in view of the fact that the investment are in the group concern we do not find any reason to believe that the assessee would have incurred any administrative expenses in holding these investments .... "
It is further submitted that during the year under consideration, the assessee company has neither earned nor claimed any income exempted from tax as well as it has neither incurred nor claimed any expenditure related to such income exempted from tax. Hence, the provisions of section 14A r. w. Rule 8D is not applicable to the extent of 2 ITA no. 6267/Mum/2016 investment in subsidiaries. 'Further, the amount invested in share application money and investments in properties are also not capable of earning any income which is chargeable to tax and hence these investments had not been considered while computing the disallowance of expenses u/s. 14A r.w.r 8d of the Income tax Act, 1961."
It is pertinent to mention that its undisputed that assessee has not earned any exempt income during the year under consideration. The A.O invoked rule 8D for making disallowance which was made as under:-
Disallowance u/s. 14A of the IT. Act, 1961 Aggregate of the following
i) Expense's directly attributable to exempt income Rs. Nil
ii) Amount of Expenditure by way of interest Rs. 15,963/-
iii) 0.5% of Average value of Investment Rs.96,93,984/ -
Total Rs.97,09,947/-
Thus, the disallowance was made by the AO to the tune of Rs.97,09,947/-
which was added to the income u/s 14A r.w.r. 8D, vide assessment order dated 09-03-2015 passed by the AO u/s 143(3).
4. Aggrieved by the assessment order dated 09-03-2015 passed by the AO u/s 143(3), the assessee filed first appeal before the learned CIT(A), who granted the relief of the assessee by following the decisions on Hon'ble Delhi High Court dated 02.09.2015 in the case of Cheminvest Ltd. v CIT in ITA no. 749/2014, where it has been held by Hon'ble Delhi High Court that no disallowance can be made u/s. 14A if there is no exempt income earned by the assessee . The learned CIT(A) held as under:-
4.3.2 However, I am inclined to accept the alternative plea of the appellant based on case-laws cited in para 4.2.1 above as well as the judgment of the Hon'ble Delhi High Court dated 02.09.2015 in the case of M/s.Cheminvest Ltd. v. CIT (ITA 749/2014) wherein it has been held that section 14A will not apply if no exempt income is received or receivable during the relevant previous year. While setting aside the decision of Hon'ble Special Bench in that case, it has been held that the expression „does not form part of the total income' in section 14A of the Act envisages that there should be an actual receipt of income which is not includible in the total income during the relevant previous year for the purpose of disallowing any expenditure in relation to the said income. It is a matter of record that the appellant has not received any exempt income during the relevant period. Therefore, respectfully following the ratio of above decisions, it is held that the A.O. was not justified in making disallowance of Rs.97,09,947/- u/s.14A r.w. Rule 3 ITA no. 6267/Mum/2016 8D in case of the appellant. The disallowance so made by the A.O: is directed to be deleted. Ground raised by the appellant is accordingly allowed.
Thus in nutshell the entire addition made by the A.O. u/s 14A stood deleted by learned CIT(A), vide appellate order dated 29-07-2016.
5. Aggrieved by the appellate order dated 29-07-2016 passed by learned CIT(A), the Revenue has come in appeal before the Tribunal . The Revenue is aggrieved by the deletion of the disallowance of Rs. 97,09,947/- by learned CIT(A), which was earlier added to the income by the AO u/s 143(3).
6. None appeared on behalf of the assessee when the appeal was called for hearing before the bench. The Ld. DR has fairly admitted that there is no exempt income earned by the assessee. However, he has made written submissions which are reproduced below.
1. Legal Submission on the issue of addition of section 14A of the Act. Intention and purpose for inserting sec. 14A of the Act a. It was pursuant to the judgement in Rajasthan State Warehousing Corporation (2000) 242 ITR 450(SC) rendered on February 23, 2000, and other judgments laying down the same ratio decidendi that the Legislature inserted section 14A by the Finance Act, 2001, with retrospective effect from April 1, 1962. At this juncture it would be appropriate to note down the intention behind the insertion of this section which is coming up from the Memorandum Explaining the Provision in the Finance Bill, 2001 (2001.248 ITR (ST.) 162), as under
(page 195):
"No deduction for expenditure incurred in respect of exempt income against taxable income.
