TMI Blog2022 (10) TMI 571X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Rule 8D(i) which is to be reckoned for the purpose of calculation of average of half percent. Only those investments are to be considered for computing average value of investments which yielded exempt income during the relevant assessment year. The question of law is answered in favour of the appellant-assessee, as this Court is of the view that the ITAT has erred in confirming the disallowance made under Rule 8D by not restricting the disallowance to 0.5% of those investment only where the assessee had earned exempt income. - ITA 7/2020 & CMAPPL.943/2020 - - - Dated:- 7-10-2022 - HON'BLE MR. JUSTICE MANMOHAN AND HON'BLE MS. JUSTICE MANMEET PRITAM SINGH ARORA Appellant Through: Mr. Ved Jain, Advocate with Mr. Nischay Kantoor, Advocate. Respondent Through: Mr. Abhishek Maratha, Sr.Standing Counsel with Ms. Chazat Lawang, DCIT-Circle 4(2). J U D G M E N T MANMOHAN, J (Oral): 1. Present Income Tax Appeal has been filed challenging the order dated 31st July, 2019 passed by the Income Tax Appellate Tribunal ( ITAT ), Bench B , New Delhi in ITA No.5944/Del/2016, whereby appellant s appeal against the disallowance of Rs.6,05,176/- made un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here the total investment in these companies was Rs.2,59,11,939/- both at the beginning and close of the year. These investments were made out of own funds as held in all completed assessments. Further, there is no exempt income in the other investments of Rs.21,63,03,000/- which was mainly in subsidiary and other group companies, which were all private limited companies whose shares were not quoted. 6. The Assessing Officer without disputing the above facts computed a disallowance by applying 0.5% of total average investments instead of average investments which had yielded dividend income as is evident from para 4.10 of the assessment order, which is reproduced hereinbelow:- 4.10 Keeping in view of above discussion and guideline prescribed by CBDT in circular no.5/2014 provisions of disallowance u/s 14A r.w. Rule 8D is invoked. The language of Rule 8D(2) refers to investment income from which 'does not or shall not form part of total income. Thus, the focus of the provision is on those investments which have the potential to give rise to exempt income presence of actual exempt income in a particular year being irrelevant. The assessee has not added disallowance und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;s own words, to avoid controversy and unnecessary litigation .. 8. Upon the matter being carried forward in appeal, the Tribunal after recording the fact of receipt of dividend income was from three companies only, concurred with the orders of the Assessing Officer and CIT(A). ARGUMENTS ON BEHALF OF THE PETITIONER 9. Learned counsel for the appellant states that the issue that the assessee has earned dividend income only from three companies, namely, Tata Motors Ltd., Tata Consultancy Services Limited and Mundra Port is not in dispute and that the disallowance, if any, is to be considered in respect of such investments which have yielded exempt income during the year. He submits that the issue that disallowance at the rate of 0.5% is to be computed with reference to average investments which have yielded exempt income and not total investments is covered by the various judgments of this Court as well as other High Courts. ARGUMENTS ON BEHALF OF THE RESPONDENT 10. Per contra, learned counsel for the respondent states that the assessee company in the relevant assessment year has earned dividend income exempt from tax of Rs.12,92,735/- on a total inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the investment, income from which does not or shall not form part of the total income should be taken into consideration. Thus, it is not all investment but only that which is expressly spelt out in Rule 8D(2)(iii) read with Section 14A and Rule 8D(i) which is to be reckoned for the purpose of calculation of average of half percent. 15. In fact, the aforementioned issue is no longer res integra. A Division Bench of this Court in ACB India Limited (formerly M/s Aryan Coal Benefications (P) Ltd. Vs. Assistant Commissioner of Income Tax, ITA 615/2014 has held as under:- 4. The AO, instead of adopting the average value of investment of which income is not part of the total income i.e. the value of tax exempt investment, chose to factor in the total investment itself. Even though the CIT (Appeals) noticed the exact value of the investments which yielded taxable income, he did not correct the error but chose to apply his own equity . 16. Another coordinate Bench of this Court in Pr. Commissioner of Income Tax-2 Vs. M/s Caraf Builders Constructions Pvt. Ltd., 2018 (12) TMI 410 has held as under:- 26. There is another error made by the Assessing Officer in co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s.Marg Limited, in which the decision of the High Court of Karnataka in Pragathi Krishna Gramin Bank vs. JCIT [(2018) 95 Taxman.com 41(Kar.)] was followed. Further, the Delhi Bench of ITAT in the case of ACIT, Circle 17(1), New Delhi vs. Vireet Investment (P) Ltd. [(2017) 82 Taxman.com 415 (Delhi-Trib.) (SB)] also decided the said issue in favour of the assessee. Thus, following the above referred decision, substantial question of law No.1 is answered in favour of the assessee and against the revenue. 19. Another Division Bench of the Madras High Court in Commissioner of Income-tax, Central 1, Chennai Vs. Chettinad Logistics (P) Ltd., (2017) 80 taxmann.com 221 (Madras) has held as under:- 9. In our opinion 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. 9.1 The legislature, in order to do away with the pernicious practice adopted by the Assessees', to claim expenditure, against income exempt from tax, introduced the said provision. 10. In the instant case, there is no dispute that no income i.e., dividend, which did not form ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... :- 13. In the above background, the key question in the present case is whether the disallowance of the expenditure will be made even where the investment has not resulted in any exempt income during the AY in question but where potential exists for exempt income being earned in later AYs. 14. In the Explanatory Memorandum to the Finance Act 2001, by which Section 14A was inserted with effect from 1st April 1962, it was clarified that expenses incurred can be allowed only to the extent they are relatable to the earned income of taxable income . The object behind Section 14A was to provide that no deduction shall be made in respect of any expenditure incurred by the Assessee in relation to income which does not form part of the total income under the Income Tax Act . 15. What is taxable under Section 5 of the Act is the total income which is neither notional nor speculative. It has to be 'real income'. The subsequent amendment to Section 14A does not particularly clarify whether the disallowance of the expenditure would apply even where no exempt income is earned in the AY in question from investments made, not in that AY, but earlier AYs. 16. Rule 8D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses incurred in relation to exempt income. Consequently, the Court is not persuaded that in view of the Circular of the CBDT dated 11th May 2014, the decision of this Court in Cheminvest Ltd. (supra) requires reconsideration. 20. In M/s. Redington (India) Ltd. v. The Additional Commissioner of Income Tax, Company Range - V, Chennai (order dated 23rd December, 2016 of the High Court of Madras in TCA No. 520 of 2016), a similar contention of the Revenue was negated. The Court there declined to apply the CBDT Circular by explaining that Section 14A is clearly relatable to the earning of the actual income and not notional income or anticipated income. It was further explained that, The computation of total income 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 thus would be carrying the artifice too far. xxx xxx xxx xxx 24. For all of the aforementioned reasons, this Court is of the view that the CBDT Circular dated 11th May 2014 cannot override the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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