TMI Blog2023 (12) TMI 801X X X X Extracts X X X X X X X X Extracts X X X X ..... that for the purpose of section 14A, instead of taking into account total investment, the investment attributable to dividend (exempt income) was only required to be adopted and thereafter the disallowance was to be arrived. Thus we hold that while calculating disallowance under section 14A of the Act, only investment that have generated exempt income should be taken into consideration. Accordingly, we remit the issue to the file of ld. AO for limited purpose of re- computation of disallowance u/s 14A of the Act r.w. Rule 8D(2)(iii) of the I.T. Rules. It is needless to make it clear that while applying Rule 8D(2)(iii), an amount equal to one half percent of the average of the value of the investment that have generated exempted income should be taken into consideration and not the total investment. Appeal of the assessee is partly allowed for statistical purposes. - SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER For the Appellant : Ms. Richa, A.R. For the Respondent : Sri Subramanian S., D.R. ORDER PER CHANDRA POOJARI, ACCOUNTANT MEMBER: This appeal by assessee is directed against order of NFAC passed u/s 250 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceedings. Accordingly, they have not taken any loans or borrowing to make such investments. Further, the assessee has not sought any professional holding expertise for making such investment decisions, so that assessee has not incurred any administrative expenses per se of any nature whatsoever to make the investments in shares and earn the dividend income thereon. However, she submitted that the learned Assessing Officer has invoked the provisions of section 14A r.w. rule 8D mechanically made a disallowance of Rs. 23,73,997/- on presumption without there being establishing any nexus. Moreover, she submitted that the learned Assessing Officer made a disallowance on the annual average of the value of the total investments, without limiting it to investments pertaining only to GE BE Limited even when no actual expenditure was incurred by the assessee relating to the exempt income. Further, the learned CIT(A) has confirmed the disallowance of Rs. 23,73,997/-made by the learned Assessing Officer. The Disallowance of expenditure cannot be made on a Notional Basis: 3.1 She further submitted that the assessee has not incurred any expenditure in connection with the dividend in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purposes of chargeability to the tax. It is equally well settled that expenditure is a payout. In order to attract the applicability of section 14A of the Act, there has to be a payout and return of investment or a payback is not such a debit item. In the instant case, the assessee has admittedly not incurred any expenditure. This case pertains to income on dividends, which by no stretch of the imagination can be treated to be an expenditure to attract the provisions of Section 14A of the Act. In view of the aforesaid enunciation of law by the Supreme Court, the first substantial question of law framed by this court is answered in favour of the assessee and against the revenue. 3.4 She further placed reliance on the decision of the Bombay High Court in the case of CIT Vs Reliance Industries Ltd reported in (2011) 339 ITR 0632 (BOM) wherein it was held as below- The Tribunal in appeal observed that: The assessee has earned dividend income only from three companies. There is no fact of having incurred any expenditure for the purpose of earning the dividend income. The disallowance, in our view, is misconceived and the same is deleted in the light of the same ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uge share capital, reserves and surpluses which do not carry any interest. Further the interest-bearing loan has no relation in respect to this investment. The same is kept on record by the assessee which is evident from Page 10 of the Annual Report placed as Annexure-1. 3.11 Therefore, she submitted that making any disallowance of any expenditure for earning exempt income under section 14A on presumption without there being any nexus is unwarranted. In this regard, she placed reliance on the case of Commissioner of Income- tax -III vs Gujarat Narmada Valley Fertilizers Co. Ltd [2014] 42 taxmann.com 270 (Gujarat), the relevant extract is produced herein below Both the authorities have also noted faultlessly that the dividend income which was earned out of the investments made in the earlier years and there was no investment made in the year under consideration. With the availability of the huge interest-free funds in the form of share capital, reserves, etc., the Assessing Officer had not correctly applied the provisions of law to the issue Only the investments yielding non-taxable income have to be considered, and not all investments: 3.12 Without prejudice to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee; or (b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely: - (i) the amount of expenditure directly relating to income which does not form part of total income; (ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely: - A x B/C Where A = amount of expenditure by way of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt, chose to factor in the total investment itself. 