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 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. (emphasis supplied).
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 I.T.Act.4
ITA no. 6267/Mum/2016 The proposed amendment will take effect retrospectively from April 1, 1962, and will accordingly apply in relation to the A.Y. 1962-63 and subsequent assessment years."
b. After the Finance Bill getting approval of parliament and the President of India, Circular No.14 was issued related to the provisions of the Finance Act, 2001 reported in (2001) 252 ITR (St.) 65, retreating that through Finance Act, 2001, a new section 14A has been inserted 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.
C. Memorandum Explaining the Provisions in the Finance Bill, 2006, as under:
"Method for allocation expenditure in relation to exempt income"
Under the existing provisions of sec. 14A, it has been provided that for the purposes of computing the total income, 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 I.T.Act. However, the existing provisions of expenditure incurred in relation to income which does not form part of the total income. Consequently, there is considerable dispute between the taxpayers and the Department on the method of determining such expenditure.
In view of the above, it is proposed to insert a new sub-section (2) in section 14A, so as to provide that it would be mandatory for the Assessing Officer to determine the amount of expenditure incurred in relation to such income which does not form part of the total income in accordance with such method as may be prescribed. However, the assessing officer shall be required to adopt the prescribed method if having regard to the accounts of assessee, he is not satisfied with the correctness of the claim of the assessee in respect of expenditure in relation to income which does not form part of the total income.
It is also proposed to provide that 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.
This amendment will take effect from April 1, 2007, and will, accordingly, apply in relation to the assessment year 2007-08 and subsequent years". (2006. 281 ITR (St.) 190) (2) Contentions of revenue 2.1 The provisions of section 14A only reiterate the settled law about Matching Principle of Accountancy that current income Vs. Current expenditure and in case exempt income - no expenditure to be allowed at all - whether direct or indirect - otherwise the matching principle gets disturbed.
(a) As per the basic principle of taxation the disallowance u/s. 14A is both direct and indirect expenditure and if an assessee claims that he has incurred no indirect expenditure- then as per mandate of Sec. 14A(2) and 14A(3) - he will have to demonstrate the same before A.O. 5 ITA no. 6267/Mum/2016 who will determine it in accordance with the provisions of sec. 14A(2) and 14A(3) and record his dissatisfaction with assessee's method of computation vis-a-vis the method of computation stated in sec. 14A(3) r.w. Rule 8D.
(b) This will apply to both the "normal profit/statutory profit" and also to the "book profit" because both have to be computed in accordance with the matching principle of accountancy which requires disallowance of both direct and indirect expenditure in relation to the exempt income. Also, section 115JB(1)(f) uses the same expression.
2.2
(a) There is fundamental difference between the "Receipt" and "Income". The concept of matching principle as explained and found to be central spine of accounting standard of recording various transactions for computation of income is based on this difference. This concept has to be understood and applied in reference to "Dividend' and "Income by way of dividend" which is used in various provisions of the Act both prior to insertion of section 14A of the Act or thereafter so to arrive at the correct import of the provision of section 14A, its interpretation and the objective and intent of the Hon‟ble Legislature for promulgating these provision.
(b) The constitutional bench of Hon'ble Supreme Court Bench consisting of five Hon'ble judges) dealt with this issue in the case of Distributors (Baroda (P) Ltd V/s. Union of India (1985) 22 Taxman 49 through dealing with section 8OM of the Act (omitted w.e.f. Ol.04.2004 but related to dividends and deduction/relief out of receipt of dividend). Hon'ble Apex Court traced, considered and explained the history of introduction of such provisions related to dividend in this landmark judgement.
