PCIT Vs JSW Energy Ltd. (Bombay High Court)
Bombay High Court has dismissed an appeal filed by the Principal Commissioner of Income Tax (PCIT) against JSW Energy Ltd., upholding the Income Tax Appellate Tribunal’s (ITAT) order. The High Court’s decision reaffirms the principle that disallowance under Section 14A of the Income Tax Act, 1961, for expenditure incurred in earning exempt income, is not applicable if no exempt income is actually received or receivable during the relevant previous year. This principle also extends to the computation of book profits under Section 115JB of the Act.
The appeal, filed under Section 260A of the Income Tax Act, pertained to the Assessment Year 2010-2011 and challenged the ITAT’s order dated July 22, 2016.
The Revenue had sought the High Court’s consideration on two primary questions of law:
1. Section 14A Disallowance without Exempt Income: Whether the Tribunal was justified in deleting the disallowance of Rs. 98,90,28,490/- made under Section 14A of the IT Act, by holding that no disallowance is called for once there is no exempt income received or receivable by the assessee during the relevant previous year, relying on the judgment of Cheminvest Ltd. Vs. CIT.
2. Section 115JB Book Profit Adjustment: Whether the Tribunal was justified in directing the Assessing Officer (AO) to delete the addition worked out under Section 14A read with Rule 8D of the Act while computing the book profits under Section 115JB, relying on its own decision in the assessee’s own case for AY 2006-07, without considering that as per Explanation 1(f) to Section 115JB, book profits must be increased by expenditure incurred for earning exempt income.
Regarding Question (i) – Section 14A Disallowance:
The High Court noted that it was an “undisputed position” that JSW Energy Ltd. had not earned any exempt income during the period relevant to the Assessment Year 2010-2011.
The ITAT, in its impugned order, had concluded that in the absence of any exempt income, there was no occasion to make any disallowance under Section 14A of the IT Act. This conclusion by the Tribunal was based on the Delhi High Court’s decision in Cheminvest Ltd. Vs. Commissioner of Income Tax (378 ITR 33).
Judicial Precedents:
The principle established in Cheminvest Ltd. Vs. Commissioner of Income Tax is that if no exempt income is earned in a particular year, no disallowance under Section 14A can be made for that year, even if investments capable of yielding exempt income exist. The rationale is that Section 14A aims to disallow expenditure incurred in relation to income that does not form part of the total income. If there is no such income, there can be no expenditure “in relation to” it.
The Bombay High Court further noted that this decision of the Delhi High Court in Cheminvest Limited Vs CIT (Delhi High Court) had been “followed accepted by this Court” in its own prior ruling in Principal Commissioner of Income Tax vs. Man Infraprojects Ltd. (Income Tax Appeal No.259 of 2017, decided on April 9, 2019). This indicated that the Bombay High Court had already adopted the same legal position.
Given this established legal position and the undisputed fact that no exempt income was earned by JSW Energy Ltd., the High Court concluded that Question No. (i) did not give rise to any “substantial question of law” requiring further deliberation. Consequently, the High Court declined to entertain this question.
Regarding Question (ii) – Section 115JB Book Profit Adjustment:
This question concerned the impact of Section 14A disallowance on the computation of “book profits” under Section 115JB, which deals with Minimum Alternate Tax (MAT). Explanation 1(f) to Section 115JB requires that book profits be increased by “the amount of expenditure relatable to income by way of dividends, interest or in relation to other income referred to in section 10, income exempt under any other section of this Act.”
The Revenue argued that even for MAT purposes, the expenditure incurred for earning exempt income should be added back to book profits.
However, the High Court observed that, similar to Question (i), since it was “admittedly” the case that no exempt income was earned by JSW Energy Ltd., there could be “no occasion to add the expenditure in terms of explanation (f) to section 115JB of the Act.” The ITAT had already held this in its impugned order.
The High Court found no reason to overturn the Tribunal’s finding on this point. It reiterated the core logic that “in the absence of any income the occasion to disallow the expenditure would not arise.” This principle, applied to Section 14A, was extended to its effect on Section 115JB. If there’s no exempt income, there’s no expenditure “relatable to” it that needs to be added back for MAT computation.
Accordingly, the High Court concluded that Question No. (ii) also did not give rise to any “substantial question of law” and thus was not entertained.
Conclusion:
Based on its analysis of both questions, the Bombay High Court dismissed the appeal filed by the Principal Commissioner of Income Tax. The judgment reinforces the consistent judicial view that the disallowance provisions under Section 14A are contingent upon the actual earning of exempt income. If an assessee does not earn any exempt income in a given year, no disallowance under Section 14A can be made, and consequently, no adjustment for such expenditure is required while computing book profits under Section 115JB.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