3.17 In this regard, the ld. A.R. placed reliance on the judicial pronouncement of Delhi High Court in the case of ACB India Ltd. v. Astt. CIT [2015] 62 taxmann.com 71/235 Taxman 22/374 ITR 108 (Delhi) wherein it was held that for the purpose of Section 14A, instead of taking into account total investment, investment attributable to the dividend (exempt income) was required to be adopted and thereafter disallowance was to have arrived. She further submitted that a similar issue came before the Hon ble Supreme Court in the case of Pr. CIT v. India bulls Capital Services Ltd [2020] 114 taxmann.com 647 wherein the SLP of revenue was dismissed upholding the validity of judgment in ACB India Ltd. s (supra) stating that where the assessee in his return has himself apportioned expenditure, but the AO was not accepting the said apportionment, in that eventuality, the Assessing Officer will have to record its satisfaction to this effect. No no such satisfaction has been recorded by the AO to come to the conclusion to invoke the provisions of Section 14A (2), and the disallowance is directed to be deleted. 3.18 Further, she submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor in the total investment itself. Even though the Commissioner of Income-tax (Appeals) noticed the exact value of the investment which yielded taxable income he did not correct the error but chose to apply his own equity. Given the record that had to be done so to substitute the figure of Rs. 38,61,09,287 with the figure of Rs. 3,53,26,800 and, thereafter, arrive at the exact disallowance of .05 percent. 8. A similar view was taken by the Hon'ble Delhi High Court in the case of PCIT Vs. Indiabulls Capital Services Ltd., in ITA No.181/2019 (judgment dated 26.02.2019). The SLP filed by the Revenue against Hon'ble Delhi High Court's judgment in the case of PCIT Vs. Indiabulls Capital Services Ltd., (supra) was dismissed by the Hon'ble Apex Court [reported in (2020)] 114 taxmann.com 647. In view of the aforesaid judicial pronouncement, we hold that while calculating disallowance under section 14A of the Act, only investment that have generated exempt income should be taken into consideration. 9. Before concluding, it is also to be mentioned that explanation inserted by Finance Act, 2022, has been held to be prospective by the judgment of the Hon'ble D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that had to be done so to substitute the figure of Rs. 38,61,09,287 with the figure of Rs. 3,53,26,800 and, thereafter, arrive at the exact disallowance of .05 per cent. 8. A similar view was taken by the Hon'ble Delhi High Court in the case of PCIT Vs. Indiabulls Capital Services Ltd., in ITA No.181/2019 (judgment dated 26.02.2019). The SLP filed by the Revenue against Hon'ble Delhi High Court's judgment in the case of PCIT Vs. Indiabulls Capital Services Ltd., (supra) was dismissed by the Hon'ble Apex Court [reported in (2020)] 114 taxmann.com 647. In view of the aforesaid judicial pronouncement, we hold that while calculating disallowance under section 14A of the Act, only investments that have generated exempt income should be taken into consideration. 9. Before concluding, it is also to be mentioned that the explanation inserted by Finance Act, 2022, has been held to be prospective by the judgment of the Hon'ble Delhi High Court in the case of PCIT Vs. Era Infrastructure (India) Ltd., (2022) 141 taxmann.com 289. In light of the aforesaid reasoning and judicial pronouncements, we delete the disallowance made under section 14A of the Act, amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his section shall apply and shall be deemed to have always applied in a case where exempt income has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such exempt income. 5. This amendment will take effect from 1 st April 2022. 6. It is also proposed to amend sub-section (1) of the said section, so as to include a non-obstante clause in respect of other provisions of the Income- tax Act and provide that no deduction shall be allowed in relation to exempt income, notwithstanding anything to the contrary contained in this Act. 7. This amendment will take effect from 1 st April 2022 and will accordingly apply in relation to the assessment year 2022-23 and subsequent assessment years. 3.36 Thus, she submitted that the Memorandum of the Finance Bill, 2022 reveals that it explicitly stipulates that the amendment made to Section 14A will take effect from 1st April 2022 and will apply in relation to the assessment year 2022-23 and subsequent assessment years. 3.36 She further submitted that the learned CIT (A) in its order reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 73,997/- on total investments is unjustified. 3.39 Therefore, the ld. A.R. submitted before this Tribunal that it is clear from the aforementioned submission that the disallowance under section 14A r.w. rule 8D cannot be made on a notional basis and the contention of the learned Assessing Officer in disallowing 0.5% of the Average total investments is not valid. However, she submitted that even if, the disallowance has to be made, the amount of disallowance to be made as per section 14A read with rule 8D cannot exceed 0.5% of the investments from which exempt income is earned. Therefore, the total disallowance even if to be made should be restricted to only Rs. 1,30,000/-(Rs.2,60,00,000*0.5%) as also held by this Tribunal in the assessee s own case as mentioned above. 4. The ld. D.R. submitted that Rule 8D(2)(iii) of the I.T. Rules is mandatorily applicable to assessee s case since the assessee has earned exempt income at Rs. 3.9 Crores. 5. We have heard the rival submissions and perused the materials available on record. In this case, it is an admitted fact that assessee has earned exempt income of Rs. 3.90 crores. As such, as rightly pointed out by the ld. D.R., the ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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