Section 14A will not apply if no exempt income is received or receivable

DCIT Vs M/s. Ambuthirtha Power P. Ltd. (ITAT Bangalore)

The issue in Maxopp Investment Ltd’s. case (supra) was whether the expenditure (including interest on borrowed funds) in respect of investment in shares of operating companies for acquiring and retaining a controlling interest therein was disallowable under Section 14A of the Act. In the said case admittedly there was dividend earned on such investment. In other words, it was not a case, as the present, where no exempt income was earned in the year in question. Consequently, the said decision was not relevant and did not apply in the context of the issue projected in the present

In the context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression ‘does not form part of the total income’ in Section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year.

FULL TEXT OF THE ITAT JUDGMENT

These are appeals filed by the Revenue against the separate orders of the CIT (A)-I, Bengaluru, dt.23.01.2018 and 29.12.2017, for the assessment years 2013-14 and 2014-15, respectively.

The effective grounds for AY 2013-14 are as under :

2. The Ld. CIT(A) erred in deleting the addition of Rs. 6,35,04,451/- made in respect of income from the sale of carbon by treating it as capital receipt.

3. The Ld. CIT (A) erred in allowing the assessee’s appeal on the issue of disallowance made u/s 14A r.w. Rule 8D as the said matter has not reached finality due to pendency of SLP before the Hon’ble  Apex Court against the decision of Hon’ble High Court of Delhi in the case of M/s Cheminvest Ltd. (378 ITR 33 (Del)).

The effective grounds for AY 2014-15 are as under :

2. The Ld. CIT (A) erred in allowing the assessee’s appeal on the issuse of disallowance made u/s 14A r.w. Rule 8D as the said matter has not reached finality due to pendency of SLP before the Hon’ble Apex Court against the decision of Hon’ble High Court of Delhi in the case of M/s Cheminvest Ltd. (378 ITR 33 (Del)).

3. The Ld. CIT (A) erred in deleting the addition of Rs. 2,99,808/- made by the Assessing officer on account of delayed payment of employees contribution to PF and ESI under Section 43B and 2(24) read with section 36(1) (va) as the matter  has not reached its finality and an SLP of the Revenue in the case of CIT Vs. Arambagh Hatcheries Ltd. is pending  for consideration before the Hon’ble Apex court.

02. Ground no.2 of AY 2013-14 pertains to the deletion of the addition of Rs.6,35,04,45 1/- in respect of sale of carbon credits by treating it as capital receipt. For that purposes, the Ld. DR relies upon the order of assessee officer.

03. On the other hand the asses see relies upon the order passed by the coordinate bench of the Tribunal in ITA.243/Bang/2016, 07.07.2017, in assessee’s own case for the AY 2012-13, wherein the Tribunal in para 6 held as under :

6. We have considered the rival submissions. For the sake of ready reference, we reproduce para 5.4.2 & 6 of the Tribunal order rendered in assessee ’s own case for A. V. 2009-10. The same read as under : 

“5.4.2. Following the aforesaid decision of the Chennai Bench of the Tribunal in the case of M/s. Ambika Cotton Mills Ltd v. DCIT, we hold that the sale of carbon credits is to be considered as capital receipt and that the ld. CIT (A) erred in confirming the addition made by the AO, holding that the consideration received on sale of the carbon credits amounting to  Rs.4,87,32,342/- by the assessee gives rise to revenue receipt. Consequently, we allow the assessee ’s ground raised at Sl.no.3.

6. In view of the assessee ’s grievance, in respect of the exigibility to tax of the receipts on sale of carbon credits amounting to Rs.4,87,32,342/- being addressed in view of our finding that the same is to be considered as capital receipt, there is no requirement for us to adjudicate on the ground raised at Sl.No.2 regarding the assessee ’s claim for deduction of the same u/s.80IA of the IT Act, 1961.”

Since no difference in facts or in law could be pointed out by the ld. DR of the revenue in the present year, we find no reason to take a contrary view in the present year and therefore, by respectfully following this Tribunal order, we decline to interfere in the order of the ld. CIT(A) on this issue.

Since is no difference in facts or in law could be pointed out by the Ld. DR in the present year, we have no reason to take a contrary view following the decision of the coordinate bench (supra). We dismiss this ground of the Revenue for AY.2013-14.

04. Now we shall deal with ground 3 of AY 20 13-14 and ground 2 of AY 2014-15 which are common.

05. In this regard the Ld. AR has submitted that during these two years the assessee has not received any dividend income and therefore the addition made by the AO by invoking Rule 8D r.w.s. 14A is without any basis. The CIT (A) in the appellate order has elaborately discussed this issue and has brought on record that no income was earned by the assessee during these years and therefore has deleted the addition made by the AO.

06. On the other hand the Ld. DR relies upon the order passed by the AO.

07. We have heard the rival contentions and perused the material. As per the financial statement for the AYs.2013-14 and 2014-15, the assessee has not received any dividend income or tax-free income during these years on account of the investment made by the assessee. This fact was not disputed by the Ld. DR. Therefore in our view, the issue is held in favour of the assessee. In similar circumstances the Hon’ble Delhi High Court in Chem Investment [2015] 61 com118 (Delhi) has held as under :

