PCIT Vs Tata Realty And Infrastructure Ltd. (Supreme Court of India)
Summary: The Supreme Court dismissed the special leave petition filed by the Principal Commissioner of Income Tax against Tata Realty and Infrastructure Ltd., declining to interfere with the Bombay High Court’s judgment dated 28 January 2026. The Supreme Court specifically noted that no appeal had been carried against the Bombay High Court’s earlier decision dated 21 January 2020 in Pr. Commissioner of Income Tax-7 Vs. Morgan Stanley India Securities Pvt. Ltd., Income Tax Appeal No. 1701 of 2017, which the High Court had followed in the present matter.
Read HC Judgment in this case: No Section 14A Disallowance Where No Exempt Income Was Earned: Bombay HC
Background: Revenue’s Appeal Against ITAT Order
The Revenue had challenged the Income Tax Appellate Tribunal’s order dated 9 May 2019 before the Bombay High Court. Three proposed substantial questions of law arose from that order. The first two concerned the applicability of Section 14A of the Income Tax Act where the assessee had earned no exempt income during the relevant assessment year, particularly in light of CBDT Circular No. 5/2014 dated 11 February 2014. The third concerned whether compensation paid for obtaining the use of premises constituted capital or revenue expenditure.
Bombay High Court: No Section 14A Disallowance Without Exempt Income
The Revenue argued that expenditure relatable to earning exempt income should be disallowed under Section 14A even where no exempt income was actually earned during the financial year. It relied upon CBDT Circular No. 5/2014 dated 11 February 2014. The second proposed question, as reproduced in the High Court judgment, referred to CBDT Circular No. 5/2024.
The Bombay High Court held that the first two questions were squarely covered by its earlier decision in Principal Commissioner of Income Tax-7 Vs. Morgan Stanley India Securities P Ltd, decided on 21 January 2020. That decision had held that where no exempt income was earned during the relevant assessment year, disallowance under Section 14A would not arise. The earlier ruling had also drawn support from Principal Commissioner of Income Tax-3 Vs. India Debt Management Pvt Ltd, decided on 15 April 2019.
Applying the same reasoning, the High Court concluded that the first two questions did not raise any substantial question of law.
₹2.5 Crore Tenancy Compensation Held to Be Revenue Expenditure
The third question concerned compensation of Rs.2.5 crores paid by Tata Realty and Infrastructure Ltd. to Brandon and Company Pvt. Ltd. for vacating premises. The assessee obtained the premises on a leave-and-license basis for 60 months on the same terms on which Ewart Investments Ltd. had provided them to Brandon and Company Pvt. Ltd.
The Assessing Officer had treated the expenditure as capital in nature on the ground that the tenancy arrangement resulted in an enduring benefit. The Tribunal, however, regarded the compensation as revenue expenditure and relied upon the Supreme Court’s decision in CIT Vs. Madras Auto Service (P) Ltd., (1998) 233 ITR 468 (SC).
The Bombay High Court examined the Tribunal’s reasoning and the cited Supreme Court authority. It found nothing objectionable in the conclusion reached by the Tribunal and the Commissioner of Income Tax (Appeals) that the Rs.2.5 crore payment was revenue expenditure. Accordingly, the third question also did not give rise to a substantial question of law.
Supreme Court: Special Leave Petition Dismissed
In the subsequent proceedings, the Supreme Court condoned the delay but declined to interfere with the Bombay High Court’s decision. Its brief order relied on the fact that the earlier Bombay High Court decision in Morgan Stanley India Securities Pvt. Ltd., which had been followed in the impugned judgment, had not been appealed.
The Supreme Court therefore dismissed the special leave petition and disposed of pending applications. Its order did not independently undertake a detailed examination of Section 14A, the CBDT circulars or the capital-versus-revenue expenditure issue. Those substantive findings were contained in the Bombay High Court judgment, which remained undisturbed.
Cases Discussed
- Pr. Commissioner of Income Tax-7 Vs. Morgan Stanley India Securities Pvt. Ltd., Income Tax Appeal No. 1701 of 2017, decided on 21.01.2020 (Bombay High Court) — Followed by the Bombay High Court on the non-applicability of Section 14A where no exempt income was earned; expressly referred to by the Supreme Court as an earlier decision against which no appeal had been carried.
- Principal Commissioner of Income Tax-3 Vs. India Debt Management Pvt Ltd, Income Tax Appeal No. 266 of 2017, decided on 15.04.2019 (Bombay High Court) — Relied upon in the earlier Morgan Stanley decision concerning disallowance under Section 14A in the absence of exempt income.
- CIT Vs. Madras Auto Service (P) Ltd., (1998) 233 ITR 468 (SC); (1998) 99 Taxman 575 (Supreme Court) — Relied upon by the Tribunal in treating compensation paid for obtaining the use of premises as revenue expenditure; the Bombay High Court found no reason to disturb that conclusion.
