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Case Number

T.C.A. No. 24 of 2017

Advocates

Mr. T.R Senthilkumar
Mr. S. Sridhar

Judges

Rajiv Shakdher
R. Suresh Kumar, JJ.

Acts

SECTION 260 A INCOME TAX ACT 1961
provisions of Rule 8 D of the Income Tax Rules, 1962 (Rules)
SECTION 260 INCOME TAX ACT 1961
Assessee.25. Rule 8
s.14A r.w Rule 8D

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Smart Summary

Structured Summary of the Opinion (Section 260-A appeal under the Income Tax Act)

Factual and Procedural Background

The appeal arises under Section 260-A of the Income Tax Act, 1961 against the Income Tax Appellate Tribunal, Madras ‘A’ Bench's order dated 25.07.2016 in I.T.A No. 637.Mds/2016. The Assessing Officer, by assessment order dated 10.03.2014 under Section 143(3), disallowed expenditure of Rs. 86,62,748/- by invoking Section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 and Circular No. 5/2014 (11.02.2014). The Assessee (a business engaged in trading, clearing and forwarding) filed its return for AY 2011-12 on 29.02.2012 declaring total income of Rs. 17,58,71,418/-. The Assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], who on 09.12.2015 reversed the Assessing Officer's disallowance. The Revenue then appealed to the Tribunal, which allowed the Revenue's appeal for statistical purposes and remitted the matter to the Assessing Officer to verify whether the Assessee's investments in sister concerns were made out of interest-free funds (raised as a factual issue). The Tribunal's remand followed submissions by the Assessee invoking a Tribunal decision in Rane Holdings Ltd. The Revenue challenged the Tribunal's remand direction before the court in the present appeal.

Legal Issues Presented

Whether the addition of Rs. 86,62,748/- by invoking Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962, was valid in the assessment for AY 2011-12.
Whether Rule 8D can be applied to disallow expenditure when no exempt income (specifically, dividend) was actually earned in the relevant previous year (i.e., whether Rule 8D can operate independently or in anticipation of exempt income).
Whether the Tribunal was correct in remanding the matter to the Assessing Officer to verify if investments in sister concerns were made out of interest-free funds for strategic purposes (a factual inquiry) despite the finding that no exempt income was earned in the year under consideration.

Arguments of the Parties

Appellant (Revenue) — Arguments

The Revenue contended that the Assessing Officer was entitled to disallow the expenditure by taking recourse to Rule 8D even though no exempt income was earned in the relevant year.
The Revenue relied upon the Board's Circular No. 5/2014 to support the proposition that Section 14A and Rule 8D could be applied even where exempt income might be earned in future (i.e., that the provision could apply to 'includable' exempt income or anticipated situations).
Before the Division Bench in Redington, the Revenue had argued that Rule 8D applied and, at least in that earlier litigation, sought to treat Rule 8D as clarificatory and retrospective in operation.
The Assessing Officer had also relied upon the decision in Cheminvest Limited to support the disallowance in the assessment order.