(c) The Hon'ble Constitutional bench of Supreme Court while dealing with the construction of sec. 80M of the Act, overturned, its earlier decision of 3 Member Bench in the case of Cloth Traders (P) Ltd. v. Addl. CIT 1979) 118 ITR 243 and observed that "To perpetuate an error is no heroism. To rectify it is the compulsion of judicial conscience. In this we derive comfort and strength from the wise and inspiring words of Justice Bronson in Pierce v. A.M.Y. Delameterat page 18:
"a Judge ought to be wise enough to know-that he is fallible and therefore ever ready to learn : great and honest enough to discard all mere pride of opinion and follow truth wherever it may lead : and courageous enough to acknowledge his errors."
Hon‟ble Apex Court at para 14 to 17 interpreted the sec.80M as follow:
"We may, therefore, first examine the language of section 80M for arriving at its true interpretation. But before we do so, let us consider what is the object behind grant of relief under section 80M. It was common ground between the parties that the main object of the relief under section 80M is to avoid taxation once again in the hands of the receiving company of the amount which has already borne full tax in the hands of the paying company vide the written submission under the 6 ITA no. 6267/Mum/2016 heading 'Object of relief on inter-corporate dividends' filed by the learned counsel on behalf of the assessee in the course of the arguments. Now when an amount by way of dividend is received by the assessee from the paying company, the full amount of such dividend would have suffered tax in the assessment of the paying company and it is obvious, that, in order to encourage intercompany investments, the Legislature intended that this amount should not bear tax once again in the hands of the assessee either in its entirety or to a specified extent. But the amount but way of dividend which would otherwise suffer tax in the hands of the assessee, would be the amount computed in accordance with the provisions of the Act and not the full amount received from the paying company. Therefore, it is reasonable to assume that in enacting section 8OM, the Legislature intended to grant relief with reference to the amount of dividend computed in accordance with the provisions of the Act and not with reference to the full amount of dividend received from the paying company. It is difficult to imagine any reason why the Legislature should have intended to give relief with reference to the full amount of dividend received from the paying company when that is not the amount which is liable to suffer tax once again in the hands of the assessee. The Legislature could certainly be attributed the intention to prevent double taxation but not to provide an additional benefit which would go beyond what is required for saving the amount of dividend from taxation once again in the hands of the assessee. Bearing in mind these prefatory observations in regard to the legislative object, we may now proceed to construe the language of section 80M.
15. Section 80M(1) opens with the words 'where the gross total income of an assessee ....... includes any income by way of dividends from a domestic company' and proceeds to say that in such a case, there shall be allowed in computing the total income of the assessee, a deduction from such income by way of dividends' of an amount equal to the whole of such income or 60 per cent of such income, as the case may be, depending on the nature of the domestic company from which the income by way of dividends is received. The opening words describe the condition which must be fulfilled in order to attract the applicability of the provision contained in Sub-section (1) of section 80M. The condition is that the gross total income of the assessee must include income by way of dividends from a domestic Company. 'Gross total income' is defined in section 8OB(5) to mean 'total income computed in accordance with the provisions of the Act before making any deduction under Chapter VI-A or under section 80-O." Income by way of dividends from a domestic company included in the gross total income would, therefore, obviously be income computed in accordance with the provisions of the Act, that is, after deducting interest on monies borrowed for earning such income. If income by way of dividends from a domestic company computed in accordance with the provisions of the Act is included in the gross total income, or in other words, forms part of the gross total income, the condition specified in the opening part of sub-section (1) of section 80M would be fulfilled and the provision enacted in that sub-section would be attracted.
