NCC Infrastructure Holdings Limited Vs ACIT (ITAT Hyderabad)
Summary: The Income Tax Appellate Tribunal, Hyderabad Bench “B”, in NCC Infrastructure Holdings Limited Vs ACIT, considered whether a disallowance under Section 14A of the Income Tax Act, 1961, read with Rule 8D of the Income Tax Rules, 1962, could be sustained when the assessee had earned no exempt income during the relevant assessment year. The assessee, a company, filed its return for Assessment Year 2017-18 on 30 October 2017 declaring a loss of ₹2,76,89,21,681 and a book loss of ₹9,06,60,050. During scrutiny assessment, the Assessing Officer observed that the company had incurred interest expenditure while holding investments amounting to ₹4,96,16,65,412. The Assessing Officer inferred that borrowed funds had been utilised for investments capable of generating exempt income and consequently made a disallowance by invoking Section 14A read with Rule 8D.
The assessee challenged the disallowance before the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, contending that no exempt income had actually been earned during the assessment year. The CIT(A), however, upheld the adjustment by relying upon the Explanation inserted in Section 14A through the Finance Act, 2022, which addressed disallowance even where exempt income had not arisen. The CIT(A) also relied upon the decision of the Guwahati Bench of the Tribunal in ACIT Vs Williamson Financial Services Limited, ITA No. 159/Gau/2019, dated 6 July 2022. The assessee’s first appeal was accordingly dismissed by order dated 27 January 2023.
Before the Hyderabad Tribunal, the assessee argued that the amendment introduced by the Finance Act, 2022 was prospective and could not be applied to Assessment Year 2017-18. Reliance was placed upon the Delhi High Court judgments in PCIT Vs Era Infrastructure (India) Ltd., (2022) 141 taxmann.com 289, and PCIT Vs Delhi International Airport (P.) Ltd., (2022) 144 taxmann.com 80. The Revenue contended that the Hyderabad Tribunal was not bound by judgments of the Delhi High Court and that the CIT(A)’s decision was consistent with the amended statutory provisions.
The Tribunal observed that the Revenue authorities had not recorded any finding contradicting the assessee’s assertion that it had earned no exempt income during the relevant year. It examined the Delhi High Court’s reasoning in Era Infrastructure (India) Ltd., which had considered the Finance Act, 2022 amendment in the light of PCIT Vs IL&FS Energy Development Co. Ltd., the Finance Bill memorandum, and the Supreme Court decisions in Sedco Forex International Drill. Inc. Vs CIT and M.M. Aqua Technologies Ltd. Vs CIT. The Tribunal accepted the principle that an amendment described as being made for removal of doubt does not automatically operate retrospectively where it alters the law as previously understood. Consequently, the Finance Act, 2022 amendment could not justify a Section 14A disallowance for the earlier assessment year merely because the assessee held investments and incurred interest expenditure.
The Tribunal rejected the Revenue’s argument that Delhi High Court decisions could be disregarded simply because the assessee was assessed within the jurisdiction of the Hyderabad Bench. It observed that, in the absence of contrary decisions of the jurisdictional High Court or the Supreme Court, decisions of other High Courts were to be followed by the Tribunal. Accordingly, the appeal was allowed, subject to the qualification adopted by the Delhi High Court that the outcome would abide by the Supreme Court’s final decision in the special leave petition concerning IL&FS Energy Development Co. Ltd.. The ruling therefore granted relief against the Section 14A disallowance for AY 2017-18 while preserving the stated qualification concerning the pending Supreme Court proceedings.
List of Cases Discussed
1. PCIT Vs Era Infrastructure (India) Ltd., (2022) 141 taxmann.com 289 (Delhi High Court): Followed for the conclusion that the Finance Act, 2022 amendment to Section 14A does not operate retrospectively merely because it is framed as a clarification or removal of doubt.
2. PCIT Vs Delhi International Airport (P.) Ltd., (2022) 144 taxmann.com 80 (Delhi High Court): Relied upon as a subsequent Delhi High Court decision following Era Infrastructure (India) Ltd. on the application of Section 14A.
3. PCIT Vs IL&FS Energy Development Co. Ltd., (2017) 84 taxmann.com 186 (Delhi High Court): Discussed as the precedent holding that no disallowance under Section 14A can be made where no exempt income was earned during the relevant assessment year. The Tribunal made its order subject to the final outcome of the related Supreme Court proceedings.
4. M.M. Aqua Technologies Ltd. Vs CIT, (2021) 129 taxmann.com 145 (Supreme Court): Referred to in connection with the principles governing retrospective operation of amendments described as clarificatory.
5. Sedco Forex International Drill. Inc. Vs CIT, (2005) 149 Taxman 352 (Supreme Court): Discussed through the reasoning of the Delhi High Court on whether a statutory amendment stated to remove doubt can retrospectively alter existing law.
6. ACIT Vs Williamson Financial Services Limited (ITAT Guwahati), ITA No. 159/Gau/2019, dated 06/07/2022 : Relied upon by the CIT(A) to sustain the Section 14A disallowance despite the absence of exempt income; the Hyderabad Tribunal did not accept that approach in preference to the Delhi High Court decisions.
