2017 (8) TMI 732 - HC - Income Tax

Addition u/s 14A r.w.r. 8D - real income - exempt income necessarily be earned in the AY in question for the applicability of the said provision - whether the disallowance of the expenditure will be made even where the investment has not resulted in any exempt income during the AY in question but where potential exists for exempt income being earned in later AYs? - ITAT allowed claim 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 above Rule 8 D (1) indicates 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 such previous year . This implies that if there is no exempt income earned in the AY in question the question of disallowance of the expenditure incurred to earn exempt income in terms of Section 14A read with Rule 8D would not arise. The CBDT Circular No. 5/2014 dated 11th May 2014 upon which extensive reliance is placed by Mr. Hossain does not refer to Rule 8D (1) of the Rules at all but only refers to the word includible occurring in the title to Rule 8D as well as 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 the considered view of the Court this will be a truncated reading of Section 14 A and Rule 8D particularly when Rule 8D (1) uses the expression such previous year . Further it 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 The mere fact that in the audit report for the AY in question the auditors may have suggested that there should be a disallowance cannot be determinative of the legal position. That would not preclude the Assessee from taking a stand that no disallowance under Section 14 A of the Act was called for in the AY in question because no exempt income was earned. For all of the aforementioned reasons this Court is of the view that the CBDT Circular dated 11th May 2014 cannot override the expressed provisions of Section 14A read with Rule 8D. - Decided in favour of assessee.

Summary

Issues Involved:

1. Applicability of Section 14A of the Income Tax Act, 1961, even when no exempt income is earned during the Assessment Year (AY).
2. Interpretation of Rule 8D of the Income Tax Rules, 1962, in relation to Section 14A.
3. Validity and impact of the CBDT Circular No. 5/2014 dated 11th February 2014.

Detailed Analysis:

1. Applicability of Section 14A of the Income Tax Act, 1961:

The Revenue questioned whether the Income Tax Appellate Tribunal (ITAT) erred in deleting the disallowance made by the Assessing Officer (AO) under Section 14A of the Income Tax Act, 1961, read with Rule 8D of the Income Tax Rules, 1962. The AO had disallowed ?4,00,78,074/- from the returned income of the Assessee. The AO relied on the Special Bench decision in Cheminvest Ltd. v. ITO, which held that Section 14A would apply even if the investment did not yield any exempt income during the AY in question. The ITAT, however, reversed this, citing the Delhi High Court decision in Cheminvest Ltd. v. Commissioner of Income Tax, which held that Section 14A would not apply if no exempt income was earned in the AY in question.

2. Interpretation of Rule 8D of the Income Tax Rules, 1962:

Rule 8D (1) of the Rules indicates a correlation between the exempt income earned in the AY and the expenditure incurred to earn it. The Court noted that the words "in relation to income which does not form part of the total income under the Act for such previous year" imply that if no exempt income is earned in the AY, the question of disallowance of the expenditure incurred to earn exempt income in terms of Section 14A read with Rule 8D would not arise. The Court emphasized the concept of 'real income' under Section 5 of the Act, indicating that notional income does not factor into the disallowance.

3. Validity and Impact of the CBDT Circular No. 5/2014:

The Revenue contended that the CBDT Circular clarified that Section 14A would apply even when exempt income was not earned in a particular AY. However, the Court found that the Circular did not refer to Rule 8D (1) and only mentioned the word "includible" in the title to Rule 8D and Section 14A. The Court held that this was a truncated reading of Section 14A and Rule 8D, which did not account for the concept of 'real income'. The Court also referred to various decisions, including M/s. Redington (India) Ltd. v. The Additional Commissioner of Income Tax and CIT v. Winsome Textile Industries Limited, which supported the view that Section 14A is relatable to the earning of actual income and not notional income.

Conclusion:

The Court concluded that the CBDT Circular dated 11th February 2014 could not override the express provisions of Section 14A read with Rule 8D. Therefore, no substantial question of law arose from the impugned order of the ITAT, and the appeal by the Revenue was dismissed.