Respondent (Assessee) — Arguments

The Assessee submitted that where investments are made in sister concerns out of interest-free funds for strategic purposes, Section 14A could not be invoked to disallow expenditure.
In support, the Assessee relied on the Tribunal judgment in Rane Holdings Ltd. (ITA No. 115.Mds/2015 dated 06.01.2016), which was advanced before the Tribunal.
The Assessee emphasized the factual finding (recorded by the CIT(A) and noted in the record) that no dividend income (i.e., no exempt income) was earned in AY 2011-12.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Cheminvest Limited v. Commissioner Of Income Tax-VI, 121 ITD 318 (Tribunal - Delhi Bench)	Relied upon by the Assessing Officer in support of the Section 14A disallowance in the assessment order.	The opinion records that the Assessing Officer relied upon this judgment in the assessment; the CIT(A) disagreed with the AO's determination (and reversed it).
Rane Holdings Ltd. v. ACIT (ITA No. 115.Mds/2015, dated 06.01.2016)	Relied on by the Assessee to argue that investments in sister concerns made out of interest-free funds for strategic purposes prevent invocation of Section 14A.	The Tribunal considered the Assessee's reliance on this decision and remanded the matter to the Assessing Officer to verify whether investments were made out of interest-free funds.
Redington (India) Ltd. v. Additional Commissioner Of Income Tax (T.C.A No. 520 of 2016) — Division Bench judgment dated 23.12.2016	Dealt with whether Section 14A read with Rule 8D could be applied where no exempt income was earned in the relevant year; rejected Revenue's plea that disallowance can be made on anticipated or notional exempt income.	The Court relied on this Division Bench judgment to reject the Revenue's argument that Section 14A/Rule 8D can be applied in absence of actual exempt income in the relevant year, noting that total income is computed on real (not notional) income.
Commissioner of Income Tax v. Maharashtra Sugar Mills Limited (1971) 82 ITR 452	Identified as part of the Supreme Court jurisprudence that led to the need for s.14A (i.e., earlier approach allowed full deduction without apportionment).	Cited in the Redington Division Bench's reasoning (as recorded) to explain legislative intent for inserting Section 14A to prevent claiming expenses against exempt income without apportionment.
Rajasthan State Ware Housing Corporation v. Commissioner of Income Tax (2002) 242 ITR 450	Also part of the earlier Supreme Court jurisprudence prompting the insertion of Section 14A.	Cited in the Division Bench reasoning to contextualize why Section 14A was enacted (to curb allowance of expenses attributable to exempt income without apportionment).
Commissioner of Income Tax v. Walfort Share and Stock Brokers (P) Ltd. (2010) 326 ITR 1	Quoted as authority describing the mandate of Section 14A — to curb claim of expenses in relation to exempt income while also availing exemption.	Quoted in the Division Bench judgment and relied upon by this Court's opinion to underscore the legislative purpose and proper scope of Section 14A.

Court's Reasoning and Analysis

The Court proceeded by examining the facts and the legal scope of Section 14A and Rule 8D in light of the record:

The Court noted the factual finding recorded by the CIT(A) (and reproduced in the Tribunal's order) that no dividend or exempt income had been earned by the Assessee in AY 2011-12.
The Court articulated the legal import of Section 14A: it can be triggered only where an assessee seeks to set off or claim deduction of expenditure against income which does not form part of the total income (i.e., expenditure incurred in relation to exempt income).
The Court explained that the provision was introduced to prevent the practice of claiming expenditure against exempt income without apportionment — a legislative response to earlier Supreme Court decisions which had permitted full allowance without apportionment.
The Court concluded that, since there was no dispute that no exempt income was earned in the relevant year, the addition made by the Assessing Officer relying on Section 14A was contrary to the provisions of Section 14A itself.
The Court addressed the Revenue's submission that disallowance could nonetheless be made by employing Rule 8D. It held that Rule 8D provides only a method for determining the amount of expenditure incurred in relation to exempt income and cannot expand the scope of Section 14A. In short, Rule 8D cannot operate independently of Section 14A's substantive applicability.
The Court relied on the Division Bench decision in Redington (India) Limited, which had rejected the Revenue's contention that Section 14A/read with Rule 8D could be applied in anticipation of exempt income in future years. The Division Bench emphasized that computation of total income concerns real income of the assessment year and not notional or anticipated income.
Having considered these legal principles, the Court held that the Tribunal's remand to verify whether investments were made out of interest-free funds was unnecessary in the present facts because the controlling factual finding (no exempt income earned) meant Section 14A/Rule 8D could not properly be invoked.
Given that the legal questions relied upon by the Revenue were already addressed by the Division Bench in Redington, the Court saw no need to interfere further with the impugned judgment and order.

Holding and Implications

Holding: The appeal is dismissed. The Court declined to interfere with the impugned judgment of the Tribunal. There shall be no order as to costs.

