Citation Codes

Equivalent Citations

citation codes

Case Number

ITA 1421/DEL/2019

Attorney(S)

Acts

SECTION 143 INCOME TAX ACT 1961
u/s 14A r.w. Rule 8D

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Smart Summary

Tribunal Opinion Summary — I.T.A. No.1421/DEL/2019 (AY 2015-16)

Factual and Procedural Background

This is an appeal arising from an assessment under Section 143(3) of the Income Tax Act, 1961 dated 21.12.2017 for Assessment Year 2015-16. The assessment resulted in an addition by the Assessing Officer (AO) under Section 14A read with Rule 8D amounting to Rs. 1,65,16,139/-. The Commissioner of Income Tax (Appeals)-IV (CIT(A)) by order dated 04.12.2018 reversed that disallowance. The Revenue filed an appeal against the CIT(A)'s order before the Income Tax Appellate Tribunal (ITAT), recorded as I.T.A. No.1421/DEL/2019 (parties identified in the record as ACIT v. M/s. Hindustan EPC Company Ltd.). The matter was heard on 27.07.2022 and the order was pronounced on 29.07.2022.

Source statements in the opinion: AO made the Section 14A addition based on his interpretation of Section 14A and the CBDT circular; the assessee had invested Rs. 5,02,00,95,000/- in optionally convertible preference shares of M/s Hindustan Clean Energy Ltd. but "has not received any exempt income" in the year under consideration.

Legal Issues Presented

Whether a disallowance under Section 14A of the Income Tax Act read with Rule 8D can be made when the assessee did not earn any exempt income during the relevant previous year (assessment year)?
Whether the CBDT circular (referred to by the AO) can be read to require a Section 14A disallowance even where no exempt income was actually earned in the assessment year, contrary to the express language of Section 14A and Rule 8D (as interpreted by certain High Court decisions)?

Arguments of the Parties

Assessing Officer / Revenue (as represented in the order)

The AO's position, as recorded, was that Section 14A is attracted despite no exempt income being earned in the year; the AO relied on his interpretation of Section 14A and the CBDT circular to make the disallowance under Section 14A read with Rule 8D.
The Revenue, via its grounds of appeal, challenged the CIT(A)'s reversal of the AO's disallowance of Rs. 1,65,16,139/-. (The order records that the Revenue pursued an appeal against the CIT(A) decision.)

Assessee / Appellant (as recorded in the order)