16. Now it was urged on behalf of the assessee that the words 'where the gross total income of an assessee ....... includes any income by way of dividends from a domestic company' in the opening part of sub- section (1) of section 8OM refer only to the inclusion of the category of 7 ITA no. 6267/Mum/2016 income and not to the quantum of such income and, therefore, the words 'such income by way of dividends' following upon the specification of this condition, cannot have reference to the quantum of the income included but must be held referable only to the category of the income included, that is, income by way of dividends from a domestic company. This was the same argument which found favour with the Court in Cloth Traders (P) Ltd.'s case (supra), but on fuller consideration, we do not think it is well founded. We may assume with the Court in Cloth Traders (P.) Ltd.'s case (supra) that the words 'where the gross total income of an assessee........ includes any income by way of dividends from a domestic company' are intended only to provide that a particular category of income, namely, income by way of - dividends from a domestic company should form a component part of gross total income, irrespective of what is the quantum of the income so included but it is difficult to see how the factor of quantum can altogether be excluded when we talk of any category of income included in gross total income. What is included in the gross total income in such a case is a particular quantum of income belonging to the specified category. Therefore, the words such income by way of dividends' must be referable not only to the category of income included in the gross total income but also to the quantum of the income so included. It is obvious, as a matter of plain grammar, that the words 'such income by way of dividends' must have reference to the income by way of dividends mentioned earlier and that would be income by way of dividends from a domestic company which is included in the gross total income. Consequently, in order to determine what is 'such income by way of dividends, we have to ask the question : what is the income by way of dividends from a domestic company included the gross total income and that would obviously be the income buy way of dividends computed in accordance with the provisions of the Act. It is difficult to appreciate how, when we are interpreting the words such income by way of dividends, we can make a dichotomy between the category of income by luau of dividends included in the gross total income and the quantum of the income by way of dividends so included. This Court observed in Cloth Traders (P) Ltd.'s case (supra) that the words such income by way of dividends' as a matter of plain grammar must be Substituted by the words income by way of dividends from a domestic company' in order to arrive at a proper construction of the Section, but there is a clear fallacy in this observation, because in making the substitution it stops short of the words income by way of dividends from a domestic company' and does not go to the full length to which plain grammar must dictate us to go, namely income by way of dividends from a domestic Company included in the gross total income', semphasis supplied) otherwise, we would not be giving to the word 'such its full meaning and effect. The word 'such' in the context in which it occurs can only mean that income by way of dividends from a domestic company which is included in the gross total income and that must necessarily be income by way of dividends computed in accordance with the provisions of the Act.
17. There is also one other strong indication in the language of sub- section [III) of section 8OM which clearly compels us to take the view that the deduction envisaged by that provision is required to be made with reference to the income by way of dividends computed in accordance with the provisions of the Act and not with reference to the 8 ITA no. 6267/Mum/2016 full amount of dividend received by the assessee. This indication was also unfortunately lost sight of by the Supreme Court in Cloth Traders (P) Ltd.'s case (supra) presumably because it was not brought to the attention of the Supreme Court. The Supreme Court observed in Cloth Traders (P) Ltd.'s case (supra )that the whole of the income by way of dividends from a domestic company or 60 per cent of such income, as the case may be, would be deductible from the gross total income for arriving at the total income of the assessee. We are afraid this observation appears to have been made under some misapprehension, because what sub-section (1) of section 80M requires is that the deduction of the whole or a specified percentage must be made from 'such income by way of dividends' and not from the gross total income.
Sub-section (1) of section 8OM provides that in computing the total income of the assessee there shall be allowed a deduction from 'such income by way of dividends' of an amount equal to the whole or a specified percentage of such income. Now when in computing the total income of the assessee, a deduction has to be made from 'such income by way of dividends, it is elementary that 'such income by way of dividends' from which deduction has to be made must be part of the gross total income. It is difficult to see how the language of this part of sub-section (1) of section 80M can possibly fit in if 'such income by way of dividends' were interpreted to mean the full amount of dividend received by the assessee. The full amount of dividend received by the assessee would not be included in the gross total income: what would be included would only be the amount of dividend as computed in accordance with the provisions of the Act. If that be so, it is difficult to appreciate how far the purpose of computing the total income from the gross total income any deduction should be required to be made from the full amount of the dividend. The deduction required to be made for computing the total income from the gross total income can only be from the amount of dividend computed in accordance with the provisions of the Act would be forming part of the gross total income. It is, therefore, clear that whatever might have been the interpretation placed on clause
(iv) of Sub-section (1) of section 99 and section 85A, the correctness of which is not in issue before us, so far as subsection (1) of section 8OM is concerned, the deduction required to be allowed under that provision is liable to be calculated with reference to the amount of dividend computed in accordance with the provisions of the Act and forming part of the gross total income and not with reference to the full amount of dividend received by the assessee."