Implications:

Direct effect: The Assessing Officer's addition of Rs. 86,62,748/- under Section 14A read with Rule 8D is not sustained by this Court; the Tribunal's order (which included a remand) remains unaltered by the Court's dismissal of the appeal, and the Court found no basis to disturb the CIT(A)'s factual finding that no exempt income (dividend) was earned in AY 2011-12.
Scope of law: The Court reaffirmed the principle (as stated in the Division Bench decision in Redington) that Section 14A can be applied only in relation to actual exempt income of the relevant year and that Rule 8D is only a computation mechanism which cannot extend the substantive ambit of Section 14A to notional or anticipated income.
Precedential note: The Court observed that the legal questions were already covered by an earlier Division Bench judgment (Redington), and the present decision does not purport to create a new departure from existing law.

This summary is strictly confined to the information contained in the provided opinion and does not add or infer information beyond the text.

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Commissioner Of Income Tax v. Chettinad Logistics Pvt. Ltd.

Prayer: Appeal filed under Section 260-A of the Income Tax Act, 1961, against the order dated 25.07.2016 passed in I.T.A No. 637.Mds/2016 by the Income Tax Appellate Tribunal, Madras ‘A’ Bench.

The Judgment of the Court was delivered by

Rajiv Shakdher, J.:— This is an appeal filed under Section 260 A of the Income Tax Act, 1961 (in short, the Act), against the judgment and order of the Income Tax Appellate Tribunal, dated 25.07.2016

2. The only issue, which arose for consideration, before the Tribunal, was, whether an addition made in the sum of Rs. 86,62,748/- qua, the Assessee, by invoking the provisions of Section 14A of the Act, read with, Rule 8 D of the Income Tax Rules, 1962 (in short, the Rules) was valid.

3. To be noted, the Assessing Officer vide order dated 10.03.2014, had added the aforementioned amount, by disallowing expenditure under Section 14A of the Act.

4. The Assessee had carried the matter in appeal, to the Commissioner of Income Tax (Appeals) [in short, CITA].

5. The CIT(A) vide order dated 09.12.2015, reversed the determination made by the Assessing Officer, in respect of this issue.

6. The Tribunal, via, the impugned judgment, allowed the Revenue's Appeal for statistical purposes and remanded the matter to the Assessing Officer, to verify, whether the investment made by the Assessee had been made by it, in its sister concerns, out of interest free funds.

7. In the body of the impugned judgment and order, the Tribunal has, at length, recorded findings of fact, given by the CIT(A), which include, inter alia that in the given Assessment Year (in short, AY), i.e, AY 2011-12, no income, by way of dividend, had been earned.

8. The Revenue, being aggrieved by the direction of remand, have preferred the instant appeal.

9. In order to adjudicate upon the appeal, the following brief facts are required to be noticed:

10. The Assessee is engaged in the business of trading, clearing and forwarding.

11. Consequently, the Assessee filed its return for the relevant assessment year, i.e, AY 2011-12, on 29.02.2012, whereby, it disclosed an income of Rs. 17,58,71,418/-.

12. It appears that the Assessee's case was taken up for scrutiny and as a result thereto, assessment was completed under the provisions of Section 143(3) of the Act, by virtue of the order passed on 10.03.2014, as indicated above.

13. The Assessing Officer while passing the said assessment order invoked the provisions of Section 14A of the Act and as alluded to above, disallowed expenditure, equivalent to a sum of Rs. 86,62,748/-, and for this purpose, recourse was also taken to the provisions of Rule 8 D of the Income Tax Rules, 1962 (Rules) and the Board's Circular No. 5/2014, dated 11.02.2014 (in short, the Circular).

14. The main plank, on which, the assessment order is based is that, in terms of the aforementioned Circular of the Board and Rule 8D read with Section 14A of the Act, the expenditure incurred by the Assessee had to be disallowed, even when, admittedly, it had not earned income exempt from tax, in the concerned previous year.

15. As indicated above, the CIT(A) disagreed with the Assessing Officer and, consequently, reversed the order dated 10.03.2014 Notably in reaching his conclusion the Assessing Officer relied upon the judgment in the matter of: Cheminvest Limited v. Commissioner Of Income Tax-Vi, 121 ITD 318 (Tribunal - Delhi Bench).

