PCIT Vs Tata Realty & Infrastructure Ltd. (
The Bombay High Court dismissed the Revenue’s appeal against the Income Tax Appellate Tribunal’s order dated 9 May 2019 in the case of PCIT Vs Tata Realty & Infrastructure Ltd., holding that none of the three questions raised by the Revenue gave rise to a substantial question of law. The dispute concerned two principal issues: the applicability of Section 14A of the Income-tax Act, 1961 where the assessee had earned no exempt income during the relevant assessment year, and the treatment of compensation of Rs.2.5 crores paid to secure possession and use of premises under a leave and licence arrangement.
Read SC Judgment: No Section 14A Disallowance Without Exempt Income: SC upholds Bombay HC Judgment
Section 14A Disallowance Where No Exempt Income Was Earned
The Revenue questioned the Tribunal’s conclusion that Section 14A could not be invoked in the absence of exempt income. It relied on CBDT Circular No. 5/2014 dated 11 February 2014, which, according to the Revenue, clarified that expenditure relatable to exempt income should be considered for disallowance even if no exempt income was earned during the financial year. The Revenue’s second proposed question referred to CBDT Circular No. 5/2024 and argued that CBDT circulars provide important clarification of legislative intent.
The High Court found that both questions were squarely covered by its earlier decision in Principal Commissioner of Income Tax-7 Vs Morgan Stanley India Securities P Ltd, Income Tax Appeal No. 1701 of 2017, decided on 21 January 2020. In that decision, the Court had held that where no exempt income was earned during the relevant assessment year, no disallowance under Section 14A could arise.
The Court also referred to Principal Commissioner of Income Tax-3 Vs India Debt Management Pvt Ltd, Income Tax Appeal No. 266 of 2017, decided on 15 April 2019, which had supported the same legal position. Since the Revenue’s first two questions were governed by these earlier decisions, the High Court concluded that neither raised a substantial question of law.
Rs.2.5 Crore Compensation for Vacating Premises
The third question concerned whether compensation paid by the assessee to obtain the use of premises should be treated as capital expenditure because the arrangement allegedly resulted in an enduring benefit.
The assessee had paid Rs.2.5 crores to Brandon and Company Pvt. Ltd. for vacating premises occupied by that company. The payment enabled the assessee to use those premises on a leave and licence basis for 60 months, on the same terms under which Ewart Investments Ltd had provided the premises to Brandon and Company Pvt. Ltd.
The Assessing Officer treated the payment as capital expenditure. However, the Commissioner of Income Tax (Appeals) and the Tribunal regarded it as revenue expenditure. In reaching its conclusion, the Tribunal relied on the Supreme Court’s judgment in CIT Vs Madras Auto Service (P) Ltd., reported in (1998) 99 Taxman 575 (SC) and (1998) 233 ITR 468 (SC).
The Bombay High Court examined the Tribunal’s reasoning and the Supreme Court precedent and found nothing objectionable in the conclusion that the compensation represented revenue expenditure rather than capital expenditure. Consequently, the third question also did not raise a substantial question of law.
Final Decision
The High Court dismissed the Revenue’s appeal in its entirety, without any order as to costs. The ruling affirmed the Tribunal’s conclusions that Section 14A disallowance could not arise where no exempt income was earned during the relevant assessment year and that the compensation paid for securing use of the premises under the particular leave and licence arrangement was deductible as revenue expenditure.
Cases Discussed
- Principal Commissioner of Income Tax-7 Vs Morgan Stanley India Securities P Ltd (Bombay High Court), Income Tax Appeal No. 1701 of 2017, decided on 21.01.2020 — Followed. Held that no disallowance under Section 14A arises where no exempt income was earned during the relevant assessment year. The Court found that the Revenue’s first two questions were squarely covered by this judgment.
- Principal Commissioner of Income Tax-3 Vs M/s. India Debt Management Pvt Ltd (Bombay High Court), Income Tax Appeal No. 266 of 2017, decided on 15.04.2019 — Relied upon through the Morgan Stanley judgment. Supported the proposition that Section 14A disallowance does not arise in the absence of exempt income.