d) Hon‟ble Supreme Court in the case of ACG Associated Capsules (P.) Ltd. (2012) 343 ITR 89 followed the ratio of Hon'ble constitution Bench of Supreme Court in the case of Distributors (Baroda) (P) Ltd (1985) 155 TR 12O) while adjudicating the issue of netting of interest for consideration u/s. 80HHC of the Act. Hon'ble Supreme Court distinguished Hon'ble Bombay High Court decision in the case of CITV/s. Asian Star Co. Ltd. (2010) 326 ITR 56 and overruled CIT v/s. Kalpataru Colours and Chemicals (2010) 192 Taxaman 435. At para 11 of that order Hon‟ble Apex Court considered the difference between income and receipt following the ratio of Distributors (Baroda) Pvt. Ltd. (Supra).The following ratio as per para 12 of Hon‟ble Supreme Court order in the case of ACG Associated Capsules Pvt. Ltd. is to be applied.
"12. If we now apply Explanation (baa) as interpreted by us in this judgment to the facts of the case before us, if the rent or interest is a 9 ITA no. 6267/Mum/2016 receipt chargeable as profits and gains of business and chargeable to tax under Section 28 of the Act, and if any quantum of the rent or interest of the assessee is allowable as are expense in accordance with Sections 30 to 44D of the Act and is not to be included in the profits of the business of the assessee as computed under the head "Profits and Gains of Business or Profession", ninety per cent of such quantum of the receipt of rent or interest will not be deducted under clause (1) of Explanation (baa) to Section 8OHHC, In other words, ninety per cent of not the gross rent or gross interest but only the net interest or net rent, which has been included in the profits of business of the assessee as computed under the head "Profits and Gains of Business or Profession", is to be deducted under clause (1) of Explanation (baa) to Section 8OHHC for determining the profits of the business."
2.3. It is in view of such interpretation clearly distinguishing the difference of "dividends receipts" and "Income by way of dividends" one has to consider following provisions of the Act as how the same is applicable for sec. 14A of the Act.
(i) Section 2(22) of the Act define "dividend" as inclusive definition being distribution of accumulated profits in cash or kind.
(ii) Section 4 of the Act is the charge of income tax on "Total income". (iii) The section 2(45) of the Act provide an exhaustive definition of "total income" as "Total amount of income referred to in sec.5, computed in the manner laid down in this Act."
(iv) Sec.5 of the Act defines the scope of "Total income".
(v) Sec.8 of the Act though has heading as "dividend income" but the same is to categorise the time when such dividend (both final or interim) is to be included intotal income. (vi) Sec. 10(34) is the section for consideration which can be broken as follows forunderstanding. • Any income •By way of dividend o •Referred to in sec. 115-0
(vii) Sec. 10(34A), 10(35), 10(35A), 10(36), 10(37) and 10(38) of the Act are similarly worded with phrase "any income by way of". This is because Chapter III of theAct has the heading "Income which do not form part of total income".
It is therefore, first we have to compute the income following the matching principle which says receipt minus expenditure/outgoing before taking a decision whether such income is excludable or not forming part of "Total income'
(viii) Section 14 of the Act under Chapter IV with the title "Computation of total income" provides various heads of income. The section can be understood by breaking it as follows •Save as otherwise provided by the Act.
•All income •Shall •For the purpose of •Charge of Income Tax and computation of Total income •Be classified •Under following heads of income The phrase " save as otherwise provided" is the safe guard for inclusion of income under deeming provision as provided in the Chapter VI of the Act with the title "aggregation of income" and "set off and carry forward of loss". The distinction of Sec.66 for inclusion of income as provided under Chapter VII though there is no income tax payable is to separate 10 ITA no. 6267/Mum/2016 out such income from the Chapter III of the Act. However, sec.68, 69, 69A, 69B, 69C, 69D of the Act are deemed income where entire sum is treated as income without following /applying matching principle
(ix) Sec. 14A though included in the Chapter IV of the Act i.e computation of total income but it is having heading as "expenditure incurred in relation to income not includable in total income". It is therefore to understand the heading it can bebroken as follows :
•Expenditure incurred •In relation to •Income •Not includable in •Total income It is therefore, the income which is not to be included in total income is the income computed under various head following matching principle under the Chapter III of the Act.
