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TMI Blog2017 (12) TMI 1061X X X X Extracts X X X X X X X X Extracts X X X X ..... 2016 passed by learned Commissioner of Income-tax (Appeals)-53, Mumbai (hereinafter called the CIT(A) ) for assessment year 2012-13, appellate proceedings had arisen before learned CIT(A) from the assessment order dated 09-03-2015 passed by learned Assessing Officer (hereinafter called the AO ) u/s 143(3) of the Income-tax Act, 1961 (hereinafter called the Act ). 2. The grounds of appeal raised by the Revenue in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called the tribunal ) read as under:- 1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition u/s 14A of the Income Tax Act, 1961 by ignoring the fact that the provisions of Section 14A apply even if no exempt income is actually earned or received during the year in any form whatsoever? 2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the additions 14A of the Income Tax Act, 1961 by ignoring the provisions of CBDT Circular No. 5/2014 dated 11.02.2014 whereby it has been clarified that Rule 8D r.w.s. 14A provides for the disallowance of expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not capable of earning any income which is chargeable to tax and hence these investments had not been considered while computing the disallowance of expenses u/s. 14A r.w.r 8d of the Income tax Act, 1961. It is pertinent to mention that its undisputed that assessee has not earned any exempt income during the year under consideration. The A.O invoked rule 8D for making disallowance which was made as under:- Disallowance u/s. 14A of the IT. Act, 1961 Aggregate of the following i) Expense's directly attributable to exempt income Rs. Nil ii) Amount of Expenditure by way of interest ₹ 15,963/- iii) 0.5% of Average value of Investment Rs.96,93,984/ - Total Rs.97,09,947/- Thus, the disallowance was made by the AO to the tune of ₹ 97,09,947/- which was added to the income u/s 14A r.w.r. 8D, vide assessment order dated 09-03-2015 passed by the AO u/s 143(3). 4. Aggrieved by the assessment order dated 09-03-2015 passed by the AO u/s 143(3), the assessee filed first appeal befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing sec. 14A of the Act a. It was pursuant to the judgement in Rajasthan State Warehousing Corporation (2000) 242 ITR 450(SC) rendered on February 23, 2000, and other judgments laying down the same ratio decidendi that the Legislature inserted section 14A by the Finance Act, 2001, with retrospective effect from April 1, 1962. At this juncture it would be appropriate to note down the intention behind the insertion of this section which is coming up from the Memorandum Explaining the Provision in the Finance Bill, 2001 (2001.248 ITR (ST.) 162), as under (page 195): No deduction for expenditure incurred in respect of exempt income against taxable income. Certain incomes are not includible while computing the total income as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll be required to adopt the prescribed method if having regard to the accounts of assessee, he is not satisfied with the correctness of the claim of the assessee in respect of expenditure in relation to income which does not form part of the total income. It is also proposed to provide that provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income. This amendment will take effect from April 1, 2007, and will, accordingly, apply in relation to the assessment year 2007-08 and subsequent years . (2006. 281 ITR (St.) 190) (2) Contentions of revenue 2.1 The provisions of section 14A only reiterate the settled law about Matching Principle of Accountancy that current income Vs. Current expenditure and in case exempt income - no expenditure to be allowed at all - whether direct or indirect - otherwise the matching principle gets disturbed. (a) As per the basic principle of taxation the disallowance u/s. 14A is both direct and indirect expenditure and if an assessee claims that he has incurred no indirect expenditure- th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he is fallible and therefore ever ready to learn : great and honest enough to discard all mere pride of opinion and follow truth wherever it may lead : and courageous enough to acknowledge his errors. Hon‟ble Apex Court at para 14 to 17 interpreted the sec.80M as follow: We may, therefore, first examine the language of section 80M for arriving at its true interpretation. But before we do so, let us consider what is the object behind grant of relief under section 80M. It was common ground between the parties that the main object of the relief under section 80M is to avoid taxation once again in the hands of the receiving company of the amount which has already borne full tax in the hands of the paying company vide the written submission under the heading 'Object of relief on inter-corporate dividends' filed by the learned counsel on behalf of the assessee in the course of