CIT Vs Kingfisher Finvest India Ltd. (Karnataka High Court)
Summary: The Karnataka High Court, in CIT Vs Kingfisher Finvest India Ltd., ITA No. 100 of 2015, decided on 29 September 2020, allowed the Revenue’s appeal concerning the applicability of Section 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules for Assessment Year 2008-09. The principal question was whether expenditure incurred in relation to investments could be disallowed even when the assessee had not earned exempt income during the relevant assessment year. The Tribunal had deleted the disallowance on the ground that no exempt dividend income had been received. The High Court disagreed with that conclusion and decided the substantial question of law in favour of the Revenue.
The assessee, Kingfisher Finvest India Ltd., was an investment and holding company that had previously operated under the names Verigate Trading Private Limited and Kingfisher Radio Ltd. During assessment proceedings, the Assessing Officer examined substantial investments made in companies including Kingfisher Airlines Ltd., Kingfisher Aviation Training Ltd., United Spirits Ltd. and Deccan Aviation Ltd. The Assessing Officer concluded that borrowed funds had been utilised for investments and that the corresponding interest expenditure was directly attributable to those investments. Accordingly, an amount of ₹57,92,44,082 was disallowed under Section 14A read with Rule 8D. The Commissioner of Income Tax (Appeals) affirmed the disallowance. However, the Income Tax Appellate Tribunal, by its order dated 17 October 2014, granted relief to the assessee because it had not earned exempt dividend income during the assessment year.
Before the High Court, the Revenue relied upon CBDT Circular No. 5/2014 dated 11 February 2014 and the Supreme Court’s judgment in Maxopp Investment Ltd. Vs CIT, (2018) 402 ITR 640 (SC). Reference was also made to CIT Vs Essar Teleholdings Ltd., (2018) 401 ITR 445 (SC), and CIT Vs Syndicate Bank, (2020) 115 taxmann.com 287 (Karnataka), concerning the applicability of amendments to Section 14A. The Revenue contended that the absence of dividend income did not, by itself, justify deletion of the disallowance. The High Court noted that the amendments introducing subsections (2) and (3) of Section 14A applied from Assessment Year 2007-08 and that the assessment year under consideration was 2008-09.
The High Court examined the reasoning adopted by the Tribunal and referred to paragraph 40 of the Supreme Court’s judgment in Maxopp Investment Ltd., particularly the discussion concerning shares held as stock-in-trade, the purpose of investment and the apportionment of expenditure. The Court also considered CBDT Circular No. 5/2014, which stated that disallowance under Section 14A read with Rule 8D could arise even where no exempt income had been earned in a particular year. On the basis of these authorities, the High Court concluded that the Tribunal had erred in deleting the disallowance solely because the assessee had not received dividend income.
Consequently, the Karnataka High Court answered the substantial question of law in favour of the Revenue, quashed the Tribunal’s order insofar as it concerned the Section 14A disallowance and allowed the Revenue’s appeal. The judgment reflects the High Court’s interpretation of Section 14A and Rule 8D in the context of Assessment Year 2008-09. Its conclusion must be read with subsequent judicial developments concerning disallowance where no exempt income is earned, rather than treated as an unqualified statement of the prevailing law for all assessment years.
Cases Discussed
- CIT v. Essar Teleholdings Ltd. — (2018) 401 ITR 445 (SC) — cited
- CIT v. Syndicate Bank — (2020) 115 taxmann.com 287 (Karnataka) — cited
- Maxopp Investment Ltd. v. CIT — (2018) 402 ITR 640 (SC) — relied upon
- State Bank of Patiala cases — Discussed within the quoted passage from Maxopp Investment
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
Mr.K.V.Aravind, learned counsel for the revenue.
2. This appeal under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’, for short) has been preferred by the revenue. The subject matter of the appeal pertains to the Assessment Year 2008-09. The appeal was admitted by a Bench of this Court to consider the following substantial question of law:
“Whether the Tribunal was correct in deleting the disallowance, when the Board’s Circular No.5/2014 dated 11.02.2014 clearly states that disallowance u/s 14A read with Rule 8D is to be made even where the tax payer in a particular year has not earned any exempted income?”