(x) Sec. 14A (1) of the Act which was brought retrospectively, by the Finance Act 2001 can be understood by breaking the provision as follows:
•For the purpose of •computing •the total income •under this chapter(i.e. under various head) •No deduction •shall be allowed •in respect of •expenditure incurred •by the assessee •in relation to • "income' •which does not from •part of the total income under this Act.
The provisions, therefore, clearly envisaged that following the matching principle for various receipts from various resources an assessee has to compute income under various head. It is after computation of income under various heads, the income which does not form part of total income has to be identified and the expenditure considered for computing such exempt income is required to be disallowed u/s. 14A of the Act. As per settled law the concept of income includes a loss i.e. negative income or zero i.e. nil income. As per matching principle there can be positive receipt resulting into positive income or loss or nil income. Similarly, from a source there can be nil receipt which may result into loss i.e. negative income or nil income. There can be a receipt (sec. 66 r.w. chapter VII) the income resulting there from though includable but no income tax is charged resulting into non application of sec. 14A of the Act. There can be dividend which is not referable u/s. 115-O of the Act i.e. on which no dividend distribution tax (DDT) is paid and therefore, for receipt of such dividend, income under the head "income from other source" is required to be computed where expenditure related to such dividend are admissible if eligible u/s. 57
(iii) of the I.T.Act. The basic intention and purpose of introducing sec.
14A of the Act was to enlarge the scope of the apportionment of various expenditure irrespective of the fact whether the business or activities of an assessee is divisible or indivisible. Such intention and object of Hon'ble Legislature cannot be disregarded delving into consideration of 11 ITA no. 6267/Mum/2016 receipt of dividend rather than considering income from dividend. The scope for prohibiting the dual benefit which were permissible prior to insertion of 14A of the Act by not only claiming exempt income on one hand and by reducing taxable income with the claim of expenditure relatable to exempt income on other hand is required to be considered. The prohibition u/s. 115-O (5) of the Act is unambiguous and clear with following words "no deduction under any other provision of this Act shall be allowed to the company or a shareholder in respect of the amount which has been charged to tax under sub-section (1) or the tax thereon". It is therefore, any expenditure relatable to dividend receipt is not allowable under any provision of the Act. There can be "Nil" dividend from any investment resulting into negative or Nil income by way of dividends u/s. 1034) of the Act required no allow ability of such expenditure if there.
2.4. Legal proposition
a) The Hon'ble Supreme Court in the case of CIT Vs. Walfort Share & Stock Brokers 326 ITR 1 (SC) observed that the insertion of sec. 14A with retrospective effect reflects 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. 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 relatable to such (exempt or non-taxable) income, even if it is of the nature specified in sec.15 to 59 cannot be allowed against any other income which is includable in the total income.
Hon'ble Supreme observed that 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, its associated or related expenditure would also not be permitted to be debited against other taxable income.
The Supreme Court made it very clear that the permissible deduction enumerated in sec. 15 to 59 are now to be allowed only with reference to income which is brought under one of the heads of income and is chargeable to tax.
Note : The above observation and ratio were duly considered by Hon'ble Delhi HighCourt in the case of Maxopp Investment Ltd V/s. CIT - (2011) 15 Taxmann.com 390 (Delhi).
b) The Hon‟ble Bombay High Court in the case of Godrei & Boyce Mfg. Co., Ltd. W/s. DCIT 328 ITR 81, adjudicated following substantial question of law.
•"(A) Whether on the facts and in the circumstances of the case, the Tribunal Ought to have held that as the limited issue raised by respondent No. 1 in the assessment order was as to the quantum of the exemption under section 10(33) that was available and not to disallow any part of the expenditure claimed, hence it was not open to the revenue to expand the scope of appeal by invoking the provisions of section 14A of the Act to disallow the expenditure incurred; • (B) Whether on the facts and in the circumstances of the case, the Tribunal ought to have held that no disallowance could be made under section 14A of the Act and hence erred in setting aside the issue 12 ITA no. 6267/Mum/2016 relating to calculation of disallowance under section 14A of the Act to respondent No. 1;
•(C) Whether the Tribunal erred in directing respondent No. 1 to apply rule 8D of the Rules for computing the amount of disallowance under section14A of the Act.
