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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 ..... who vide order dated 29.03.2019 granted substantial relief to the assessee. Aggrieved by the order of CIT(A), Revenue is now in appeal and has raised the following grounds: "1. On the facts and in the circumstances of the case and in law the Ld. CIT(A) has erred in deleting the addition of Rs. 11,37,85,368/- u/s. 14A of the Act. 2. The appellant craves, leave or reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of appeal." 4. On the date of hearing, none appeared on behalf of the assessee nor any adjournment application was filed. The case file further reveal that the notice of hearing was sent to the assessee at the address stated in Form No. 36 but the same was returned undelivered by the postal authorities with remark "Left". Assessee has not placed on record its current address. Considering the aforesaid facts and the fact that the issue has been decided by CIT(A) after considering the various decisions cited therein including the decision of Jurisdictional High Court, we proceed to dispose of the appeal ex parte qua the assessee and after considering the submissions made by the Learned DR. 5. Duri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further held that for making disallowance u/s. 14A, the precondition is satisfaction of assessing officer that voluntary disallowance made by assessee is unreasonable and unsatisfactory and in absence of such satisfaction, disallowance is not justified. It is further held by Hon'ble Court in another case namely CIT Vs. Om Prakash Khaitan 376 ITR 390 that even if satisfaction is recorded, no disallowance can be made if no nexus between expenditure incurred and income not forming part of total income has been established by AO. In the case Cheminvest Ltd. vs. CIT 378 ITR 33, Hon'ble Court, after reversing the decision of Spl. Bench, opined that if no exempt income was earned by the assessee in the relevant assessment year and since the genuineness of expenditure incurred was not in doubt, no disallowance could be made u/s. 14A of the Act. In a decision dated 16.08.2017 in the case of II & FS Energy Development Vs. Pr. CIT-04 ITA No. 520/2017, Jurisdictional High Court has again deliberated on the issue and after discussing the decision of CIT Vs. Rajendra Prasad Moody of Hon'ble Supreme Court & CBDT Circular No. 5/2014 : dated 11.02.2014, along with the other decisions, h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tax Act, 1961 vide Finance Act 2001, with retrospective application from 1.4.1962. It provides for disallowance of expenditure in relation to income not "includible" in total income. Over a period of time, there have been several cases decided on this issue by various High Courts and the Hon. Supreme Court along with clarifications by the CBDT. CBDT issued a Circular No. 5/2014 on 11th February 2014, clarifying, inter alia, as follows:- "A controversy has arisen in certain cases as to whether disallowance can be made by invoking section 14A of the Act even in those cases where no income has been earned by an assessee which has been claimed as exempt during the financial-year. 2. It is pertinent to mention that section 14A of the Act was introduced by the Finance Act, 2001 with retrospective effect from 01.04.1962. The purpose for introduction of section 14A, with retrospective effect since inception of the Act was clarified vide Circular No. 14 of 2001 as under: "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 inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant as section 14A applies irrespective of whether shares are held to gain control or as stock-in-trade. However, where shares are held as stock-in-trade, main purpose is to trade in those shares and earn profits there from and, in process, certain dividend is also earned which is tax exempt under section 10(34); expenditure attributable to exempt dividend income will have to be apportioned to be disallowed under section 14A. (iii) Rule8D is prospective in nature and could not have been made applicable in respect of assessment years prior to 2007 when this rule was inserted. (iv) Theory of Apportionment of Expenditure between taxable and non taxable income has in principle, which was widened by the SC in the case of Walfort Share & Stock Brokers Pvt. Ltd. ( (2010) 326 ITR 1), has now been upheld by the SC in the above case of Maxopp. 3. Crux of the issue - Section 14A(1) says that no deduction shall be allowed in respect of expenditure incurred in relation to income which does not form part of total income. Following main points need to be considered:- (i) Whether section 14A(1) would stand attracted even if such income, i.e., income not includible in the total income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "The mandate of section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of section 14A is that certain incomes are not includible while computing total income as these are exempt under certain provisions of the Act." (ii) The issue, thus, considered in perspective, is not if the income not forming the part of the total income (the tax-exempt income) is earned or not, but if expenditure relatable to such income has been incurred. If such expenditure stands incurred, section 14A(1) becomes applicable. (iii) The decision by the Apex Court in the case of CIT v. Walfort Share & Stock Brokers (P.) Ltd. (supra) stands followed in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2017] 81 taxmann.com 111 (SC), where the Hon'ble Supreme Court, while considering whether deduction of expenditure incurred in earning dividend income which is not includible in the total income of the Assessee, by virtue of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income, i.e., positive income, which is in any case a matter subsequent, and that the mere fact that expenditure stands incurred for the purpose is sufficient for its admissibility, as explained by the Apex Court in CIT vs. Rajendra Prasad Moody [1978] 115 ITR 519 (SC). 