TaxTMI 
TaxTMI 
2017 (8) TMI 732
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....acts are that the Respondent-Assessee is a company engaged in provision of consultancy services. On 26th September 2011, the Assessee filed its return at a loss of Rs. 2,42,63,176/-. The Assessee was asked to explain why disallowance should not be made under Section l4A of the Act read with Rule 8D of the Rules for the purpose of normal computation of book profit for the purpose of Minimum Alternative Tax ('MAT') under Section 115JB of the Act. 5. The response of the Assessee was that it had made investment in mutual funds and that no interest bearing funds were invested to earn tax free income. It accordingly pleaded that no disallowance under Section 14A of the Act was called for. 6. However, this plea was rejected by the AO who relied on the decision of the Special Bench of the ITAT Delhi in Cheminvest Ltd. v. ITO [2009] 121 ITD 318 (Del) (SB) wherein it was held that Section 14A would apply even if during the AY in question, the investment has not actually yielded any exempt income. The AO, by the assessment order dated 20th February 2014, made an addition of Rs. 15,44,43,369/- to the income of the Assessee. The AO held that the Assessee had made investments in shares to ....
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....ments in shares of subsidiary companies and joint ventures for the purposes of business and not for earning exempted dividend income, there could not be any disallowance. This Court, in Cheminvest Ltd. v. Commissioner of Income Tax (2015) 378 ITR 33 (Del), reversed the decision of the Special Bench of the ITAT and held that Section 14A of the Income Tax Act would not apply if the Assessee had not received any exempt income in the year in question. The Gujarat High Court had, in CIT v. Corrtech Energy Pvt. Ltd. [2015] 372 ITR 97 (Guj) held likewise. The Assessee held interest free funds in the form of share capital, share application money and reserve paid surplus, which exceeded the amount invested by the Assessee. Consequently, the question of disallowance of any expenditure incurred to earn exempt income during the AY in question did not arise. 9. Mr. Zoheb Hossain, learned Senior Standing Counsel for the Revenue, submitted that, in Cheminvest Ltd. (supra), this Court had no occasion to consider the CBDT Circular No. 5/2014 dated 11th February 2014 which clarified that Section 14A would apply even when exempt income was not earned in a particular AY. According to him, the othe....
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....s 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 (1) of the Rules is helpful, to some extent, in understanding the above issue. It reads as under: "8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with- (a) the correctness of the clai....
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....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." 21. The decisions in CIT v. M/s Lakhani Marketing Inc. 2014 SCC Online P&H 20357, CIT v. Winsome Textile Industries Limited [2009] 319 ITR 204 (P&H), CIT v. Shivam Motors (P) Ltd. (2014) 272 CTR (All) 277 have all taken a similar view. The decision in Taikisha Engineering India Pvt. Ltd. (supra) does not specifically deal with this issue. 22. It was suggested by Mr. Hossain that, in the context of Section 57(iii), the Supreme Court in Commissioner Of In....