the arguments. Now when an amount by way of dividend is received by the assessee from the paying company, the full amount of such dividend would have suffered tax in the assessment of the paying company and it is obvious, that, in order to encourage intercompany investments, the Legislature int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tic company included in the gross total income would, therefore, obviously be income computed in accordance with the provisions of the Act, that is, after deducting interest on monies borrowed for earning such income. If income by way of dividends from a domestic company computed in accordance with the provisions of the Act is included in the gross total income, or in other words, forms part of the gross total income, the condition specified in the opening part of sub-section (1) of section 80M would be fulfilled and the provision enacted in that sub-section would be attracted. 16. Now it was urged on behalf of the assessee that the words 'where the gross total income of an assessee ....... includes any income by way of dividends from a domestic company' in the opening part of sub- section (1) of section 8OM refer only to the inclusion of the category of income and not to the quantum of such income and, therefore, the words 'such income by way of dividends' following upon the specification of this condition, cannot have reference to the quantum of the income included but must be held referable only to the category of the income included, that is, income by way ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubstitution it stops short of the words income by way of dividends from a domestic company' and does not go to the full length to which plain grammar must dictate us to go, namely income by way of dividends from a domestic Company included in the gross total income', semphasis supplied) otherwise, we would not be giving to the word 'such its full meaning and effect. The word 'such' in the context in which it occurs can only mean that income by way of dividends from a domestic company which is included in the gross total income and that must necessarily be income by way of dividends computed in accordance with the provisions of the Act. 17. There is also one other strong indication in the language of sub- section [III) of section 8OM which clearly compels us to take the view that the deduction envisaged by that provision is required to be made with reference to the income by way of dividends computed in accordance with the provisions of the Act and not with reference to the full amount of dividend received by the assessee. This indication was also unfortunately lost sight of by the Supreme Court in Cloth Traders (P) Ltd.'s case (supra) presumably be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reference to the amount of dividend computed in accordance with the provisions of the Act and forming part of the gross total income and not with reference to the full amount of dividend received by the assessee. d) Hon‟ble Supreme Court in the case of ACG Associated Capsules (P.) Ltd. (2012) 343 ITR 89 followed the ratio of Hon'ble constitution Bench of Supreme Court in the case of Distributors (Baroda) (P) Ltd (1985) 155 TR 12O) while adjudicating the issue of netting of interest for consideration u/s. 80HHC of the Act. Hon'ble Supreme Court distinguished Hon'ble Bombay High Court decision in the case of CITV/s. Asian Star Co. Ltd. (2010) 326 ITR 56 and overruled CIT v/s. Kalpataru Colours and Chemicals (2010) 192 Taxaman 435. At para 11 of that order Hon‟ble Apex Court considered the difference between income and receipt following the ratio of Distributors (Baroda) Pvt. Ltd. (Supra).The following ratio as per para 12 of Hon‟ble Supreme Court order in the case of ACG Associated Capsules Pvt. Ltd. is to be applied. 12. If we now apply Explanation (baa) as interpreted by us in this judgment to the facts of the case before us, if the rent or inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ludable or not forming part of Total income' (viii) Section 14 of the Act under Chapter IV with the title Computation of total income provides various heads of income. The section can be understood by breaking it as follows Save as otherwise provided by the Act. All income Shall For the purpose of Charge of Income Tax and computation of Total income Be classified Under following heads of income The phrase save as otherwise provided is the safe guard for inclusion of income under deeming provision as provided in the Chapter VI of the Act with the title aggregation of income and set off and carry forward of loss . The distinction of Sec.66 for inclusion of income as provided under Chapter VII though there is no income tax payable is to separate out such income from the Chapter III of the Act. However, sec.68, 69, 69A, 69B, 69C, 69D of the Act are deemed income where entire sum is treated as income without following /applying matching principle (ix) Sec. 14A though