Case Law Details
Nirved Traders Pvt. Ltd. Vs DCIT (Bombay High Court)
The assessee, a private limited company and a non-banking financial company, appealed against the order of the Income Tax Appellate Tribunal (ITAT) for Assessment Year 2008-09. The appeal raised the substantial question of whether the Tribunal was correct in confirming a disallowance under Section 14A of the Income Tax Act, 1961 in excess of the exempt income earned by the assessee.
During the relevant assessment year, the assessee claimed interest expenditure of ₹6,87,57,951 and earned exempt dividend income of ₹1,13,72,545. The Assessing Officer (AO) disallowed interest expenditure of ₹3,79,83,539 and further disallowed administrative expenditure, resulting in a total disallowance of ₹4,22,72,425 under Section 14A read with Rule 8D. The Tribunal upheld the disallowance.
Before the High Court, the assessee submitted that several High Courts had consistently held that a disallowance under Section 14A read with Rule 8D cannot exceed the exempt income earned during the relevant year. The assessee stated that it would accept the disallowance if it was restricted to the exempt dividend income of ₹1,13,72,545.
The High Court examined the decisions of various High Courts. It referred to the Delhi High Court’s decision in Cheminvest Ltd., which held that where no exempt income is earned, no disallowance under Section 14A is permissible. It also considered the Karnataka High Court’s decision in Pragati Krishna Gramin Bank, which held that expenditure disallowed under Section 14A must bear a reasonable nexus to the exempt income and cannot exceed such income. The Court further referred to the Gujarat High Court’s decision in Corrtech Energy (P.) Ltd., which held that Section 14A has no application where no exempt income is claimed.
The Court also relied on its own earlier decision in Pr. Commissioner of Income Tax-10 v. HSBC Invest Direct (India) Ltd., where it had held that even where exempt income is earned, the disallowance under Section 14A cannot exceed the exempt income earned during the relevant year.
Observing that there was a consistent judicial view across various High Courts, the Bombay High Court answered the substantial question of law in favour of the assessee. It reversed the Tribunal’s decision to the extent that the disallowance exceeded the exempt income and restricted the disallowance under Section 14A to ₹1,13,72,545, being the exempt dividend income earned during the assessment year.
Accordingly, the appeal was partly allowed and disposed of.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
1. The Appeal is admitted for consideration of the following substantial question of law.
“Whether ITAT was right in law in confirming the disallowance under Section 14A of the Income Tax Act, 1961 in excess of exempt income earned by the Assessee during the assessment year in question ?”
2. With the consent of the learned Counsel for the parties, the Appeal is taken up for final disposal forthwith.
3. This Appeal is filed by the Assessee to challenge the Judgment of the Income Tax Appellate Tribunal (‘the Tribunal’, for short). The Appellant Assessee is a private limited company and a nonbanking financial company. In the Assessment Year 20082009, the Assessee had claimed interest expenditure of Rs.6,87,57,951. During the same period relevant to the Assessment Year in question, the Assessee had earned dividend income of Rs.1,13,72,545/ which was exempt from tax. The Assessing Officer disallowed the interest expenditure of Rs.3,79,83,539/. He further disallowed administrative expenditure and made a total disallowance of Rs.4,22,72,425/ under Section 14A of the Income Tax Act, 1961 (‘the Act’, for short) read with Rule 8D of the Rules. The Tribunal, by the impugned Judgment, confirmed such disallowance upon which, the Assessee has filed this Appeal.
4. At the outset, learned Counsel for the Appellant Assessee submitted that several High Courts have held that disallowance under Section 14A of the Act read with Rule 8D of the Rules, cannot exceed the exempt income earned by the Assessee during the relevant year. She submitted that if such disallowance, therefore, is restricted to Rs.1,13,72,545/ which is exempt income earned by the Assessee, the Assessee would accept the same.
5. Having heard the learned Counsel for the parties and having perused the documents on record, consistently different High Courts in the country have taken a view that the disallowance under Section 14A of the Act read with Rule 8D of the Rules cannot exceed the Assessee’s exempt income. The Delhi High Court, in the case of Cheminvest Ltd. Vs. Commissioner of Income Tax1, has held that when the Assessee has not earned any income which was exempt from tax, disallowance of the expenditure under Section 14A read with 8D of the Rules would not be permissible.
6. Karnataka High Court, in the case of Pragati Krishna Gramin Bank Vs. Joint Commissioner of Income tax2, has held that expenditure in relation to income not includable in the total income cannot exceed such income. It was observed as under.