•The assessee has, in addition, filed a Petition under Article 226 of the Constitution in order to challenge the constitutional validity of theprovisions of section 14A and of rule 8D Hon‟ble Jurisdictional High Court held that "Section 14A ensures that the shareholder, whose income from dividend is not included in the total income of a previous year, shall not claim a deduction in respect of the expenditure incurred in relation to earning such income. Section 14A is founded on a valid rationale that the basic principle of taxation is to tax net income, that is to say, gross income minus the expenditure. On that analogy as the Supreme Court observed in Walfort Share & Stock Brokers (P.) Ltd.'s case (supra), the exemption is also in respect of net income and expenses allowed can only be in relation to the earning of taxable income. Therefore, it cannot be said that an absurdity would result on the application of the literal interpretation of section 14A (Para
45)".
i) The CBDT vide circular No.5/2013 dt.11.02.14 through a clarification in respect of disallowance of expenses under Rule 14 A of the Act clarified as follows:
"SECTION 14A OF THE INCOME-TAX ACT, 1961, READ WITH RULE 8D OF THE INCOME-TAX RULES, 1962 - EXPENDITURE INCURRED IN RELATION TO INCOME MOT INCLUDIBLE IN TOTAL INCOME - CLARIFICATION ON DISALLOWANCE OF EXPENSES UNDER SECTION 14A IN CASES WHERE CORRESPONDING EXEMPT INCOME HAS NOT BEEN EARNED DURING THEFINANCIAL YEAR CIRCULAR No.5/2014 F.N.O.225/182/2013-ITA.II), DATED11-2-2014 Section 14A of the Income-tax Act, 1961 Act' provides for disallowance of expenditure in relation to income not "includible" in total income.
3. A controversy has arisen in certain cases as to whether disallowance can be made by invoking section 14A of the Act even in those cases where no income has been earned by an assessee which has been claimed as exempt during the financial year.
3.1. The matter has been examined in the Board. It is pertinent to mention that section 14A of the Act was introduced by the Finance Act, 2001 with retrospective effect from 01.04.1962. The purpose for introduction of section 14A with retrospective effect since inception of the Act was clarified vide Circular No. 14 of 2001 as under:
"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 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".13
ITA no. 6267/Mum/2016 Thus, legislative intent is to allow only that expenditure which is relatable to earning of income and it therefore follows that the expenses which are relatable to earning of exempt income have to be considered for disallowance, irrespective 6f the fact whether any such income has been earned during the financial year or not.
4.The above position is further clarified by the usage of term 'includible' in the Heading to section 14A of the Act and also the Heading to Rule- 8D of I.T. Rules, 1962 which indicates that it is not necessary that exempt income should necessarily be included in a particular year's income, for disallowance to be triggered. Also, section 14A of the Act does not use the word "income of the year" but "income under the Act". This also indicates that for invoking disallowance under section 14A, it is not material that assessee should have earned such exempt income during the financial year under consideration.
5. The above position is further substantiated by a language used in Rule 8D(2)(ii) & 8D(2) (iii) of I.T. Rules which are extracted below:
"(ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt of amount computed in accordance with the following formula, namely:-
A*B/C Where...
B=the average of value of investment, income from which does not or shall not form part of the total income as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year;"
(iii) an amount equal to one-half percent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance-sheet of the assessee, on the first day and the last day of the previous year."
(Emphasis added)
6.Thus, in light of above, Central Board of Direct Taxes, in exercise of its powers under section 119 of the Act hereby clarifies that Rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income.
7. This may be brought to the notice of all concerned."
The ratio of the above judgements emphasises that for computation of income one has to follow the scheme under various heads given u/s 14 of the Act. Out of the total receipts from various sources one has to categorize the head under which such receipt will fall and for computing the income under that head the expenditure / allowance / deduction required to be reduced, if allowable under such head. There can be nil receipt from a source during previous year but nature of such receipt accrues or arises earlier or in later years will determine the head under which income has to be computed. The shift of nature of receipt i.e investment converted into stock in trade has to be limited for shifting of head from that year only.