included in the Chapter IV of the Act i.e computation of total income but it is having heading as expenditure incurred in relation to income not includable in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble Legislature cannot be disregarded delving into consideration of receipt of dividend rather than considering income from dividend. The scope for prohibiting the dual benefit which were permissible prior to insertion of 14A of the Act by not only claiming exempt income on one hand and by reducing taxable income with the claim of expenditure relatable to exempt income on other hand is required to be considered. The prohibition u/s. 115-O (5) of the Act is unambiguous and clear with following words no deduction under any other provision of this Act shall be allowed to the company or a shareholder in respect of the amount which has been charged to tax under sub-section (1) or the tax thereon . It is therefore, any expenditure relatable to dividend receipt is not allowable under any provision of the Act. There can be Nil dividend from any investment resulting into negative or Nil income by way of dividends u/s. 1034) of the Act required no allow ability of such expenditure if there. 2.4. Legal proposition a) The Hon'ble Supreme Court in the case of CIT Vs. Walfort Share Stock Brokers 326 ITR 1 (SC) observed that the insertion of sec. 14A with retrospective effect r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly rule 8D of the Rules for computing the amount of disallowance under section14A of the Act. The assessee has, in addition, filed a Petition under Article 226 of the Constitution in order to challenge the constitutional validity of theprovisions of section 14A and of rule 8D Hon‟ble Jurisdictional High Court held that Section 14A ensures that the shareholder, whose income from dividend is not included in the total income of a previous year, shall not claim a deduction in respect of the expenditure incurred in relation to earning such income. Section 14A is founded on a valid rationale that the basic principle of taxation is to tax net income, that is to say, gross income minus the expenditure. On that analogy as the Supreme Court observed in Walfort Share Stock Brokers (P.) Ltd.'s case (supra), the exemption is also in respect of net income and expenses allowed can only be in relation to the earning of taxable income. Therefore, it cannot be said that an absurdity would result on the application of the literal interpretation of section 14A (Para 45) . i) The CBDT vide circular No.5/2013 dt.11.02.14 through a clarification in respect of disallowance of expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ading to section 14A of the Act and also the Heading to Rule- 8D of I.T. Rules, 1962 which indicates that it is not necessary that exempt income should necessarily be included in a particular year's income, for disallowance to be triggered. Also, section 14A of the Act does not use the word income of the year but income under the Act . This also indicates that for invoking disallowance under section 14A, it is not material that assessee should have earned such exempt income during the financial year under consideration. 5. The above position is further substantiated by a language used in Rule 8D(2)(ii) 8D(2) (iii) of I.T. Rules which are extracted below: (ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt of amount computed in accordance with the following formula, namely:- A*B/C Where... B=the average of value of investment, income from which does not or shall not form part of the total income as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; (iii) an amount equal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... puting income by way of dividend from the dividend receipt so to claim exempt u/s 10(34) of the Act, no expenditure can be allowed under any provision. 8. In view of the above, it is submitted that the issue of disallowance under section 14A of the Act may be decided after taking due cognizance of the discussion made in the preceding paragraphs and accordingly the order of the Assessing Officer be confirmed. (Purushottam Kumar) Sr. AR, ITAT, D‟ Bench, Mumbai The learned DR fairly agreed that there is no exempt income earned by the assessee during the impugned assessment year and the ratio of decision of Cheminvest Limited(supra) shall be applicable in the instant case. 6. We have heard Ld. DR and we have perused the material on record including relevant case laws as well written submissions made by learned DR. We have observed the assessee is in the business of property development. The assessee has made investments in equity shares which are capable of yielding exempt income , however during the year no exempt income has been received by the assessee by way of dividend etc. . The A.O has disallowed ₹ 97,90,947/- by invoking Section 14A read with Rule ..... X X X X Extracts X X X X X X X X Extracts X X X X
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