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TMI Blog2023 (12) TMI 801X X X X Extracts X X X X X X X X Extracts X X X X ..... nder rule 8D(2)(iii) = 0.5% of average value of investments = 474799500*0.5/100 Rs. 23,73,997/- 2. On appeal, NFAC confirmed the same. Against this assessee is in appeal before us. 3. The ld. A.R. submitted that the assessee had the investment of 26,00,000 equity shares totaling Rs. 2,60,00,000/- in its joint venture company GE BE Private Limited, Bangalore. During the year under consideration, the assessee has received a dividend income of Rs. 3.90 crores from GE BE Private Ltd., and the said dividend income was exempted under Section 10(34) of the Act. In this regard, she reiterated that the assessee is engaged in the business of electronics and it was only the idle funds, which were invested in GE- BE(P) Ltd. She submitted that the impugned investment was made in the earlier years and no fresh investment was made in the year under consideration. It had huge share capital, reserves, and surpluses, which did not carry any interest. The assessee has not made any disallowance under Section 14A of the Act relating to this exempt income as it is pertinent to note that the assessee did not incur any expenditure related to earning such income. She further submitted that the investmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me and are non-identifiable can be considered for invoking rule 8D. In this regard, she submitted that the learned Assessing Officer, hence, has failed to demonstrate the correct reason for invoking rule 8D. The reason stated by the Assessing Officer itself is invalid and non-existent as the Assessee has not incurred any interest expenditure which is unattributable. The interest expenditure is clearly identifiable and is mostly towards the trade payables and finance lease costs since there are no other borrowings held by the Assessee. She reiterated that the assessee does not have any long-term or short-term borrowed funds for the said year. 3.3 In this regard, the ld. A.R. for the assessee placed reliance on the decision of the Karnataka High Court in the case of CIT Vs Syndicate Bank [2020] 422 ITR 0298(Karn) wherein it was held as below- "From a 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 to the income which does not form part of his total income under the Act. The expenditure, the return on investment, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in earning the dividend income." 3.7 She further submitted that the Delhi High Court in the case of Wimco Seedlings Ltd [2007] 107 ITD 267 (Delhi) observed that the expression 'expenditure incurred' refers to actual expenditure and not to some imagined expenditure. If no expenditure is incurred in relation to the exempt income, no disallowance can be made under Section 14A. 3.8 Similarly, the ld. A.R. for the assessee submitted that the Tribunal in the case of DLF Ltd ITA Nos.236 & 384/2010 held that the expenditure which is incurred in relation to earning tax-free income can be disallowed and the section cannot be extended to disallow even expenditure that is assumed to have been incurred for earning tax-free income. 3.9 The ld. A.R. submitted that the ld. Authority cannot disallow expenditure on an assumption basis when no expenditure is actually incurred by the assessee in relation to earning exempt income. Accordingly, the first condition to apply provisions of section 14A of the Act is that the assessee must have incurred expenditure that can be said to be related to exempt income. No fresh investment was made in the year under consideration: 3.10 She submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this Act, for the purposes of] computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The 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 under this Act: Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not forming part of the total income) shall be allowed. Section 14A(2) provides that if the learned Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the assessee' s claim for the expenditure incurred in relation to exempt income, then in such a case the Assessing Officer has to determine the quantum of disallowance as per the method prescribed i.e., in accordance to rule 8D of the rules. 3.15 Further, she submitted that Sub-rule 2 of rule 8D, which prescribes the method of determining the expenditure in relation to exempt income, imbibes three limbs as follows - * Rule 8D(2)(i): Under this first limb, all direct expenditures that have been incurred for earning tax-exempt income are disallowed. * Rule 8D(2)(ii): Under the second limb, interest expenditure with respect to monies borrowed for making investments to earn dividend income is disallowed. * Rule 8D(2)(iii): Under the third limb, investments w.r.t exempted income earned is to be disallowed. If an investment has yielded exempt income in a particular year, only then it will need to be used in the computation of 0.5% of the average value of investments for the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has ITA No. 395/Bang/2023 for the AY 2014-15 wherein it was held that only investment that has generated exempt income should be taken into consideration while calculating disallowance under section 14A of the Act. 3.20 She reproduced the extract of the ITAT order in the assessee's own case has ITA No. 395/Bang/2023 for the AY 2014-15 stating that the disallowance under section 14A of the Act is to be calculated by taking into consideration only the investment