It is therefore difference between receipt and income is to be considered with the scheme of various heads. There is difference between receipt of dividend and income from dividend. Similarly it is the income which does not form part of total income which is required to be considered u/s 14 A of the IT Act. In sec 10(34) of the act it is income by way of 14 ITA no. 6267/Mum/2016 dividend and not the receipt of dividend which is exempted. Further such income by way of dividend is referred to the provision of section 115-O of the act i e not all the income by way of dividend is exempt see 115-O (1) of the IT Act deals with the additional income tax chargeable on domestic company on any amount declared, distributed, or paid by such company by way of dividend. For domestic company this is in the form of appropriation while the same is receipt in the hands of shareholder. Sec 115-O (5) of the Act restricts any deduction under any other provision of the act to be allowed to shareholder in respect of such dividend receipt. It is therefore for computing income by way of dividend from the dividend receipt so to claim exempt u/s 10(34) of the Act, no expenditure can be allowed under any provision.
8. In view of the above, it is submitted that the issue of disallowance under section 14A of the Act may be decided after taking due cognizance of the discussion made in the preceding paragraphs and accordingly the order of the Assessing Officer be confirmed.
(Purushottam Kumar) Sr. AR, ITAT, „D‟ Bench, Mumbai"
The learned DR fairly agreed that there is no exempt income earned by the assessee during the impugned assessment year and the ratio of decision of Cheminvest Limited(supra) shall be applicable in the instant case.
6. We have heard Ld. DR and we have perused the material on record including relevant case laws as well written submissions made by learned DR. We have observed the assessee is in the business of property development. The assessee has made investments in equity shares which are capable of yielding exempt income , however during the year no exempt income has been received by the assessee by way of dividend etc. . The A.O has disallowed Rs.97,90,947/- by invoking Section 14A read with Rule 8D as under:-
Disallowance u/s. 14A of the IT. Act, 1961 Aggregate of the following
i) Expense's directly attributable to exempt income Rs. Nil
ii) Amount of Expenditure by way of interest Rs. 15,963/-
iii) 0.5% of Average value of Investment Rs.96,93,984/ -
Total Rs.97,09,947/-
We have observed that Hon'ble Delhi High Court in the case of Cheminvest Limited(supra) had held that no disallowance can be made u/s. 14A . if no exempt income is received or receivable during the year. The decision of the Hon'ble Delhi High Court is approved by Hon'ble Bombay High Court in the 15 ITA no. 6267/Mum/2016 case of Principal CIT v. Ballarpur Industries Ltd. in ITA no. 51 of 2016 reported in {2016 (10) TMI 1039 Bombay High Court}. Thus keeping in view ratio of decision of Hon'ble Delhi High Court in the case of Cheminvest Limited (supra) and Hon'ble Bombay High Court in the case of Ballarpur Industries Ltd.(supra) , we order deletion of the addition of Rs. 97,90,947/-
as made by the A.O u/s. 14A by applying Rule 8D as the assessee has not received any exempt income during the previous year relevant to the impugned assessment year . We do not find any infirmity in the decision of the Ld. CIT(A) which we affirm/confirm .Thus , the appeal of the Revenue stands dismissed. We order accordingly.
8. In the result appeal of the Revenue in 6267/Mum/2016 for assessment year 2012-13 is dismissed.
Order pronounced in the open court on 19.12.2017 आदे श की घोषणा खुऱे न्यायाऱय में ददनांकः 19.12.2017 को की गई ।
Sd/- Sd/-
(C.N PRASAD) (RAMIT KOCHAR)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, dated: 19.12.2017
Nishant Verma
Sr. Private Secretary
copy to...
1. The appellant
2. The Respondent
3. The CIT(A) - Concerned, Mumbai
4. The CIT- Concerned, Mumbai
5. The DR Bench, E
6. Master File
// Tue copy//
BY ORDER
DY/ASSTT. REGISTRAR
ITAT, MUMBAI
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