“14. We make it clear that the expenditure for earning exempted income has to have a reasonable proportion to the income, so earned, going by the common financial prudence. Therefore, even if the Assessing Authority has to make an estimate of such an expenditure incurred to earn exempted income, it has to have a rational nexus with the amount of income earned itself. Disallowance under Section 14A of Rs.2,48,85,000/ as expenses to earn exempted Dividend income of Rs.1,80,30,965/ is per se absurd and hypothetical. The disallowance under Section 8D cannot exceed the expenses claimed by assessee under the Proviso to Rule 8D. Therefore, where the assessee claimed that assessee did not incur any such expenditure during the year in question to earn Dividends of Rs.1,80,30,965/, the burden was upon the assessing authority to compute the interest on such borrowed funds which were dedicatedly used for investment in securities to earn such exempted Dividend income. The disallowance under Section 14A cannot be wild guesswork bereft of ground realities. It has to have a reasonable and close nexus with the factually incurred expenses. It is not deemed disallowance under Section 14A of the act but an enabling provision for assessing authority to compute the same on the given facts and figures in the regularly maintained Books of Accounts. The assessing authority also could not have called upon the Assessee himself to undertake the exercise of computing the disallowance under Section 8D of the Rules. Such abdication of duty is not permissible in law.Since no such exercise has been undertaken by the assessing authority, the case calls for a remand.”
7. Gujarat High Court, in the case of Commissioner of IncometaxI Vs. Corrtech Energy (P.) Ltd.3, has held and observed as under :
“4. Counsel for the Revenue submitted that the Assessing Officer as well as CIT (Appeals) had applied formula of rule 8D of the Income Tax Rules, since this case arose after the assessment year 20092010. Since in the present case, we are concerned with the assessment year 20092010, such formula was correctly applied by the Revenue. We however, notice that subsection (1) of section 14A provides that for the purpose of computing total income under chapter IV of the Act, 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 the Act.
In the present case, the tribunal has recorded the finding of fact that the assessee did not make any claim for exemption of any income from payment of tax. It was on this basis that the tribunal held that disallowance under section 14A of the Act could not be made. In the process tribunal relied on the decision of Division Bench of Punjab and Haryana High Court in case of CIT v Winsome Textile Industries Ltd. [2009] 319 ITR 204 in which also the Court had observed as under :
“7. We do not find any merit in this submission. The judgement of this court in Abhishek Industries Ltd. (2006) 286 ITR 1 was on the issue of allowability of interest paid on loans given to sister concerns, without interest. It was held that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. The observations made therein have to be read in that context. In the present case, admittedly the assessee did not make any claim for exemption. In such a situation section 14A could have no application.”
5. We do not find any question of law arising. Appeal is therefore dismissed.”
8. Recently, this Court, in a decision dated 4th February, 2019, in the case of The Pr. Commissioner of Income Tax10 Vs. HSBC Invest Direct (India) Ltd. had observed as under.
“4. Having heard learned Counsel for the parties and perused documents on record, we notice that in Cheminvest Ltd. (supra) Delhi High Court had referred to and relied upon its earlier decision in the case of CIT Vs. Holcim India (P) Ltd. (I.T.A. No.486 of 2014, decided on 5th September 2014). we further notice that this Court in Income Tax Appeal No.693 of 2015 by an order dated 21st November, 2017 while dismissing the Revenue’s appeal on similar issue had noted that the decision of Delhi High Court in case of Holcim India )P) Ltd. (supra) had adopted the same principles. In the present case, Counsel for the Revenue however, points out that this is not a case where the assessee had earned no income which was exempt from tax. However, in our opinion, the ratio of the above noted decisions in the cases of Cheminvest Ltd. and Holcim India (P) Ltd. (supra) would include a facet where the assessee’s income exempt from tax is not NIL but has earned exempt income which is larger than the expenditure incurred by the assessee in order to earn such income. In such a situation that disallowance cannot exceed the exempt income so earned by the assessee during the year under consideration. We do not find any error in the view of the Tribunal. We record that the assessee had offered voluntary disallowance of expenditure of Rs.1.30 crores, which is not been disturbed by the Tribunal.
5. The tax appeal is dismissed.”
9. In view of such consistent trend of the High Courts, we answer the question in favour of the Assessee. We reverse the decision of the Tribunal to the extent of limiting the disallowance under Section 14A of the Act to a sum of Rs.1,13,72,545/.
10. The Appeal is allowed in part and disposed of accordingly.
Notes:
1 378 ITR 33
2 [2018] 256 Taxman 349 (Karnatama)
3 [2015] 372 ITR 97
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