The assessee's primary submission (as recorded by the CIT(A) and repeated before the Tribunal) was that no exempt income was received or receivable during the year under consideration; therefore, Section 14A could not be invoked and no disallowance was called for.
The CIT(A) noted that the assessee's written submissions were mainly confined to the ground that "no exempt income has been received during the year under consideration" and granted relief on that basis while leaving other grounds as otiose.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Cheminvest Ltd. v. CIT-IV [378 ITR 33] (Delhi High Court, 2015)	Held that Section 14A will not apply if no exempt income is received or receivable during the relevant previous year; the phrase "does not form part of the total income" contemplates an actual receipt of income in the relevant previous year for the purpose of disallowance.	CIT(A) relied on this decision to conclude the assessee deserved relief from disallowance since no exempt income was earned; the Tribunal accepted this reasoning in affirming the CIT(A).
Holcim India Pvt. Ltd. (57 Taxmann.com 28) (referred)	Referenced by Cheminvest and used in support of the same principle (as noted in the CIT(A) discussion).	Used indirectly via Cheminvest to support the conclusion that Section 14A is not attracted where no exempt income is earned.
PCIT v. IL&FS Energy Development Company Ltd. [2017] 84 Taxmann.com 186 (Delhi High Court)	Held that if there is no exempt income earned in the assessment year, disallowance under Section 14A read with Rule 8D would not arise; emphasized correlation between exempt income in the previous year and expenditure to earn it.	CIT(A) and the Tribunal relied on this case to hold that Rule 8D(1)'s language ("such previous year") requires a nexus with exempt income actually earned in that year and that CBDT circular could not override Rule 8D; Tribunal endorsed this reasoning.
Commissioner of Income Tax v. Walfort Share and Stock Brokers Pvt. Ltd. [2010] 326 ITR 1 (Supreme Court)	Explains the mandate of Section 14A: to curb claiming deductions for expenses incurred in relation to exempt income while taking the benefit of exemption without apportionment; discussion of 'real income' and notional income under Section 5.	Cited in the PCIT (IL&FS) discussion which the CIT(A) relied on to reject the CBDT circular's broader application; used to support the principle that Section 14A targets expenses related to actual exempt income.
Joint Investments Pvt. Ltd. v. CIT (2015) 372 ITR 694 (Delhi High Court)	Held that disallowance under Section 14A cannot exceed the exempt income; used to constrain the scope of Section 14A disallowances.	The Tribunal referred to this decision as clinching the issue in favour of the assessee and as supporting limitation on disallowance where exempt income is absent or limited.
CIT v. Chettinad Logistics (P.) Ltd. [2017] 80 Taxmann.com 221 (Madras High Court); SLP dismissed by Supreme Court on 02.07.2018 (95 Taxmann.com 250)	Madras High Court held Section 14A could not be invoked where no exempt income was earned in the relevant year; SLP against that decision was dismissed by the Supreme Court in favour of the assessee.	Tribunal referenced this chain to reinforce that the absence of exempt income precludes Section 14A disallowance; the Tribunal noted the Supreme Court dismissal as supportive of the assessee's position.
Corrtech Energy (P.) Ltd. (2014) 45 Taxmann.com 116 (Gujarat High Court)	Expressed the proposition that Section 14A disallowance cannot be made where no exempt income exists in the relevant year (as cited in the order).	Used by the Tribunal as part of the consistent judicial line rejecting the CBDT circular's expansive application; supported the conclusion that no disallowance was called for.
Pr. CIT v. India Gelatine and Chemicals Ltd. (2016) 66 Taxmann.com 356 (Gujarat High Court)	Similar proposition as Corrtech — limitation on Section 14A where exempt income is absent.	Relied upon in the Tribunal's reasoning as part of supporting precedents aligning with the decision to delete the addition.
PCIT v. M/s. ERA Infrastructure (India) Ltd., ITA No.204/2022 & CM APPL.31445/2022 (Delhi High Court, 20 July 2022)	Examined the Explanation to Section 14A as inserted by Finance Act, 2022 and held that the Explanation could not be presumed to be retrospective; therefore pre-Explanation law continues to govern earlier years.	Tribunal relied on this recent High Court decision to confirm that the Explanation (Finance Act, 2022) does not govern AY 2015-16, and therefore prior judicial precedents remain applicable; this supported upholding the CIT(A)'s order.

Court's Reasoning and Analysis

The Tribunal recited the CIT(A)'s approach and the factual finding that the assessee had invested Rs. 5,02,00,95,000/- in optionally convertible preference shares but "has not received any exempt income" in the year under review. The AO had applied Section 14A read with Rule 8D and the CBDT circular to compute and make a disallowance.

The CIT(A) examined the AO's assessment and the submissions of the assessee, and observed that the assessee's written submissions were mainly that no exempt income had been earned in the year; on that ground and by relying on binding decisions of the jurisdictional High Court (notably Cheminvest and Holcim as considered by Cheminvest), the CIT(A) deleted the addition of Rs. 1,65,16,139/-. The CIT(A) also considered PCIT v. IL&FS (Delhi High Court) which emphasized the necessity of a correlation between exempt income in the previous year and expenditure to earn it under Rule 8D(1), and which held that the CBDT circular could not override the explicit provisions of Section 14A read with Rule 8D.