3. Facts giving rise to the filing of the appeal briefly stated are that the assessee was initially incorporated as Verigate Trading Private Limited. Subsequently, the assessee was taken over by UB Group of Mr.Vijay Mallya and was renamed as Kingfisher Radio Ltd. and thereafter, it was renamed as Kingfisher Finvest India Ltd. The assessee is an investment company and the main object of the Company is to make investment. It is also a holding company. The assessee filed the return of income for the Assessment Year 2008-09. The return of income was selected for scrutiny and notices dated 17.08.2009, 27.01.2010, 29.06.2010 and 02.08.2010 were issued to the assessee. In response to the notices, the representative of the assessee entered appearance. The Assessing Officer, by an order dated 17.09.2012, held that profit relating to loan was Rs.519.61 crores as on 31.03.2007 whereas it was Rs.1507.39 crores as on 31.03.2008 and substantial investments have been made in the shares of Avantis Pharma Limited, Kingfisher Airlines Ltd., Kingfisher Aviation Training Ltd., United Spirits Ltd. and also Deccan Aviation Ltd. It was further held that the money borrowed has found its way directly to the investments and as the assessee does not have any other major business other than investments, therefore, the claim towards interest payment is directly related to the investments. The Assessing Officer, therefore, disallowed the interest expenditure of Rs.57,92,44,082/- under Section 14A of the Act read with Rule 8D of the Income Tax Rules. The aforesaid order was affirmed by the Commissioner of Income Tax (Appeals) vide order dated 17.08.2012. Being aggrieved, the assessee approached the Income Tax Appellate Tribunal. The Tribunal, by an order dated 17.10.2014, allowed the appeal preferred by the assessee inter alia on the ground that until and unless there is a receipt of exempted income from the concerned Assessment Years, provision of Section 14A of the Act cannot be invoked. In the aforesaid factual background, this appeal has been filed.
4. Learned counsel for revenue, while inviting the attention of this Court to the decision of the Supreme Court in the case of ‘COMMISSIONER OF INCOME TAX, 5, MUMBAI VS. ESSAR TELEHOLDINGS LIMITED’ (2018) 401 ITR 445 (SC) as well as Division Bench of this Court in the case of ‘COMMISSIONER OF INCOME – TAX VS. SYNDICATE BANK’ (2020) 115 TAXMANN.COM 287 (KAR), fairly submitted that sub-sections (2) and (3) were inserted in Section 14A by the Finance Act, 2006 and the aforesaid amendments are prospective in nature and apply in relation to the assessment year 2007-08. It is also pointed out that the assessment year in question is 2008-09. It is further submitted that the Tribunal grossly erred in holding that since the assessee had not received any dividend on the investment, therefore, since there was no earning of maximum income, the disallowance under Section 14A of the Act is not permissible. It is submitted that the aforesaid view which has been taken by the Tribunal is in contravention of law laid down by the Supreme Court in ‘MAXOPP INVESTMENT LIMITED VS. COMMISSIONER OF INCOME TAX, NEW DELHI’ (2018) 402 ITR 640 (SC) as well as Circular No.5/2014 dated 11.02.2014 issued by the Central Board of Direct Taxes.
5. We have considered the submissions made by the learned counsel for the revenue and have perused the record. From perusal of paragraph 10 of the order passed by Tribunal, it is evident that the Tribunal has held that since the assessee had not received any dividend on the investment and since there was no earning to exempt income, therefore, there can be no disallowance under Section 14A of the Act. The aforesaid issue is no longer res-integra and is covered by the decision of the Supreme Court in MAXOPP INVESTMENT LIMITED (supra). The Supreme Court, in the aforesaid decision, the relevant extraction of which is reproduced below for the facility of reference, has held as under:
“40. We note from the facts in the State Bank of Patiala cases that the AO, while passing the assessment order, had already restricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in Rule 8D of the Rules and holding that section 14A of the Act would be applicable. In spite of this exercise of apportionment of expenditure carried out by the AO, CIT(A) disallowed the entire deduction of expenditure. That view of the CIT(A) was clearly untenable and rightly set aside by the ITAT. Therefore, on facts, the Punjab and Haryana High Court has arrived at a correct conclusion by affirming the view of the ITAT, though we are not subscribing to the theory of dominant intention applied by the High Court. It is to be kept in mind that in those cases where shares are held as ‘stock-in-trade’, it becomes a business activity of the assessee to the deal in those shares as a business proposition. Whether dividend is earned or not becomes immaterial. In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. The situation here is, therefore, different from the case like Maxopp Investment Ltd. where the assessee would continue to hold those shares as it wants to retain control over the investee company. In that case, whenever dividend is declared by the investee company that would necessarily be earned by the assessee and the assessee alone. Therefore, even at the time of investing into those shares, the assessee knows that it may generate dividend income as well and as and when such dividend income is generated that would be earned by the assessee. In contrast, where the shares are held as stock-in-trade, this may not be necessarily a situation. The main purpose is to liquidate those shares whenever the share price goes up in order to earn profits. In the result, the appeals filed by the Revenue challenging the judgment of the Punjab and Haryana High Court in State Bank of Patiala also fail, though law in this respect has been clarified hereinabove.”
6. In view of the aforesaid enunciation of law by the Supreme Court as well as Circular No.5/2014 dated 11.02.2014 issued by the Central Board of Direct Taxes which clearly provides that disallowance under Section 14A of the Act read with Rule 8D has to be made even when the tax paid for a particular year is not earned in exempt income, the substantial question of law framed by this Court is answered in negative and in favour of revenue.
7. In view of preceding analysis, the order of the Tribunal insofar as it pertains to disallowance under Section 14A of the Act read with Rule 8D of the Income Tax Rules is hereby quashed.
In the result, the appeal is allowed.