4. The Apex Court was in that case examining the true interpretation of section 57(iii), which employed the words 'any expenditure (not being in the nature of capital expenditure) laid out or expended for the purpose of making or earning such income', the question of law raised before it reading as under:- "Whether, on the facts and in the circumstances of the case, interest on money borrowed for investment in shares which had not yielded any dividend is admissible under s. 57(iii)?" 5. The revenue's contention in the above case was that the making or earning of income was a sine qua non to the admissibility of the expenditure u/s. 57(iii). And, therefore, where no income resulted, no expenditure would be deductible. The Apex Court rejected the revenue's contention, and held that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me which itself is spared from tax net. There is no quarrel up to this extent." 7. The Hon'ble Supreme Court, in the judgment in the case of Maxopp Investment Ltd. reported in [2018] 91 taxmann.com 154 (SC), has also affirmed the view that the dominant purpose for which investment into shares is made by assessee may not be relevant as section 14A applies irrespective of whether shares are held to gain control or as stock-in-trade. 8. In sum, the principle that it is the net income, i.e., net of expenditure relatable thereto, which is subject to tax and, correspondingly, not liable to tax, i.e., where it does not form part of the total income, is well established. It follows, therefore, that once an income is liable (or not liable) to tax, all expenditure relatable thereto is to be reckoned, and it matters little that the said expenditure has indeed resulted in a positive income. This principle, i.e., to exclude all expenditure relatable to the earning of income not forming part of the total income, irrespective of its quantum, has also been noted with further approval by the Hon'ble Apex Court in Maxopp Investment Ltd. 's case (supra), in para 32 of its order, as un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. No doubt, the assessee like Maxopp Investment Limited may have made the investment in order to gain control of the investee company. However, that does not appear to be a relevant factor in determining the issue at hand. Fact remains that such dividend income is non-taxable. In this scenario, if expenditure is incurred on earning the dividend income, that much of the expenditure which is attributable to the dividend income has to be disallowed and cannot be treated as business expenditure. Keeping this objective behind Section 14A of the Act in mind, the said provision has to be interpreted, particularly, the word 'in relation to the income' that does not form part of total income. Considered in this hue, the principle of apportionment of expenses comes into play as that is the principle which is engrained in Section 14A of the Act. This is so held in Walfort Share & Stock Brokers (P.) Ltd., relevant passage whereof is already reproduced above, for the sake of continuity of discussion, we would like to quote the following few lines therefrom. "The next phrase is, "in relation to income which does not form part of total income under the Act". It means that if an income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above. This Circular takes note of the judgment of this Court in Nawanshahar case wherein it is held that investments made by a banking concern are part of the business or banking. Therefore, the income arises from such investments is attributable to business of banking falling under the head 'profits and gains of business and profession'. On that basis, the Circular contains the decision of the Board that no appeal would be filed on this ground by the officers of the Department and if the appeals are already filed, they should be withdrawn. A reading of this circular would make it clear that the issue was as to whether income by way of interest on securities shall be chargeable to income tax under the head 'income from other sources' or it is to fall under the head 'profits and gains of business and profession'. The Board, going by the decision of this Court in Nawanshahar case, clarified that it has to be treated as income falling under the head 'profits and gains of business and profession'. The Board also went to the extent of saying that this would not be limited only to co-operative societies/Banks claiming deduction under Section 80P(2)(a)(i) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO, after applying provisions of Section 14A read with Rule 8D(2)(iii), is appropriate and therefore may kindly be upheld. Submitted for kind consideration." 9. Learned DR thus supported the order of AO. 10. We have heard the Learned DR and perused the material available on record. The issue in the present ground is with respect to the disallowance u/s. 14A r.w.r. 8D of the IT Rules that was made by AO and deleted by CIT(A). We find that CIT(A) while deleting the addition made by the AO has noted that assessee has not earned any exempt income during the year under consideration. Before us, Revenue has not placed any material on record to demonstrate that the findings of the CIT(A) that assessee has not earned any exempt income is factually incorrect. We further find that CIT(A) while deleting the addition had relied on the decision of Jurisdictional High Court in the case of Cheminvest Ltd. vs. CIT reported in 378 ITR 33, IL & FS Energy Development vs. PCIT and other decisions. Before us, Revenue has not placed any contrary binding decision in its support but however has placed reliance on the CBDT Circular No. 5/2014 dated 11.02.2014, for the proposition that even there is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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