The Tribunal heard rival submissions and agreed with the assessee's factual position that no exempt income was earned. The Tribunal surveyed a series of High Court decisions (Delhi, Madras, Gujarat) that have held Section 14A disallowance cannot be made where there is no exempt income in the relevant year, and noted the Supreme Court's dismissal of the SLP against the Madras High Court decision in Chettinad Logistics in favour of the assessee.

The Tribunal also noted a recent Delhi High Court decision (ERA Infrastructure) on the Explanation to Section 14A (Finance Act, 2022), which held that the Explanation was not retrospectively operative; therefore, the law as it stood prior to the Explanation governed AY 2015-16. On this basis, the Tribunal concluded that the CIT(A)'s deletion of the Section 14A addition was in accordance with extant judicial precedents and found no infirmity in that conclusion.

Holding and Implications

Holding: The appeal of the Revenue is DISMISSED. The Tribunal upheld the CIT(A)'s deletion of the addition made by the AO under Section 14A read with Rule 8D amounting to Rs. 1,65,16,139/-. (The CIT(A) had allowed the ground of appeal and deleted the disallowance.)

Implications:

Direct effect: The specific disallowance of Rs. 1,65,16,139/- under Section 14A r.w. Rule 8D for AY 2015-16 is deleted and the Revenue's challenge to that deletion is rejected.
Legal consequence as applied in this opinion: The Tribunal applied existing High Court precedents to conclude that Section 14A/Rule 8D cannot be invoked where no exempt income is earned or receivable in the relevant previous year; the Tribunal also accepted the view that the CBDT circular cannot override the clear language of Section 14A and Rule 8D as interpreted by those precedents.
Scope of decision: The Tribunal expressly relied on prior judicial decisions and a recent High Court ruling on the non-retrospective operation of the Explanation to Section 14A; the opinion frames the outcome as consistent with extant precedent rather than as establishing a new principle of law.

Order pronounced in open court on 29.07.2022. Bench: [KUL BHARAT] (Judicial Member) and [PRADIP KUMAR KEDIA] (Accountant Member).

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ACIT, Circle- 11(2), New Delhi v. Hindustan EPC Company Ltd., New Delhi

IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH "C" DELHI

BEFORE SHRI KUL BHARAT, JUDICIAL MEMBER

SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER

I.T.A. No.1421/DEL/2019 Assessment Year 2015-16 ACIT, v. M/s. Hindustan EPC Company Circle-11(2), Ltd.,

New Delhi. 616A, (16A, 6^thFloor), Devika Tower, Nehru Place,

New Delhi.

TAN/PAN: AAFCM9606E

(Appellant) (Respondent)

Appellant by: Shri A.T. Panda, Adv. Respondent by: Shri Gurpreet Shah Singh, Sr.DR Date of hearing: 27 07 2022

Date of pronouncement: 29 07 2022

O R D E R

PER PRADIP KUMAR KEDIA, A.M.:

The captioned appeal has been at the instance of the Assessee against the order of the Commissioner of Income Tax (Appeals)-IV, New Delhi ['CIT(A)' in short], dated 04.12.2018 arising from the assessment order dated 21.12.2017 passed by the Assessing Officer (AO) under Section 143(3) of the Income Tax Act, 1961 (the Act) concerning AY 2015-16.

2. As per its grounds of appeal, the Revenue has challenged the action of the CIT(A) in reversing the disallowances made by the Assessing Officer under Section 14A amounting to Rs.1,65,16,139/-.

3. The CIT(A) has dealt with the issue hereunder:

"6 I have carefully considered the AO's viewpoint contained in the Assessment Order and the submission made by the appellant including relevant judicial decisions in the matter. The appellant, during the year under consideration has made investment amounting to Rs.5,02,00,95,000/- in the optionally convertible preference shares of M/s Hindustan Clean Energy Ltd. but has not received any exempt income from such investment. The AO's view is that Section 14A is attracted in this case inspite of the fact that no exempt income has been earned during the year under consideration. The basis for making addition by AO is his interpretation of Sec. 14A and CBDT's circular on the applicability of Sec. 14A. The disallowance made by AO has been challenged on various grounds but written submission is confined mainly to the ground that this is a case where no exempt income has been received during the year under consideration and hence no disallowance is called for u/s 14A. Merely on this ground, I find that appellant deserves relief from disallowance u/s 14A in view of binding decisions of jurisdictional High Court as discussed below leaving other grounds of appeal as otiose.

