Case Law Details
DCIT Vs Anant Raj Limited (ITAT Mumbai)
ITAT Mumbai held that disallowance under section 14A of the Income Tax Act cannot exceed the amount of exempt income. Hence, AO directed to restrict the disallowance to the extent of exempt income earned.
Facts- The solitary issue contested in the ground of appeal of the revenue is directed against the decision of ld. CIT(A) in holding that disallowance u/s 14A cannot exceed the exempt income.
Conclusion- Hon’ble Supreme Court in the case of State Bank of Patiala (2018) 99 com 286 (SC) and Hon’ble Delhi High Court in the case of CIT Vs. Joint Investment Pvt. Ltd. (2015) 372 ITR 69 (Delhi) held that disallowance is to be restricted to the extent of exempt income earned by the assessee. Therefore, following the decision of Hon’ble Apex Court and High Court, we direct the A.O to restrict the disallowance to the extent of exempt income earned by the assessee. Therefore, we don’t find any infirmity in the decision of ld. CIT(A). Accordingly, the ground of appeal of the revenue stand dismissed.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
Both these appeals filed by the revenue are directed against the different order of ld. CIT(A)-54 Mumbai pertaining to A.Y. 2017-18 and A.Y. 2018-19. Since these appeals are based on identical fact and similar issue, therefore, for the sake convenience both these appeals are adjudicated together by taking the ITA No. 625/Mum/2023 as a lead case and its finding will be applied mutatis mutandis to the other appeal wherever applicable.
ITA No.625/Mum/2023
“1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition u/s. 14A by holding that the disallowance u/s 14A cannot exceed the exempt income by ignoring the CBDT Circular No.5/2014 which clarificatory in nature.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) has erred in ignoring the explanation to the section 14A introduced w.e.f. 01.04.2022 which clearly states that the provisions of the section 14A shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, 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 forming of the total income.
3. The appellant craves to leave, to add, to amend and / or to alter any of the ground of appeal if need be.”
2. The solitary issue contested in the ground of appeal of the revenue is directed against the decision of ld. CIT(A) in holding that disallowance u/s 14A cannot exceed the exempt income. During the course of assessment the assessing officer noticed that assesse company has made investment in the partnership firms, therefore, assessee was asked to show cause as to why the disallowance u/s 14A should not be made as per Rule 8D of the IT Rule 1962. In response the assessee explained that it had earned dividend income of Rs.11,486/- which was claimed as exempt for the year under consideration. During the course of assessment in support of its contention that disallowance cannot exceed the exempt income the assessee has placed reliance on the following judicial pronouncements:
“Cheminvest Ltd. Vs. CIT (Delhi High Court)
Joint Investment Pvt. Ltd. Vs. CIT [2015 – TIOL -574- HC- DEL- IT]
Pepsico India Holding Pvt. Ltd. Vs. ACIT (2016-TIOL-963-ITAT-DEL]
Daga Global Chemicals Pvt. Ltd. Vs. ACIT [ITAT, Mumbai]”
However, the AO has not agreed with the submission of the assessee and referred the CBDT Circular No. 5/2014 dated 10.02.2014 that for invoking disallowance u/s 14A, the disallowance of the expenditure can be made even where tax payer has not earned any exempt income. The A.O after referring the provisions of Sec.14A of the Act stated that actually earning of income is not sine qua non for deciding deduction of expenditure laid out or expended wholly or exclusively for purpose of such income. Therefore, AO has computed the disallowance u/s 14A in accordance with Rule 8D to the amount of Rs.3,73,91,600/- and added to the total income of the assessee.
3. The assessee filed appeal before the ld. CIT(A). The ld. CIT(A) has partly allowed the appeal of the assessee and directed the AO to restrict the disallowance to the extent of exempt income of Rs.11,486/- earned by the assessee during the year under consideration.
4. During the course of appellate proceedings before us the ld. Departmental Representative has placed reliance on the decision of ITAT Guwahati in the case of Williamson Financial Services Ltd. Vs. ACIT vide ITA No. 156 & 159/Gau/2019 dated 06.07.2022 for A.Y. 2009-10 & 2012-13 and the decision of ITAT Hyderabad in the case of Mandava Holdings (P) Ltd. Vs. DCIT vide ITA No. 2089/Hyd/2017 dated 19.07.2022 for AY. 2014-15 wherein held after referring explanation inserted by Finance Act 2022 to Sec. 14A w.e.f 01.04.2022 that provision shall apply whether or not exempt income has accrued, arisen or received and the provisions of the amended Section is applicable retrospectively.