FULL TEXT OF THE ORDER OF ITAT HYDERABAD
Aggrieved by the order dated 27/01/2023 passed by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi (“Ld. CIT(A)”), in the case of NCC Infrastructure Holdings Limited (“the assessee”) for the assessment year 2017-18, assessee preferred this appeal.
2. Brief facts of the case are that assessee is a company, filed its return of income for the assessment year 2017-18 on 30/10/2017 declaring loss of Rs. 2,76,89,21,681/- and book loss at Rs. 9,06,60,050/-. During the course of scrutiny, learned Assessing Officer found that the assessee incurred interest expense and at the same time it made investments to the tune of Rs. 4,96,16,65,412/- learned Assessing Officer inferred that the assessee had incurred interest expenditure towards borrowings utilised for the purpose of investment and earning of exempt income and, therefore, by invoking section 14A of the Income Tax Act, 1961 (for short “the Act”) read with rule 8D of the Income Tax Rules, 1962 (for short “the Rules”) made addition equivalent to 1% of the annual average of the monthly averages of the opening and closing balances on the value of the investment.
3. Assessee preferred appeal and argued that no such disallowance can be made since it has not obtained any exempt income in the year under consideration. Learned CIT(A) while referring to the amendment to section 14A of the Act by insertion of explanation, which allows for such disallowance even if no exempt income had arisen, and also referring to the view taken by the Guwahati Bench of the Tribunal in the case of ACIT vs. Williamson Financial Services Limited, dated 06/07/2022 in ITA No. 159/Gau/2019 upheld the addition and dismissed the appeal.
4. Assessee preferred this appeal before us and contended that the amendment to section 14A by insertion of an explanation referred to by the learned CIT(A) is prospective in its operation and cannot be made applicable to the year under consideration. He placed reliance on various decisions of the Tribunal and also the decision of the Hon’ble Delhi High Court in the case of PCIT vs. Era Infrastructure (India) Ltd. (2022) 141 taxmann.com 289 (Delhi) and PCIT vs. Delhi International Airport (P.) Ltd., (2022) 144 taxmann.com 80 (Delhi).
5. Learned DR submitted that the Tribunal at Hyderabad is not bound by the decisions of the Hon’ble Delhi High Court and the view taken by the learned CIT(A) legal and in accordance with the provisions of law and, therefore, the same cannot be justified.
6. We have gone through the record in the light of the submissions made on either side. There are no contrary findings of the authorities to the plea taken by the assessee that during the year under consideration, the assessee did not earn any exempt income. The basis for making the addition that the assessee incurred interest expenditure in respect of the amounts that were used for making investment also. In that process, learned CIT(A) relied upon the amendment to section 14A of the Act by insertion of explanation by Finance Act, 2022 and also to the decision of the Guwahati Bench of the Tribunal, referred above.
7. In the case of Era Infrastructure (India) Ltd., (supra) Hon’ble Delhi High Court considered the effect of amendment made by the Finance Act, 2022 to section 14A of the Act by insertion of a non obstante clause and explanation after the proviso, subsequent to the decision of the Hon’ble Delhi High Court in the case of PCIT vs. IL&FS Energy Development Co. Ltd., (2017) 84 taxmann.com 186, Hon’ble Delhi High Court and also the memorandum of Finance Bill, 2022 accordingly to clauses 5 to 7 thereof. The Hon’ble High Court analysed the same in the light of the decision of the Hon’ble Supreme Court in the case of Sedco Forex International Drill. Inc. vs. CIT (2005) 149 Taxman 352 reiterated in M.M. Aqua Technologies Ltd. vs. CIT (2021) 129 taxmann.com 145 and held that the amendment of section 14A of the Act which is ‘for removal of doubt’ cannot be presumed to be retrospective even where such language is used, if it alters or changes law as it earlier stood.
8. Thereupon the Hon’ble High Court followed the decision of IL&FS Energy Development Co. Ltd., (supra) and concluded that no disallowance under section 14A of the Act can be made if the assessee had not earned any exempt income during the year under consideration. Hon’ble High Court, however, was pleased to clarify that the orders passed in the case of Era Infrastructure (India) Ltd., (supra) shall abide by the final decision of the Hon’ble Supreme Court in the SLP filed in the case of IL&FS Energy Development Co. Ltd., (supra). The decision in Era Infrastructure (India) Ltd., (supra) was followed by the Hon’ble Delhi High Court in the case of Delhi International Airport (P.) Ltd., (supra).
9. We are not in agreement with the submissions made on behalf of the Revenue that since the Tribunal at Hyderabad is not bound by the decisions of the other Hon’ble High Courts, the findings of the learned CIT(A) following the provisions of law has to be upheld. It is pertinent to note that learned CIT(A) himself followed the decision of the Guwahati Bench of the Tribunal in the case of Williamson Financial Services Limited (supra). In the absence of any decision of the Hon’ble jurisdictional High Court/Hon’ble Supreme Court, the decisions of other Hon’ble High Courts will constitute the binding precedent to be followed by the Tribunal.
10. With this view of the matter, we allow the appeal of assessee, and in view of the direction of the Hon’ble Delhi High Court the orders now passed in this appeal shall abide by the final decision of the Supreme Court in the SLP filed in the case of IL&FS Energy Development Co. Ltd., (supra). Subject to the above observation, the appeal of assessee stands allowed.
Order pronounced in the open court on this the 12th day of June, 2023.