6.1 The jurisdictional Hon'ble Delhi High Court in the case of

Chemnivest Ltd. vs. CIT-IV [378 ITR 33] (2015) (supra) while placing reliance on its earlier judgement in the case of Holcim India Pvt. Ltd. 57 Taxmann.com 28 (2015) has held that Sec. 14A will not apply if no exempt income is received or receivable during the relevant previous year. In this case, it was held that -

"the expression 'does not form part of the total income' in section 14A 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 incurred in relation to the said income"

6.2 In the recent Judgement dt . 19/08/2017 in the case of PCIT Vs IL&FS Energy Development Company Ltd. [2017] 84 taxmann.com 186 (Delhi), the Hon'ble High Court of Delhi has held that i f there is no exempt income earned in the assessment year in question, question of disallowance of the expenditure incurred to earn exempt income in terms of Section 14A read with Rule 8D would not arise. It has further been held that the words

"in relation to income which does not form part of the total income under the Act for such previous year" in the Rule 8D(1) indicate a correlation between the exempt income earned in the AY and the expenditure incurred to earn it . In other words, the expenditure as claimed by the Assessee has to be in relation to the income earned in ' in such previous year' .

6.3 In this judicial pronouncement, CBDT'S Circular dt . 11/02/2014 has also been discussed to hold that said circular cannot override the expressed provisions of Section 14A read with Rule 8D. The Hon'ble Court has observed that the CBDT's Circular does not refer to Rule 8D(1) of the Rules at all but only refers to the word "includible" occurring in the ti tle to Rule 8D as well as in the title to Section 14A. The Circular concludes that it is not necessary that exempt income should necessarily be included in a particular year's income for the disallowance to be triggered. In this connection, the Hon'ble Court's views are under:

" In the considered view of the Court , this will be a truncated reading of Section 14A and Rule 8D particularly when Rule 8D(1) uses the expression 'such previous year' . Further, i t does not account for the concept of 'real income'. It does not note that under Section 5 of the Act, the question of taxation of 'notional income' does not arise. As explained in Commissioner of Income Tax V. Walfort Share and Stock Brokers Pvt. Ltd [2010] 326 ITR 1(SC), the mandate of Section 14A of the Act is to curb the practice of claiming deduction of expenses incurred

in relation to exempt income being taxable income and at the same time avail of the tax incentives by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. Consequently, the Court is not persuaded that in view of the Circular of the CBDT dated 11th May 2014, the decision of this Court in Cheminvest Ltd. (supra) requires reconsideration."

Also the Hon'ble jurisdictional High Court in Joint Investment Pvt. Ltd. vs. CIT (2015) 372 ITR 694 (Del.) has held that disallowance u/s 14A cannot exceed the exempt income. Further, recently SLP filed against the order of High Court in the case of CIT vs. Chettinad Logistics (P) Ltd. [2017] 80 taxmann.com 221/248 Taxman 55 (Mad.) in which it was held that where no exempt income was earned in relevant assessment year by assessee, section 14A could not be invoked, was dismissed by Hon'ble Supreme Court in favour of assessee in its decision dated 02.07.2018 [95 taxmann.com 250(SC)] .

6.4 In view of the fact that appellant did not earn any exempt income during the year, taking cognizance of the above judicial decisions, it is held that no disallowance u/s 14A is called for in this case. Keeping in view of the above, the addition made by the AO amounting to Rs 1,65,16,139/- u/s 14A r.w. Rule 8D is hereby deleted. The ground of appeal is allowed."

