TMI Blog2021 (1) TMI 922X X X X Extracts X X X X X X X X Extracts X X X X ..... onourable Ms. Justice R. N. Manjula For the Appellant : Mr.Karthik Ranganathan Senior Standing Counsel For the Respondent : Mr.R.Sivaraman JUDGMENT (DELIVERED BY T.S.SIVAGNANAM,J ) This appeal has been filed by the Revenue under Section 260A of the Income Tax Act, 1961 ('the Act' for brevity) challenging the order dated 27.09.2019 made in ITA.No.568/Chny/2019 on the file of the Income Tax Appellate Tribunal, Madras 'C' Bench ('the Tribunal' for brevity) for the assessment year 2015-16. 2. The Revenue has raised the following substantial questions of law for consideration: 1. Whether on the facts and in circumstances of the case, the Tribunal was right in restricting the disallowance u/s14A of the Act by relying on the following decisions wherein the quantum of disallowance u/s14A of the Act was not the subject matter? (i) State Bank of Patiala [2018]99 taxmann.com 286 (ii) M/s.Redington (India) Ltd [2017]77 taxmann.com 257 2. Whether on the facts and in circumstances of the case, the Tribunal was right in restricting the disallowance u/s14A of the Act to the extent of exempt income earned during the relevant p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y it, which is exempted from income tax to the extent of ₹ 1,80,30,965/- for the assessment year 2011-12 but the learned Assessing Authority vide the aforesaid order has disallowed the expenditure to the extent of ₹ 2,48,85,000/- which is exfacie illegal and impermissible. He also submits that the expenditure incurred to earn the exempted income in the form of Dividend was really not incurred by the Bank during the year but the said computation of expenses of ₹ 2,48,85,000/- was made as per the direction of Assessing Authority in terms of Rule 8D of the Rules with a clear submission made by the assessee that no expenditure deserves to be disallowed in the hands of assessee Bank under section 14A of the Act r/w rule 8D of the Rules but ignoring such factual submissions as well as the provisions of law, the assessing authority has disallowed the said sum and unfortunately the Appellate Authorities have also casually upheld the said findings. 7. On the other hand, Sri Y.V.Raviraj learned counsel for the Revenue urged before the Court that though the disallowance in excess of the dividend income earned by the assessee to the extent of ₹ 1,80,30,965/- may no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1) For the purposes of computing the total income under this 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 this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act: Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest other than the amount of interest included in clause (i) incurred during the previous year; B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; C = the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; (iii) an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. 61. Omitted by the IT (Fourteenth Amdt.) Rules, 2016, w.e.f. 2-6-2016. Prior to its omission, sub-rule (3) read as under: '(3) For the purpose of this rule, the total assets shall mean, total assets as appearing in the balance sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets.' 13. The manner in which the aforesaid disallowance has been made by the assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Maxopp Investment Ltd.(supra) held in paragraphs 40 and 41 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 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 asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d judgment is quoted below for ready reference. 12.3 The reasoning of the Division Bench is contained in the following part of the judgment: 4. The admitted position is that no exempt income has been earned by the assessee in the financial year relevant to the assessment year in issue. The order of assessment records a finding of fact to that effect. The issue to be decided thus lies within the short compass of whether a disallowance in terms of s.14A of the Act read with rule 8D of the Rules can be contemplated even in a situation where no exempt income has admittedly been earned by the assessee in the relevant financial year. 7. Per contra, Sri.T.Ravikumar appearing on behalf of the revenue drew our attention to the marginal notes of s.14 A pointing out that the provision would apply not only where exempted income is 'included' in the total income, but also where exempt income is 'includable' in total income. 8. He relied upon a Circular issued by the Central Board of Direct taxes in Circular No. 5 of 2014 dated 11-2-2014 to the effect that s.14A was intended to cover even those situations whether there is a possibility of exempt income being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computation of disallowance in terms of Rule 8D is by way of a determination involving direct as well as indirect attribution. Thus, accepting the submission of the Revenue would result in the imposition of an artificial method of computation on notional and assumed income. We believe this would be carrying the artifice too far. (Emphasis is ours) 13. Mr. Senthil Kumar, seeks to distinguish the judgment in M/s.Redington (India) Limited case based on the fact that Rule 8D had not kicked-in by AY 2007-08, which was the AY being considered in the said case. 13. The provisions of Section 14A themselves are very clear and without recording satisfaction by the Assessing Authority that the expenditure incurred to earn exempted income, as computed by the Assessee is not acceptable for the specified reasons, the Assessing Authority cannot even resort to computation of such disallowance under rule 8D of the Rules. Despite this being the position of law crystal clear and there being no other contrary view from any other High Court, one fails to understand how the Tribunal in the impugned order could still take a view contrary to this legal position and uphold the disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee, which could never be the intention of section 14A of the Act, providing for a proportionate disallowance of expenditure incurred to earn the exempted income. 15. The expenditure incurred to earn any income has to be always below the extent of income itself and bear a reasonable proportion thereto, as the commercial prudence does not permit any one to spend more and earn less. The investment in shares of which dividend is earned and dividend being exempted income, the expenditure incurred for earning such dividend in the form of interest on the borrowed funds, which are employed to buy such shares can obviously be not more than the dividend itself and even if the interest paid on such borrowed funds is more than the actual dividend earned during the year in question, the disallowance of interest cannot go beyond the amount of dividend itself. As such, interest paid on borrowed funds by the Assessee does not constitute 'income of Assessee for that year'. Section 14A has been introduced not to allow expenditure incurred to earn such exempted income in the form of dividend as an allowable expenditure against the exempted income of the Assessee and therefore, obv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investee company or subsidiary company as the case may be, the disallowance computed under Rule 8D cannot be taxed as a hypothetical income of the Assessee, by providing a negative figure beyond the dividend income earned during that year, to be added to the taxable income of the Assessee. That will make the mockery of the concept of real income of the Assessee being taxed and it is the bedrock of the Income Tax Act itself. 18. The computation of disallowance made by the Assessing Authority and upheld by the Tribunal, as given in paragraph 6 of its impugned order, are quoted below for ready reference: 6. We have heard both the parties and perused the material on record. The assessee made total investment in the assessment year 2009-10 as follows: Subsidiaries UTI Infrastructure ₹ 2,38,89,48,500/- Advantage Fund series ₹ 10,00,000/- Investment in sister concerns ₹ 1,59,39,000/- 6.1 For the assessment year 2010-11, the total investment is as follows: Subsidiaries UTI Infrastructure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y made by the Assessee, which is part of the Paper Book before us for the four assessment years in question. In the Table quoted in the beginning of the order, shows that the Assessee himself computed and offered the disallowance beyond the exempted income in the particular year, namely AY 2009-10, as against the dividend income of ₹ 41,042/- and the Assessee himself computed disallowance under Rule 8D of the Rules to the extent of ₹ 2,38,575/-, which was increased to ₹ 98,16,104/- by the Assessing Authority. Similarly, for AY 2012-13, against Nil dividend income, the Assessee himself computed disallowance at ₹ 8,50,000/-, which was increased to ₹ 2,61,96,790/-. 21. We cannot approve even the larger disallowance proposed by the Assessee himself in the computation of disallowance under Rule 8D made by him. These facts are akin to the case of Pragati Krishna Gramin Bank (supra) decided by Karnataka High Court. The legal position, as interpreted above by various judgments and again reiterated by us in this judgment, remains that the disallowance of expenditure incurred to earn exempted income cannot exceed exempted income itself and neither the A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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