PCIT Vs Morgan Stanley India Securities P Ltd (Bombay High Court)
The revenue filed an appeal under Section 260A of the Income Tax Act challenging the order dated 5 January 2017 of the Income Tax Appellate Tribunal, Mumbai, in relation to the assessment year 2008–09. The revenue raised three questions of law regarding the Tribunal’s decision to delete a disallowance made under Section 14A. The first issue concerned whether the Tribunal was justified in deleting the disallowance on the ground that the assessee had not earned dividend income in the relevant year, given the department’s view that Section 14A applies even if no exempt income is earned. The second issue questioned whether the Tribunal erred in ignoring CBDT Circular No. 5/2014, which clarifies that Section 14A read with Rule 8D allows for disallowance of expenditure even when no exempt income is earned. The third issue challenged the Tribunal’s conclusion that the assessee’s investments were strategic in nature, with the revenue relying on a Karnataka High Court decision stating that strategic investments also fall within Section 14A.
The High Court noted that the issue pertained solely to disallowance under Section 14A. It examined the provision, which disallows expenditure incurred in relation to income not forming part of total income. The department argued that “includible” in the heading meant that exempt income need not be earned in that specific year for the provision to apply. However, the Court referred to earlier Bombay High Court decisions, including Delite Enterprises (2009) and India Debt Management Pvt Ltd (2019), which held that when no exempt income is earned during the relevant year, disallowance under Section 14A does not arise. The Court also noted that the Supreme Court had dismissed the SLP against the Delhi High Court decision in Chemivest Ltd., which supported the same view. Additionally, the Delhi High Court in IL & FS Energy Development Company Ltd. held that CBDT Circular No. 5/2014 cannot override statutory provisions.