16. The Revenue, being aggrieved, approached the Tribunal. The record shows that during the course of arguments before the Tribunal, the Assessee advanced a submission, to the effect, that in cases, where, investments are made in sister concern(s), out of interest free funds, for strategic purposes, the provisions of Section 14A of the Act, could not be invoked. In support of this submission, the Assessee relied upon the judgment of the Tribunal in the case of: Rane Holdings Ltd. v. ACIT, passed in ITA No. 115.Mds/2015, dated 06.01.2016

17. It is, in this background, that the Tribunal remanded the matter to the Assessing Officer, so as to reach a conclusion as to whether investments had been actually made, in sister concerns of the Assessee, out of interest free funds, albeit, for strategic purposes.

18. According to us, this exercise, in the given facts which emerge from the record, was clearly unnecessary, as the CIT(A) had returned the finding of fact that no dividend had been earned in the relevant assessment year, with which, we are concerned, in the present appeal.

19. In our opinion Section 14A of the Act, can only be triggered, if, the Assessee seeks to square off expenditure against income which does not form part of the total income under the Act.

20. The legislature, in order to do away with the pernicious practice adopted by the Assessees', to claim expenditure, against income exempt from tax, introduced the said provision.

21. In the instant case, there is no dispute that no income i.e, dividend, which did not form part of total income of the Assessee was earned in the relevant assessment year.

22. Therefore, to our minds, the addition made by the Assessing Officer by relying upon Section 14A of the Act, was completely contrary to the provisions of the said Section.

23. Mr. Senthil Kumar, who appears for the Revenue, submitted that the Revenue could disallow the expenditure even in such a circumstance by taking recourse to Rule 8D.

24. According to us, Rule 8D, only provides for a method to determine the amount of expenditure incurred in relation to income, which does not form part of the total income of the Assessee.

25. Rule 8 D, in our view, cannot go beyond what is provided in Section 14A of the Act.

26. Furthermore, we may note that a similar argument was sought to be advanced by the Revenue in the matter concerning, Redington (India) Ltd. v. Additional Commissioner Of Income Tax, which was, subject matter of T.C.A No. 520 of 2016.

27. A Co-ordinate Bench of this Court, vide judgment dated 23.12.2016, rejected the plea of the Revenue advanced in that behalf.

28. As a matter of fact, a perusal of the judgment would show that the Revenue had sought to argue that because exempt income could be earned in future years, therefore, recourse could be taken to the provisions of Section 14A of the Act, to disallow expenditure. In other words the stand taken by the Revenue was irrespective of the fact whether or not income was earned in the concerned assessment year expenditure under Section 14A could be disallowed against anticipated income.

29. Pertinently, the Division Bench in Redington (India) Limited case has repelled this precise argument.

30. The Division Bench, in our view, quiet correctly held that, the computation of total income, in terms of Section 5 of the Act, is made qua real income and not, vis-a-vis, notional income.

31. The Division Bench went on to hold that Section 4 of the Act brings to tax, that income, which is relatable to the assessment year in issue. The Division Bench, thus, held that where no exempt income is earned in the previous year, relevant to the assessment year in issue, provisions of Section 14A of the Act, read with Rule 8 D could not be invoked.

32. While coming to this conclusion, the Division Bench also took note of the aforementioned Circular, issued by the Board.

33. The reasoning of the Division Bench is contained in the following part of the judgment:

“4. The admitted position is that no exempt income has been earned by the assessee in the financial year relevant to the assessment year in issue. The order of assessment records a finding of fact to that effect. The issue to be decided thus lies within the short compass of whether a disallowance in terms of s.14A of the Act read with Rule 8D of the Rules can be contemplated even in a situation where no exempt income has admittedly been earned by the assessee in the relevant financial year.