Legal Significance
The combined proceedings distinguish the Bombay High Court’s substantive determination from the Supreme Court’s limited order refusing interference. The High Court applied existing precedent to reject Section 14A disallowance where no exempt income was earned and upheld the treatment of the Rs.2.5 crore compensation as revenue expenditure on the facts presented. The Supreme Court left that decision undisturbed, specifically referring to the unappealed earlier Morgan Stanley judgment.
FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER
1.Delay condoned.
2.Having regard to the fact that no appeal has been carried from the order dated 21st January, 2020 in Income Tax Appeal No.1701 of 20171, which has been followed by the Division Bench of the High Court of Judicature at Bombay2 in the impugned order dated 28th January, 2026, we see no reason to interfere with the impugned judgment and order of the High Court; hence, the special leave petition stands dismissed.
1 titled as “Pr. Commissioner of Income Tax-7 Vs. Morgan Stanley India Securities Pvt. Ltd.” 2 High Court
3.Pending application(s), if any, shall stand disposed of.
1. This Appeal is filed by the Revenue challenging the order passed by the ITAT dated 9th May 2019.
2. According to the Revenue, the following 3 questions of law arise for our consideration:-
“i.Whether on the facts and circumstance of th case and in law, the Hon’ble ITAT was right in holding that the provisions of section 14A will not be applicable when there is no exempt income earned by the assessee during the year failing to appreciate the clarification in Board’s Circular No. 5/2014 dated 11.02.2014 wherein it is clearly laid down that expenses which are relatable to earning of exempt income have to be considered for disallowance irrespective of the fact whether any such income has been earned during the Financial Year or not?
ii. Whether on the facts and circumstance of the case and in law, the Hon’ble ITAT was correct in not noticing CBDT Circular No. 5/2024 when it is judicially acknowledged that CBDT Circulars constitute important clarifications of legislative intent?
iii. Whether on the facts and in the circumstances of the case and in law, the Hon’ble Tribunal was right in holding that the expenditure on amortization of tenancy right is not of Capital nature failing to appreciate that the tenancy right acquired by the assessee has resulted in an enduring benefit?”
3. As far as questions (i) and (ii) are concerned, we find that the same are squarely covered by a decision of this Court in the case of Principal Commissioner of Income Tax-7 Vs. Morgan Stanley India Securities P Ltd [Income Tax Appeal No. 1701 of 2017 decided on 21st January 2020]. Questions (i) and (ii), as raised in the present Appeal, are the exact questions that were raised for the consideration of this Court in Income Tax Appeal No. 1701 of 2017. The Division Bench of this Court in the case of Morgan Stanley India Securities P Ltd (Income Tax Appeal No. 1701 of 2017) has clearly held that where there was no exempt income that was earned in the relevant Assessment Year, the question of disallowance under Section 14A would not arise. They drew support from a view taken by this Court in the Income Tax Appeal No. 266 of 2017 [Principal Commissioner of Income Tax -3 Vs. M/s. India Debt Management Pvt Ltd, decided on 15th April 2019].
4. Once we find that the issues raised in questions (i) and (ii) above are squarely covered by the decision of this Court in Morgan Stanley India Securities P Ltd (supra), we do not find that questions (i) and (ii) give rise to any substantial questions of law.
5. As far as question (iii) is concerned, we find that this issue also does not give rise to any substantial question of law. On this particular issue, the findings of the Tribunal can be found in paragraphs 10 to 14 of the impugned order. The Tribunal, in fact, held that the compensation paid by the Assessee of Rs.2.5 Crores to Brandon and Company Pvt. Ltd. for vacating the premises occupied by them and availing of the said premises on a leave and license basis for a period of 60 months on the same terms at which said premises were given by Ewart Investments Ltd to Brandon and Company Pvt. Ltd. amounted to a Revenue expenditure and not a capital expenditure as held by the Assessing Officer. The Tribunal, to come to this conclusion, placed reliance on the decision of the Hon’ble Supreme Court in the case of CIT Vs. Madras Auto Service (P) Ltd. (1998) 99 Taxman 575 (SC); 1998 233 ITR 468 (SC).
6. After going through the impugned order as well as the decision of the Hon’ble Supreme Court in the Madras Auto Service (P) Ltd. (supra), we do not find anything objectionable in the findings given by the Tribunal, as well CIT (Appeals), that the compensation of Rs.2.5 Crores paid by the Assessee to Brandon and Company Pvt. Ltd. is nothing but a Revenue expenditure.
7. We accordingly find that question (iii) also does not give rise to any substantial question of law. Accordingly, the above Appeal is dismissed. However, in the facts and circumstances of this case, there shall be no order as to costs.
8. This order will be digitally signed by the Private Secretary/ Personal Assistant of this Court. All concerned will act on production by fax or email of a digitally signed copy of this order.
