2024 (6) TMI 1291 - AT - Income Tax

Disallowance u/s. 14A - As argued assessee has not earned exempt income during the relevant previous year under consideration - As per CIT(A) as there is no exempt income earned in the present Assessment Year disallowance made u/s 14A is not sustainable - HELD THAT - We have noticed that the above findings of the Ld. CIT(A) is apt and accurate and legally sustainable as being duly supported by settled principles of law by the Hon ble High Court and Hon ble Supreme Court and we find no illegality and perversity in the same. Regarding the reliance by the Ld. AO on the case of Hon ble Supreme Court in M/s. Maxopp Investment Ltd. 2018 (3) TMI 805 - SUPREME COURT we have noticed that the appellant has unequivocally asserted that they have made the investment from their own funds raised by the issuing of Optional Convertible Debentures (considered entirely equity in nature) and subscribed by holding company. Further the assessee has unequivocally asserted that they have not debited any interest expenses or similar expenses incurred to any income from investment made by the appellant. Nothing contrary has been brought on record by the revenue/appellant which may controvert the said assertions of the assessee in this case. Therefore the facts of case of the assessee are distinguishable from the facts of case of M/s. Maxopp Investment Ltd. referred (supra). Addition of book profit u/s 115JB on addition u/s 14A - The finding of the Hon ble jurisdictional High Court in M/s. Bengal Finance Investment Pvt. Ltd. case 2015 (2) TMI 1263 - BOMBAY HIGH COURT the amount of disallowance u/s. 14A of the Act cannot be added for arriving at book profit for the purpose of Section 115JB of the Act confirmed. We are of the considered view that there is no illegality in the impugned order passed by the Ld. CIT(A) wherein the order of the Ld. AO was set aside and disallowances made by the Ld. AO were deleted. Assessee appeal allowed.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Applicability of Rule 8D of the Income Tax Rules, 1962.
3. Addition to Book Profit under Section 115JB of the Income Tax Act, 1961.

Detailed Analysis:

Disallowance under Section 14A of the Income Tax Act, 1961

The primary issue revolves around whether the disallowance under Section 14A of the Income Tax Act is applicable when the assessee has not earned any exempt income during the year under consideration. The department argued that the CIT(A) erred in holding that Section 14A disallowance is not applicable as the assessee had investments capable of earning exempt income.

The assessee contended that since no exempt income was earned, Section 14A should not apply. The CIT(A) upheld this view, citing the Delhi High Court's decision in Pr. Commissioner of Income Tax Vs. IL & FS Energy Development Company Ltd., which held that no disallowance under Section 14A is warranted if no exempt income is earned. The CIT(A) also referenced the explanatory memorandum to the Finance Act 2001, clarifying that expenses can be allowed only to the extent they are relatable to taxable income.

Applicability of Rule 8D of the Income Tax Rules, 1962

The department also contested the deletion of disallowance on account of expenditure under Section 14A read with Rule 8D of the Income Tax Rules, 1962. The CIT(A) noted that the AO made the addition based on CBDT Circular No. 5/2014, which states that disallowance under Section 14A would be attracted even if no exempt income is earned during the financial year. However, the CIT(A) held that the circular cannot override the express provisions of Section 14A read with Rule 8D, as supported by the Delhi High Court's decision in Pr. Commissioner of Income Tax Vs. IL & FS Energy Development Company Ltd.

The CIT(A) further cited the Delhi High Court's judgment in Cheminvest Ltd. vs. CIT, which held that Section 14A will not apply if no exempt income is received or receivable during the relevant previous year.

Addition to Book Profit under Section 115JB of the Income Tax Act, 1961

The department argued that the CIT(A) was incorrect in deleting the disallowance under Section 14A for the purpose of computing book profit under Section 115JB. The AO had added the disallowance amount to the book profit, referencing the Mumbai ITAT's decision in Dy. CIT Cen. Cir. 18 & 19, Mumbai Vs. Viraj Profiles Ltd.

The CIT(A), however, relied on the Bombay High Court's decision in Principal Commissioner of Income Tax – 6 Vs. M/s. Bengal Finance Investment Pvt. Ltd., which held that an amount disallowed under Section 14A cannot be added to arrive at book profit for the purposes of Section 115JB.

Conclusion

After considering the rival submissions and case laws cited, the tribunal found no merit in the department's appeal. The CIT(A)'s order, which set aside the AO's disallowance under Section 14A and its addition to book profit under Section 115JB, was upheld. The tribunal concluded that the CIT(A)'s findings were legally sustainable and supported by settled principles of law. Therefore, both grounds of appeal by the department were decided against the revenue and in favor of the assessee.

The appeals for both A.Y. 2017-18 and A.Y. 2018-19 were dismissed, and the order was pronounced in the open court on 25.06.2024.