15. Turning to the central question that arises for consideration, the Court finds that the complete answer is provided by the decision of this Court in CIT v. Holcim India (P.) Ltd. [2015] 57 taxmann.com28. In that case a similar question arose, viz., whether the ITAT was justified in deleting the disallowance under Section 14A of the Act when no dividend income had been earned by the Assessee in the relevant AY? The Court referred to the decision of this Court in Maxopp Investment Ltd’s. case (supra) and to the decision of the Special Bench of the ITAT in this very case i.e. Cheminvest Ltd. v. ITO [2009] 121 ITD 318. The Court also referred to three decisions of different High Courts which have decided the issue against Revenue. The first was the decision in CIT v. Lakhani Marketing Inc . [2014] 226 Taxman 45/49 taxmann.com257  of the High Court of Punjab and Haryana which in turn referred to two earlier decisions of the same Court in CIT v. Hero Cycles Ltd. [2010] 323 ITR 518/189 Taxman 50 and CIT v. Winsome Textile Industries Ltd . [2009] 319 ITR 204. The second was of the Gujarat High Court in CIT v. Corrtech Energy (P.) Ltd. [2014] 223  Taxman 130/45 taxmann.com 116 and the third of the Allahabad High Court in CIT v. Shivam Motors (P.) Ltd . [2015] 230 Taxman 63/55 taxmann.com 262. These three decisions reiterated the position that when an Assessee had not earned any taxable income in the relevant AY in question “corresponding expenditure could not be worked out for disallowance.”

16. In Holcim India (P.) Ltd’s. case (supra), the Court further explained as under:

“15. Income exempt under Section 10 in a particular assessment year, may not have been exemptearlier and can become taxable in future years. Further, whether income earned in a subsequent year would or would not be taxable, may depend upon the nature of transaction entered into in the subsequent assessment year. For example, long term capital gain on sale of shares is presently not taxable where security transaction tax has been paid, but a private sale of shares in an off market transaction attracts capital gains tax. It is an undisputed position that respondent assessee is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to management. Possibility of sale of shares by private placement etc. cannot be ruled out and is not an improbability. Dividend may or may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend. When declared, it is subjected to dividend distribution tax.”

17. On facts, it was noticed in Holcim India (P.) Ltd’s. case (supra) that the Revenue had accepted the genuineness of the expenditure incurred by the Assessee in that case and that expenditure had been incurred to protect investment made.

18. In the present case, the factual position that has not been disputed is that the investment by the Assessee in the shares of Max India Ltd. is in the form of a strategic investment. Since the business of the Assessee is of holding investments, the interest expenditure must be held to have been incurred for holding and maintaining such investment. The interest expenditure incurred by the Assessee is in relation to such investments which gives rise to income which does not form part of total income.

19. In light of the clear exposition of the law in Holcim India (P.) Ltd’s. case (supra) and in view of the admitted factual position in this case that the Assessee has made strategic investment in shares of Max India Ltd.; that no exempted income was earned by the Assessee in the relevant AY and since the genuineness of the expenditure incurred by the Assessee is not in doubt, the question framed is required to be answered in favour of the Assessee and against the Revenue.

20. Since the Special Bench has relied upon the decision of the Supreme Court in Rajendra Prasad Moody’s case (supra), it is considered necessary to discuss the true purport of the said It is noticed to begin with that the issue before the Supreme Court in the said case was whether the expenditure under Section 57(iii) of the Act could be allowed as a deduction against dividend income assessable under the head “income from other sources”. Under Section 57(iii) of the Act deduction is allowed in respect of any expenditure laid out or expended wholly or exclusively for the purpose of making or earning such income. The Supreme Court explained that the expression “incurred for making or earning such income’, did not mean that any income should in fact have been earned as a condition precedent for claiming the expenditure. The Court explained:

“What s. 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of s. 57(iii) and that purpose must be making or earning of income. s. 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There is in fact nothing in the language of s. 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the language of s. 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure.”

21. There is merit in the contention of Mr. Vohra that the decision of the Supreme Court in Rajendra Prasad Moody’s case (supra) was rendered in the context of allowability of deduction under Section 57(iii) of the Act, where the expression used is ‘for the purpose of making or earning such income’. Section 14A of the Act on the other hand contains the expression ‘in relation to income which does not form part of the total income.’ The decision in Rajendra Prasad Moody’s case (supra) cannot be used in the reverse to contend that even if no income has been received, the expenditure incurred can be disallowed under Section 14A of the Act.

22. In the impugned order, the ITAT has referred to the decision in Maxopp Investment Ltd’s. case (supra) and remanded the matter to the AO for reconsideration of the issue afresh. The issue in Maxopp Investment Ltd’s. case (supra) was whether the expenditure (including interest on borrowed funds) in respect of investment in shares of operating companies for acquiring and retaining a controlling interest therein was disallowable under Section 14A of the Act. In the said case admittedly there was dividend earned on such investment. In other words, it was not a case, as the present, where no exempt income was earned in the year in question. Consequently, the said decision was not relevant and did not apply in the context of the issue projected in the present

23. In the context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression ‘does not form part of the total income’ in Section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year.

Following the same, we decide this ground in favour of the assessee and against the Revenue.

08. The third ground for AY 2014-15 pertains to the deletion of addition of Rs.2,99,808/- on account of delayed payment of employees’ PF and ESI u/s.43B of the Act. The CIT (A) in 3.2 of his order has observed as under :

“3.2 However, it was remitted before filing the return of income and return of income was filed within due date as specified in section 139(1) of the Act. The learned assessing officer held that since the employees contribution has not been deposited within the due date as per the respective statutes  therefore, the same has to be added as income u/s.2(24)(x) r.w.s. 36(1)(va) of the Act.”

Being aggrieved the assessee filed this ground before us.

09. In this regard, we notice that this issue is also covered in favour of the assessee for the earlier years. We find no discrepancy in the order of the CIT (A), as the payments were made prior to filling of the return of income. In view of the above the ground filed by the Revenue in both the appeals are liable to be dismissed.

10. In the result, both the appeals of the Revenue are dismissed.

Order pronounced in the open court on 6^th day of July, 2018.