4. We have heard the rival submission on the issue. It was pointed out on behalf of the assessee that the assessee has not earned any exempt income during the year under review. It is the case of the assessee that in the absence of any exempt income the provisions of Section 14A of the Act could not be invoked. We find merit in the aforesaid plea of the assessee. Various Courts have held that Section 14A of the Act disallowance cannot be

kicked when there was no exempt income earned by the assessee as is the case in the present appeals. Hon'ble Delhi High Court in PCIT vs IL&FS Energy Development Company Ltd. (2017) 84 Taxman.com 186(Delhi) and the Hon'ble Madras High Court in CIT v. Chettinad Logistics (P.) Limited (2017) 80 taxmann.com 221(Madras) have expressed a clear disagreement with CBDT Circular and held that where there is no exempt income in relevant year there cannot be a disallowance of expenditure under S.14A of the Act. Similar proposition has been laid down by the Hon'ble Gujarat High Court in the case of Corrtech Energy (P.) Ltd (2014) 45 taxmann.com. 116 (Guj) and Pr.CIT vs. India Gelatine and Chemicals Ltd. (2016) 66 taxmann.com 356 (Guj). The aforesaid judicial fiat was reiterated by the Hon'ble Delhi High Court in the case of Joint Investments Pvt. Ltd. vs. CIT reported in 372 ITR 692 (Delhi) wherein Hon'ble Delhi High Court has categorically ruled that disallowance under S.14A of the Act cannot exceed the amount of tax exempt income. Notably, the SLP filed against the decision of Hon'ble Madras High Court in Chettinad

Logistics (supra) has been dismissed by Hon'ble Supreme Court in CIT vs. Chettinad Logistics (P.) Ltd. (2018) 95 taxmann.com 250 (SC). Hence, in conformity with the judicial precedents, we find substantial merit in the conclusion drawn by the CIT(A) which essentially holds that Section 14A of the Act can be triggered only if assessee seeks to square off expenditure against the income which does not form part of total income under the Act and Section 14A of the Act cannot be invoked where no exempt income was earned in the relevant assessment years. Thus, without going into other aspect of contentions, in consonance with the judicial precedents, we do not see any infirmity in the conclusion

drawn by the CIT(A) for non applicability of Section 14A of the Act in the facts of the case.

5. The judgment rendered by the Hon'ble Delhi High Court in Joint Investment Pvt. Ltd. vs. CIT in ITA No.117/2015 order dated 25.02.2015, thus clinches the issue in favour of assessee. Thus, the CIT(A) has rightly restricted the disallowance to the extent of the exempt income. Significantly, the Hon'ble Delhi High Court in the case of PCIT vs. M/s. ERA Infrastructure (India) Ltd. in ITA No.204/2022 and CM APPL.31445/2022 judgment and order dated 20 ^th

July, 2022 had the occasion to examine the law on applicability of Section 14A having regard to the newly inserted Explanation to Section 14A as codified by Finance Act, 2022. The Hon'ble High Court held that the aforesaid Explanation cannot be presumed to be retrospective in operation. As a corollary, the law prevailing prior to the insertion of Explanation would continue to apply and shall not be guided by the Explanation being prospective. We therefore see no reason to interfere with the order of the CIT(A) which is in sync with extant law as expounded by judicial precedents.

6. In the result, the appeal of the Revenue is dismissed.

Order was pronounced in the open Court on 29/07/2022.

Sd/- Sd/-

[KUL BHARAT] [PRADIP KUMAR KEDIA]

JUDICIAL MEMBER ACCOUNTANT MEMBER

DATED: /07/2022

Prabhat

ACIT, Circle- 11(2), New Delhi v. Hindustan EPC Company Ltd., New Delhi

Tribunal Opinion Summary — I.T.A. No.1421/DEL/2019 (AY 2015-16)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessing Officer / Revenue (as represented in the order)

Assessee / Appellant (as recorded in the order)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

ACIT, Circle- 11(2), New Delhi v. Hindustan EPC Company Ltd., New Delhi

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