7. Per contra, Sri. T. Ravikumar appearing on behalf of the revenue drew our attention to the marginal notes of s.14 A pointing out that the provision would apply not only where exempted income is ‘included’ in the total income, but also where exempt income is ‘includable’ in total income.

8. He relied upon a Circular issued by the Central Board of Direct taxes in Circular No. 5 of 2014 dated 11.2.2014 to the effect that s.14A was intended to cover even those situations whether there is a possibility of exempt income being earned in future. The Circular, at paragraph 4, states that it is not necessary for exempt income to have been included in the income of a particular year for the disallowance to be triggered. According to the Learned Standing Counsel, the provisions of s.14A are made applicable, in terms of sub section (1) thereof to income ‘under the act’ and not ‘of the year’ and a disallowance under s.14A r.w Rule 8D can thus be effected even in a situation where a tax payer has not earned any taxable income in a particular year.

9. We are unable to subscribe to the aforesaid view. The provisions of section 14A were inserted as a response to the judgments of the Supreme Court in Commissioner of Income Tax v. Maharashtra Sugar Mills Limited (1971) 82 ITR 452) and Rajasthan State Ware Housing Corporation v. Commissioner of Income Tax ((2002) 242 ITR 450) in terms of which, expenditure incurred by an assessee carrying on a composite business giving rise to both taxable as well as non-taxable income, was allowable in entirety without apportionment. It was thus that s.14A was inserted providing that no deduction shall be allowable in respect of expenditure incurred in relation to the earning of income exempt from taxation. As observed by the Supreme Court in the judgment in the case of Commissioner of Income Tax v. Walfort Share and Stock Brokers (P) Ltd. (2010) 326 ITR 1

‘…. 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 of the tax incentive by way of an exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income.’

10. The provision this is clearly relatable to the earning of actual income and not notional or anticipated income. The submission of the Department to the effect that s.14A would be attracted even to exempt income ‘includable’ in total income would entail the assessment of notional income, assumed to be exempt in the future, in the present assessment year. The computation of total income in terms of s.5 of the Act is on real income and there is no sanction in law for the assessment of admittedly notional income, particularly in the context of effecting a disallowance in connection therewith.

11. The computation of disallowance in terms of Rule 8D is by way of a determination involving direct as well as indirect attribution. Thus, accepting the submission of the Revenue would result in the imposition of an artificial method of computation on notional and assumed income. We believe this would be carrying the artifice too far.

(emphasis is ours)”

34. Mr. Senthil Kumar, seeks to distinguish the judgment in Redington (India) Limited case based on the fact that Rule 8D had not kicked-in by AY 2007-08, which was the AY being considered in the said case.

35. According to us, this was not the argument, put forth, before the Division Bench. As a matter of fact, the Revenue relied heavily on Rule 8D.

36. Mr. Ravikumar, who appeared for the Revenue, in that matter and who is present in this Court, informs us that he had in fact argued that the Rule was clarifactory in nature and would apply retrospectively, and that, the Division Bench, therefore, discussed the impact of Rule 8D of the Rules.

37. However, it is, our view, as indicated above, independent of the reasoning given in Redington (India) Limited case that Rule 8D cannot be read in a manner, which takes it beyond the scope and content of the main provision, which is, Section 14A of the Act.

38. Therefore, as adverted to above, Rule 8D, cannot come to the rescue of the Revenue.

39. In any event, the Tribunal, via, the impugned judgment has remitted the matter to the Assessing Officer.

40. Therefore, for the foregoing reasons, we are of the view, that no interference is called for qua the impugned judgment.

41. To our minds, questions of law, which could have arisen are already covered by the judgment of a Co-ordinate Bench of this Court rendered in Redington (India) Limited case.

42. The appeal is accordingly, dismissed. However, there shall be no order as to costs.

Commissioner Of Income Tax v. Chettinad Logistics Pvt. Ltd.

Structured Summary of the Opinion (Section 260-A appeal under the Income Tax Act)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant (Revenue) — Arguments

Respondent (Assessee) — Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Commissioner Of Income Tax v. Chettinad Logistics Pvt. Ltd.

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