Case Law Details

Case Name : L&T Power Development Ltd.V/S CIT (ITAT Mumbai)
Appeal Number : I.T.A. No.874/Mum/2017
Date of Judgement/Order : 09/08/2018
Related Assessment Year : 2013-14
Courts : All ITAT (7623) ITAT Mumbai (2174)

Section 14A of the Act provides that for the purposes of computing the total income under Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Hence, what section 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction.

In other words if no exempt income was received or receivable during the relevant previous year under consideration , no disallowance of expenditure can be made u/s. 14A of the 1961 Act.

Income Tax Department issue circular (CBDT Circular no. 5/2014 dated 11.02.2014) to determine the amount of expenditure to be disallowed Under Rule 8D:

As per the Income-tax law as it stands today (post amendment in June 2016), expenditure incurred in relation to earning exempt income is the aggregate of following:

  • Any amount of expenditure which is directly relating to exempt income; and
  • Amount equal to 1% of annual average of monthly average of opening and closing balances of value of investment whose income is or shall be exempt

However, any disallowance computed under this Rule cannot exceed total expenditure claimed by taxpayer.

This circular ( CBDT Circular no. 5/2014 dated 11.02.2014) to put forth that invocation of Sec. 14A of the Act is permissible even in the absence of exempt income during a particular year. Which means even though assessee not earn the exempt income during the year , the expenditure incurred during current year to earn income which will become accrue in subsequent FY will be disallowed in current FY.

L&T Power Development Ltd.V/S CIT (ITAT Mumbai); I.T.A. No.874/Mum/2017; 09/08/2018

Brief Facts of the Case

1. This appeal, filed by the Revenue, being ITA No. 874/Mum/2017, is directed against appellate order dated 09.11.2016 passed by learned Commissioner of Income Tax (Appeals)-5, Mumbai (hereinafter called “the CIT(A)”), for assessment year 2013-14, the appellate proceedings had arisen before learned CIT(A) from assessment order dated 30.11.2015 passed by learned Assessing Officer (hereinafter called “the AO”) u/s 143(3) of the Income-tax Act, 1961 (hereinafter called “the Act”) for assessment year 2013-14.

2. The grounds of appeal raised by Revenue in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called “the tribunal”) read as under:- “1. “Whether on the facts and in circumstances of the case and in law Ld. CIT(A) was right in deleting the disallowance of Rs.6,87,36,342/- made u/s. 14A r. w. Rule 8D(iii) of the I. T. Rule without appreciating the fact that assessee cannot earn dividend income without systematic management and that dividend income can be earned by incurring no or nominal expenditure

3. The brief facts of the case are that the assessee is engaged in the business of developing, investing, operating and maintaining power generation projects. The dispute which has arisen between rival parties before us is in very narrow compass . The assessee had made substantial investment in shares of compan es and average investment of the assessee during the year stood at 13,74,72,86,430/- . It is an undisputed fact between rival parties that the assessee did not earned any exempt income during the year under consideration by way of dividend or even otherwise. The AO applied provision of section 14A of 1961 Act r.w.r. 8D(2)(iii) of the Income-tax Rules, 1962 and made disallowance of expenditure of Rs. 6,87,36,432/- purported to be incurred in relation to earning of an exempt income by relying on CBDT Circular no. 5/2014 dated 11.02.2014 and judicial precedents , vide assessment order dated 30.11.2015 passed by the AO u/s 143(3) of the 1961 Act .

DECISION OF CASE:

ITAT observed that the assessee is engaged in the business of developing, investing, operating and maintaining power generation projects. The assessee has made investments in shares of companies and average investment of Rs. 13,74,72,86,430/- was held by the assessee during the year .

It is undisputed fact between rival parties that the assessee did not receive any dividend income or even otherwise no exempt income was received during the relevant previous year under consideration before us. The assessee filed before the tribunal audited financial statements as well computation of income to make its point that no dividend or as a matter no exempt income was received during the year under consideration as also to make its point that all investments are in shares of companies and no investments were made in Mutual Funds. The said audited financial statements as well computation of income are placed in file.

The finding of the AO that the assessee had made investments in Mutual funds is already discarded by learned CIT(A) while it is concurrent finding by both the authorities namely the AO and learned CIT(A) that the assessee did not receive any exempt income during the year under consideration. The AO has disallowed expenditure of Rs. 6,87,36,432/- purported to be incurred in relation to earning of an exempt income by invoking provisions of Section 14A of the 1961 Act r.w.r. 8D(2)(iii) of the 1962 Rules .

The learned CIT(A) has given relief to the assessee based upon the proposition that if no exempt income has been received during the relevant year, no disallowance can be made u/s. 14A of the Act. The finding of learned CIT(A) is extracted by us in preceding para’s of this order. We have also observed that the same issue came up for adjudication before Mumbai-tribunal for AY 2010-11 and 2011-12 in assessee’s own case.

The Mumbai-tribunal decided the issue under similar factual matrix in favour of assessee wherein it was held by tribunal that no disallowance can be made u/s 14A of the 1961 Act when no exempt income is earned by the assessee.

Hon’ble Madras High Court affirmed the proposition in  Redington (India) Ltd. v. Addl. CIT 120171 77 taxmann.com 257 (Mad.)  that if no exempt income is received during the previous year relevant to the impugned assessment year, no disallowance of expenditure u/s 14A of the Act of 1961 is warranted.

Respectfully following the ratio of aforesaid decision of Hon’ble High Courts including decision of Hon’ble Jurisdictional High Court and also taking note of dismissal of Revenue’ SLP by Hon’ble Supreme Court in the case of CIT v. Chettinad Logistics Private Limited reported in (2017) 80 taxmann.com 221(Mad. HC) on grounds of delay as also on merits, we uphold the well reasoned order of Ld. CIT(A) on the proposition that if no exempt income is earned by the assessee during the previous year relevant to the impugned assessment year , no disallowance u/s 14A of the 1961 Act is called for and we dismiss the appeal of Revenue on this short ground only.

CRUX OF THE CASE:

1. Section 14 A of the Act, can only be triggered, if, the Assessee seeks to square off expenditure against income which does not form part of the total income under the Act.

2. Rule 8D, only provides for a method to determine the amount of expenditure incurred in relation to income, which does not form part of the total income of the Assessee, Rule 8 D, cannot go beyond what is provided in Section 14 A of the Act.

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