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TMI Blog2022 (7) TMI 485X X X X Extracts X X X X X X X X Extracts X X X X ..... CBDT Circular dated 11.02.2014 is concerned, we find that Hon'ble Delhi High Court in the case of IL FS Energy Development Co. Ltd.(supra) has held that the CBDT Circular dated 11th May 2014 cannot override the expressed provisions of Section 14A read with Rule 8D. Further the decisions relied upon in written submissions made by Learned DR are not applicable to the present facts. Considering the totality of the aforesaid facts, we find no reason to interfere with the order of CIT(A) and thus the ground of Revenue is dismissed. - ITA No. 5178/Del/2019 - - - Dated:- 29-6-2022 - SH. ANIL CHATURVEDI, ACCOUNTANT MEMBER AND SH. ANUBHAV SHARMA, JUDICIAL MEMBER Assessee by : --None-- Revenue by : Shri Surender Pal, CIT-D.R. ORDER Per Anil Chaturvedi, AM The present appeal filed by the Revenue is directed against the order dated 29.03.2019 of the Commissioner of Income Tax (Appeals)-28, New Delhi relating to Assessment Year 2014-15. 2. The relevant facts as culled from the material on records are as under: 3. The assessee is a company stated to be engaged in the business of wireless communications site leasing business. Assessee electronically filed i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er including the decision of Hon'ble Jurisdictional High Court noted that since the assessee has not earned any exempt income and therefore no disallowance u/s. 14A of the Act is called for. He further noted that the legal requirements of Section 14A of the Act have not been fulfilled by the AO and he therefore deleted the disallowance made by AO. The relevant findings of CIT(A) reads as under: 3.2 I have considered the facts of the case, basis of disallowance made by the AO and submissions of appellant. As it is clear from the assessment order as well as submissions of appellant that the assessee has not earned any exempt income nor any expenditure against it has been claimed by it which can be made subject matter of Section 14A of the Act. However, AO has taken into consideration the investment by appellant during the year as well as the preceding year and by applying the provisions of Section 14A of the Act r.w. Rule 8D and mechanically worked out the disallowance at Rs. 11,37,85,368/-. During the appellate proceedings, for not disallowing any expenditure, appellant has given its submissions. In such situation, when the issue has been decided by various Courts, firstly w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and expenditure incurred against it with cogent reasons by rejecting the claim of assessee before computing the disallowance u/s. 14A of the Act. However, the same has not been done. He has given only a general observation about the applicability of provisions of section 14A in the assessment order in the case of appellant and mechanically computed the disallowance on the basis of investment made by appellant in the shares during and preceding year. The AO has also not been able to establish any nexus between the exempt income, if any earned by appellant and any expenditure incurred to earn this income. He has simply computed the disallowance only on the ground that no expenditure had been disallowed by appellant in its computation against the receipts not forming part of total income whereas there are no such receipts which are part of total income. In such situation, the legal requirements of Section 14A of the Act are not fulfilled by the AO for making any disallowance as per this Section as held by Hon'ble Jurisdictional High Court in different cases, as mentioned above. Hence, the action of AO is not justified and sustainable. In view of this discussion, the disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me have to be considered for disallowance, irrespective' of the fact whether any such income has been earned during the financial-year or not. 3. The above position is further clarified by the usage of term 'includible' in the Heading to section 14A of the Act and also the Heading to Rule 8D of I.T. Rides, 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. 4. The above position is further substantiated by the language used in Rule 8D(2(ii) 8D(iii) of I.T. Rules. Thus, in light of above, Central Board of Direct Taxes, in exercise of its powers under section 119 of the Act hereby clarifies that Rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income. 2. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly materialized or not, so that the disallowance of the said expenditure u/s. 14A would follow. The same therefore is only a continuation of Circular 14 of 2001, taking the premise of section 14A to its logical conclusion. The purpose of these Circulars and the legislative intent is to apply the basic principle of taxation, i.e., that it is only the net income - taxable or non-taxable, i.e., net of all expenditure incurred for earning the same, that could be subject to tax or, as the case may be, exempt from tax. The latter Circular, which is in consonance with the Memorandum explaining the provisions of Finance Bill, 2001 (introducing section 14A) as well as the Notes to the Clauses presented along with the said Bill, has been noted with approval by the Hon'ble Supreme Court in CIT v. Walfort Share Stock Brokers (P.) Ltd. [ 2010] 192 Taxman 211/326 ITR 1 (SC), holding as under: The insertion of section 14A with retrospective effect is the serious attempt on the part of Parliament not to allow' deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... insertion of Section 14A in the Income Tax Act by Finance Act, 2001, details of which have already been noticed. Noticing the objects and reasons behind introduction of Section 14A of the Act this Court held that: Expenses allowed can only