that has generated exempt income as below for our quick reference- "7. We have heard the rival submissions and perused the material on record. We are of the view that only investment yielding non-taxable income has to be considered and not all the investments. This proposition has been held correct by the Hon'ble Delhi High Court in the case of ACB India Ltd., Vs. ACIT (supra). The Hon'ble Delhi High Court had held that for the purpose of section 14A, instead of taking into account total investment, the investment attributable to the dividend (exempt income) was only required to be adopted and thereafter the disallowance was to arrive. The relevant finding of the Hon'ble Delhi High Court in the case of ACB Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted as per Rule 8D(2)(iii) considering only the investments in which the assessee has received exempt income. In similar issue in the assessee's own case for the AY 2014-15 in ITA NO. 395/Bang/2023 order dated 30.08.2023 the co-ordinate bench has decided as under: - 7. We have heard the rival submissions and perused the material on record. We are of the view that only investment yielding non-taxable income has to be considered and not all the investments. This proposition has been held correct by the Hon'ble Delhi High Court in the case of ACB India Ltd., Vs. ACIT (supra). The Hon'ble Delhi High Court had held that for the purpose of section 14A, instead of taking into account total investment, the investment attributable to dividend (exempt income) was only required to be adopted and thereafter the disallowance was to be arrived. The relevant finding of the Hon'ble Delhi High Court in the case of ACB India Ltd., Vs. ACIT (supra) reads as follows: "8. The Assessing Officer, instead of adopting the average value of investment of which income is not port of the total income, i.e., the value of tax-exempt investment, chose to factor in the total investment itself ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . CIT (A) has wrongly alleged that even if there are no exempt income disallowances required to be made. In this regard, the learned CIT (A) drew support from the amendment to Section 14A of the Act by Finance Act 2022 by way of the insertion of an Explanation. The Notes on clauses explaining the intention behind the insertion of Explanation to Section 14A states as under- "It is also proposed to insert an Explanation to the said section to clarify that notwithstanding anything to the contrary contained in this Act, the provisions of the said section shall apply and shall be deemed to have been always applied in a case where the income, not forming part of the total income, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not form part of the total income. This amendment will take effect from 1st April, 2022." 3.35 The ld. A.R. for the assessee reproduced the Clauses 4, 5, 6 & 7 of the Memorandum of Finance Bill, 2022 which provides the following guidelines: "4. In order to make the intention of the legislation clear and to m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s pertinent to mention that the view held by ITAT Guwahati Bench in the above case is not approved by Hon'ble Delhi High Court in Pr. CIT v. Era Infrastructure (India) Ltd. [2022] 141 taxmann.com 289/288 Taxman 384 where it was held, following the judgment of Hon'ble Supreme Court in Sedco Forex International Drill Inc. v. CIT [2005] 149 Taxman 352/12 SCC 717 (SC), that the amendment of Section 14A, which is "for removal of doubts" cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood. Therefore, the Explanation is held prospective. The decision of Hon'ble Delhi High Court in Era Infrastructure Ltd. (supra) was followed in following cases - * Dy. CIT v. Lodha Developers Ltd. [2022] 143 taxmann.com 442 (Mum. - Trib.); * Asst. CIT v. Bajaj Capital Ventures (P.) Ltd. [2022] 140 taxmann.com 1/196 ITD 24 (Mum. - Trib.) 3.38 Thus, in view of the submissions made above, the ld. A.R. for the assessee humbly submitted that there cannot be any disallowance under Section 14A of the Act because no expenditure has been incurred on the exempt income earned during the year. Given the above, she submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d taxable income he did not correct the error but chose to apply his own equity. Given the record that had to be done so to substitute the figure of Rs. 38,61,09,287 with the figure of Rs. 3,53,26,800 and, thereafter, arrive at the exact disallowance of .05 per cent." 5.1 A similar view was taken by the Hon'ble Delhi High Court in the case of PCIT Vs. Indiabulls Capital Services Ltd., in ITA No.181/2019 (judgment dated 26.02.2019). The SLP filed by the Revenue against Hon'ble Delhi High Court's judgment in the case of PCIT Vs. Indiabulls Capital Services Ltd., (supra) was dismissed by the Hon'ble Apex Court [reported in (2020)] 114 taxmann.com 647. In view of the aforesaid judicial pronouncement, we hold that while calculating disallowance under section 14A of the Act, only investment that have generated exempt income should be taken into consideration. 5.2 Further, same view was taken by this Tribunal in assessee's own case in ITA No. 395/Bang/2023 dated 30.8.2023. Accordingly, we remit the issue to the file of ld. AO for limited purpose of re- computation of disallowance u/s 14A of the Act r.w. Rule 8D(2)(iii) of the I.T. Rules. It is needless to make it clear that while apply ..... X X X X Extracts X X X X X X X X Extracts X X X X
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