5. On the other hand, ld. Counsel submitted that explanation introduced to Sec. 14A vide the Finance Act 2022 w.e.f 01.04.2022 is prospective in nature and therefore, no disallowance could be made u/s 14A when no exempt income is earned prior to assessment year 202223. The ld. Counsel has placed reliance on the following judicial pronouncements:
“1. Era infrastructure (India) Ltd. (2022) 141 taxmann.com 289 (Delhi)
2. PCIT Vs. Delhi International Airport (P) Ltd. (2022) 144 com 80 (Delhi)
3. Bajaj Capital Ventures (P) Ltd. (2022) 141 com 1 (Mumbai – Trib).”
The ld. Counsel further submitted that the disallowance u/s 14A cannot exceed the amount of exempt income earned during the year and placed reliance on the various judicial pronouncements.
6. Heard both the sides and perused the material on record. It is undisputed fact that assesse company had earned exempt income in the form of dividend of Rs.11,486/- only for the year under consideration. However, the AO has computed the disallowance u/s 14A as per provisions of Rule 8D to the amount of Rs.3,73,91,600/-.
7. Regarding the applicability of explanation introduced in section 14A vide the Finance Act, 2022 w.e.f 01.04.2022 we consider that Hon’ble Delhi High Court in the case of Era Infrastructure (India) Ltd. (2022) 141 com 289 (Delhi) held that explanation introduced in Sec. 14A vide the Finance Act 2022 is prospective in nature, therefore, no disallowance could be made u/s 14A if there is no exempt income earned prior to assessment year 2022-23. Therefore, the decisions of Coordinate benches of the ITAT referred by the ld. D.R will not provide any held in view of the decision of Hon’ble High Court of Delhi as referred supra.
8. We have considered the various decisions of Hon’ble Supreme Court and High Courts referred by the ld. Counsel that disallowance u/s 14A cannot exceed the amount of exempt income earned during the year. Hon’ble Supreme Court in the case of State Bank of Patiala (2018) 99 com 286 (SC) and Hon’ble Delhi High Court in the case of CIT Vs. Joint Investment Pvt. Ltd. (2015) 372 ITR 69 (Delhi) held that disallowance is to be restricted to the extent of exempt income earned by the assessee. Therefore, following the decision of Hon’ble Apex Court and High Court, we direct the A.O to restrict the disallowance to the extent of exempt income earned by the assessee. Therefore, we don’t find any infirmity in the decision of ld. CIT(A). Accordingly, the ground of appeal of the revenue stand dismissed.
ITA No. 626/Mum/2023
Ground No. 1 & 2: (Erred in deleting the addition u/s 14A )
9. These ground of appeal are based on similar issue on identical facts as we have adjudicated vide ITA No.625/Mum/2023 supra, therefore applying the finding of ITA No. 625/Mum/2023 as mutatis mutandis these grounds of appeal are also dismissed.
Ground No. 3: (Amount of expenditure disallowed u/s 14A to be included in the books profit determined u/s 115JB)
10. During the course of assessment the A.O had determined the book profit u/s 115JB at Rs.49,38,15,263/- after adding the amount of Rs.5,83,41,870/- disallowed u/s 14A r.w.Rule 8D of the I.T Rule 1962.
11. However, in the appeal, the ld. CIT(A) after following the decision of special bench of the ITAT, Delhi in the case of Vireet Investment Pvt. Ltd. (82 com 415) held that disallowance made u/s 14A cannot be added while computing the book profit u/s 115JB of the Act.
12. Heard both the sides and perused the material on record. The Special Bench of ITAT Delhi as referred supra held that disallowance u/s 14A cannot be added while computing the book profit u/s 115JB of the Act. Following the decision of special bench as supra we don’t find any infirmity in the decision of ld. CIT(A) therefore, this ground of appeal of the revenue stand dismissed.
13. In the result, the appeals of the revenue are dismissed.
Order pronounced in the open court on 22.05.2023
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