2020 (1) TMI 1141 - HC - Income Tax

Disallowance u/s 14A - HELD THAT - From perusal of Section 14A of the Act, it is evident that for the purposes of computing the total income under this chapter, no deduction shall be allowed in respect of the expenditure incurred by the assessee in relation of the income which does not form part of his total income under the Act. The expenditure, the return of investment and cost of requisition are distinct concepts. Therefore the word incurred in Section 14A of the Act have to be read in the context of the scheme of the Act and if so read, it is clear that it disallows certain expenditures incurred to earn exempt income from being deducted from other incomes which is includable in the total income for the purposes of chargeability to the tax. It is equally well settled that expenditure is a pay out. In order to attract applicability of section 14A of the Act, there has to be a pay out and return of investment or a pay back is not such a debit item. See WALFORT SHARE AND STOCK BROKERS (P) LTD 2010 (7) TMI 15 - SUPREME COURT as well as MAXOPP INVESTMENT LTD. 2018 (3) TMI 805 - SUPREME COURT In the instant case, the assessee has admittedly not incurred any expenditure. This case pertains to income on dividend, which by no stretch of imagination can be treated to be an expenditure to attract the provisions of Section 14A of the Act. In view of aforesaid enunciation of law by the Supreme Court, the first substantial question of law framed by this court is answered in favour of the assessee and against the revenue. Whether provisions of Section 115JA apply to the Banking Companies? - HELD THAT - This court by an order passed 2020 (1) TMI 1116 - KARNATAKA HIGH COURT 2has already held that the provisions of Section 115JA do not apply to the banking companies. Effect of section 14A amendment - HELD THAT - Issue squarely covered by the decision of the Supreme Court in CIT VS. ESSAR TELEHOLDINGS LTD. 2018 (2) TMI 115 - SUPREME COURT wherein it has been held that provisions of Section 14A read with rule 8D of the Income Tax Rules are prospective in nature and can not be applied to any assessment year prior to Assessment Year 2008-09. Accordingly, the aforesaid substantial question of law is answered against the revenue and in favour of the assessee.

Summary

Issues:
1. Application of Section 14A of the Income Tax Act, 1961.
2. Interpretation of provisions under Section 115JA of the Act.
3. Treatment of interest on zero coupon bonds for book profit computation under Section 115JB of the Act.

Analysis:

1. Application of Section 14A of the Income Tax Act, 1961:
The primary issue revolved around the applicability of Section 14A of the Act concerning the disallowance of expenditure in relation to income not forming part of the total income. The court examined the essence of "expenditure incurred" in the context of the Act, emphasizing that it disallows specific expenditures incurred to earn exempt income. The judgment clarified that for Section 14A to apply, there must be a genuine pay-out, and return of investment or pay-back does not qualify as expenditure. Citing precedents such as WALFORT SHARE AND STOCK BROKERS (P) LTD and MAXOP INVESTMENTS LTD, the court ruled in favor of the assessee, as no actual expenditure was incurred in earning dividend income, which cannot be considered an expense under Section 14A.

2. Interpretation of provisions under Section 115JA of the Act:
The court addressed various aspects related to Section 115JA, including the estimation of administrative or financial costs, treatment of different provisions like doubtful debts and depreciation on securities, and the addition of interest on zero coupon bonds to chargeable book profits. The judgment highlighted the need for a comprehensive understanding of the provisions and their applicability to different scenarios. Notably, the court referred to previous decisions and legal principles to determine the correct interpretation of Section 115JA, ensuring a fair and just application of the law in the given context.

3. Treatment of interest on zero coupon bonds for book profit computation under Section 115JB of the Act:
Another significant issue involved the treatment of interest on zero coupon bonds for calculating book profits under Section 115JB of the Act. The court examined the relevant provisions and considered the arguments presented by both parties. By referring to the decision in CIT VS. ESSAR TELEHOLDINGS LTD, the court established that certain provisions, including Section 114A read with rule 8D of the Income Tax Rules, are prospective in nature and cannot be retroactively applied. Consequently, the court ruled in favor of the assessee on this particular issue.

In conclusion, the judgment provided a detailed analysis of the legal issues surrounding the application of Sections 14A, 115JA, and 115JB of the Income Tax Act, ensuring a thorough examination of the relevant provisions and their implications in the given context.