- CIT Vs Madras Auto Service (P) Ltd. (Supreme Court), (1998) 99 Taxman 575 (SC); (1998) 233 ITR 468 (SC) — Relied upon. The Tribunal applied this decision in treating the Rs.2.5 crore compensation for securing use of premises as revenue expenditure. The High Court found no error in that conclusion.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
1. This Appeal is filed by the Revenue challenging the order passed by the ITAT dated 9th May 2019.
2. According to the Revenue, the following 3 questions of law arise for our consideration:-
“i.Whether on the facts and circumstance of th case and in law, the Hon’ble ITAT was right in holding that the provisions of section 14A will not be applicable when there is no exempt income earned by the assessee during the year failing to appreciate the clarification in Board’s Circular No. 5/2014 dated 11.02.2014 wherein it is clearly laid down that expenses which are relatable to earning of exempt income have to be considered for disallowance irrespective of the fact whether any such income has been earned during the Financial Year or not?
ii. Whether on the facts and circumstance of the case and in law, the Hon’ble ITAT was correct in not noticing CBDT Circular No. 5/2024 when it is judicially acknowledged that CBDT Circulars constitute important clarifications of legislative intent?
iii. Whether on the facts and in the circumstances of the case and in law, the Hon’ble Tribunal was right in holding that the expenditure on amortization of tenancy right is not of Capital nature failing to appreciate that the tenancy right acquired by the assessee has resulted in an enduring benefit?”
3. As far as questions (i) and (ii) are concerned, we find that the same are squarely covered by a decision of this Court in the case of Principal Commissioner of Income Tax-7 Vs. Morgan Stanley India Securities P Ltd [Income Tax Appeal No. 1701 of 2017 decided on 21st January 2020]. Questions (i) and (ii), as raised in the present Appeal, are the exact questions that were raised for the consideration of this Court in Income Tax Appeal No. 1701 of 2017. The Division Bench of this Court in the case of Morgan Stanley India Securities P Ltd (Income Tax Appeal No. 1701 of 2017) has clearly held that where there was no exempt income that was earned in the relevant Assessment Year, the question of disallowance under Section 14A would not arise. They drew support from a view taken by this Court in the Income Tax Appeal No. 266 of 2017 [Principal Commissioner of Income Tax -3 Vs. M/s. India Debt Management Pvt Ltd, decided on 15th April 2019].
4. Once we find that the issues raised in questions (i) and (ii) above are squarely covered by the decision of this Court in Morgan Stanley India Securities P Ltd (supra), we do not find that questions (i) and (ii) give rise to any substantial questions of law.
5. As far as question (iii) is concerned, we find that this issue also does not give rise to any substantial question of law. On this particular issue, the findings of the Tribunal can be found in paragraphs 10 to 14 of the impugned order. The Tribunal, in fact, held that the compensation paid by the Assessee of Rs.2.5 Crores to Brandon and Company Pvt. Ltd. for vacating the premises occupied by them and availing of the said premises on a leave and license basis for a period of 60 months on the same terms at which said premises were given by Ewart Investments Ltd to Brandon and Company Pvt. Ltd. amounted to a Revenue expenditure and not a capital expenditure as held by the Assessing Officer. The Tribunal, to come to this conclusion, placed reliance on the decision of the Hon’ble Supreme Court in the case of CIT Vs. Madras Auto Service (P) Ltd. (1998) 99 Taxman 575 (SC); 1998 233 ITR 468 (SC).
6. After going through the impugned order as well as the decision of the Hon’ble Supreme Court in the Madras Auto Service (P) Ltd. (supra), we do not find anything objectionable in the findings given by the Tribunal, as well CIT (Appeals), that the compensation of Rs.2.5 Crores paid by the Assessee to Brandon and Company Pvt. Ltd. is nothing but a Revenue expenditure.
7. We accordingly find that question (iii) also does not give rise to any substantial question of law. Accordingly, the above Appeal is dismissed. However, in the facts and circumstances of this case, there shall be no order as to costs.
8. This order will be digitally signed by the Private Secretary/ Personal Assistant of this Court. All concerned will act on production by fax or email of a digitally signed copy of this order.