be in respect of earning of taxable income. In paragraph 17, this Court went on to observe that: Therefore, one needs to read the words expenditure incurred in section 14A in the context of the scheme of the Act and, if so read, it is clear that it disallows certain expenditure incurred to earn exempt income from being deducted from other income which is includible in the total income for the purpose of chargeability to tax. The views expressed in Walfort Share and Stock Brokers (P.) Ltd. (supra), in our considered opinion, yet again militate against the plea urged on behalf of the Assessee. (iv) The expenditure is incurred to produce or generate or in anticipation of, income, whether taxable or non-taxable. In fact, the classification as to tax status (i.e., taxable or non-taxable) has nothing to do with the income generating process; an income being, as a matter of fiscal incentive, being granted tax-exempt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder dated 12.02.2018 Hon'ble Supreme Court has observed in para 3 of its order, as follows:- 3. Though, it is clear from the plain language of the aforesaid provision that no deduction is to be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act, the effect whereof is that if certain income is earned which is not to be included while computing total income, any expenditure incurred to earn that income is also not allowed as a deduction. It is well known that tax is leviable on the net income. Net income is arrived at after deducting the expenditure incurred in earning that income. Therefore, from the gross income, expenditure incurred to earn that income is allowed as a deduction and thereafter tax is levied on the net income. The purpose behind Section 14A of the Act, by not permitting deduction of the expenditure incurred in relation to income, which does not form part of total income, is to ensure that the assessee does not get double benefit. Once a particular income itself is not to be included in the total income and is exempted from tax, there is no reasonable basis for giving ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure. To put it differently, such expenditure would then be considered as incurred in respect of other income which is to be treated as part of the total income. 9. The Hon'ble Supreme Court, in the case of Maxopp Investment Ltd. v. Commissioner of Income Tax, New Delhi [2018] 91 taxmann.com 154 (SC), while defining the scope of the term 'in relation to' as used in section 14A, further interpreted the dominant purpose test and upheld the theory of apportionment, in following words: 33 .........The entire dispute is as to what interpretation is to be given to the words 'in relation to' in the given scenario, viz. where the dividend income on the shares is earned, though the dominant purpose for subscribing in those shares of the investee company was not to earn dividend. We have two scenarios in these sets of appeals. In one group of cases the main purpose for investing in shares was to gain control over the investee company. Other cases are those where the shares of investee company were held by the assessees as stock-in-trade (i.e. as a business activity) and not as investment to earn dividends. In this context, it is to be examined as to wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... served that prior to introduction of Section 14A of the Act, the law was that when an assessee had a composite and indivisible business which had elements of both taxable and non-taxable income, the entire expenditure in respect of said business was deductible and, in such a case, the principle of apportionment of the expenditure relating to the non-taxable income did not apply. The principle of apportionment was made available only where the business was divisible. It is to find a cure to the aforesaid problem that the Legislature has not only inserted Section 14A by the Finance (Amendment) Act, 2001 but also made it retrospective, i.e., 1962 when the Income Tax Act itself came into force. The aforesaid intent was expressed loudly and clearly in the Memorandum explaining the provisions of the Finance Bill, 2001. We, thus, agree with the view taken by the Delhi High Court, and are not inclined to accept the opinion of Punjab Haryana High Court which went by dominant purpose theory. The aforesaid reasoning would be applicable in cases where shares are held as investment in the investee company, may be for the purpose of having controlling interest therein. On that reasoning, appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion applied by the Punjab and Haryana High Court, which we have already discarded. In that event, the question is as to on what basis those cases are to be decided where the shares of other companies are purchased by the assessees as 'stock-in-trade' and not as 'investment'. We proceed to discuss this aspect hereinafter. 39. In those cases, where shares are held as stock-in-trade, the main purpose is to trade in those shares and earn profits therefrom. However, we are not concerned with those profits which would naturally be treated as 'income' under the head 'profits and gains from business and profession'. What happens is that, in the process, when the shares are held as 'stock-in-trade', certain dividend is also earned, though incidentally, which is also an income. However, by virtue of Section 10(34) of the Act, this dividend income is not to be included in the total income and is exempt from tax. This triggers the applicability of Section 14A of the Act which is based on the theory of apportionment of expenditure between taxable and non-taxable income as held in Walfort Share Stock Brokers (P.) Ltd. case. Therefore, to that exten ..... X X X X Extracts X X X X X X X X Extracts X X X X
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