TaxTMI 
TaxTMI 
2017 (12) TMI 1061
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...., the Ld. CIT(A) has erred in deleting the addition u/s 14A of the Income Tax Act, 1961 by ignoring the fact that the provisions of Section 14A apply even if no exempt income is actually earned or received during the year in any form whatsoever? 2. "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the additions 14A of the Income Tax Act, 1961 by ignoring the provisions of CBDT Circular No. 5/2014 dated 11.02.2014 whereby it has been clarified that Rule 8D r.w.s. 14A provides for the disallowance of expenditure even where the assessee in particular has not earned exempt income? " 3. The appellant prays that the order of Commissioner of Income Tax (Appeal) on the above grounds be set aside and that DC1T be restored. " 4. "The appellant craves leave to amend or alter any ground or add a new ground. which may be necessary." 3. The brief facts of the case that assessee is in business of property development . The assessee has investments which are capable of yielding exempt income. The A.O asked the assessee to explain why the provision of section 14A of the 1961 Act r.w.r. 8D of Income-tax Act,1961 ....
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....st Rs. 15,963/- iii) 0.5% of Average value of Investment Rs.96,93,984/ - Total Rs.97,09,947/- Thus, the disallowance was made by the AO to the tune of Rs. 97,09,947/- which was added to the income u/s 14A r.w.r. 8D, vide assessment order dated 09-03-2015 passed by the AO u/s 143(3). 4. Aggrieved by the assessment order dated 09-03-2015 passed by the AO u/s 143(3), the assessee filed first appeal before the learned CIT(A), who granted the relief of the assessee by following the decisions on Hon'ble Delhi High Court dated 02.09.2015 in the case of Cheminvest Ltd. v CIT in ITA no. 749/2014, where it has been held by Hon'ble Delhi High Court that no disallowance can be made u/s. 14A if there is no exempt income earned by the assessee . The learned CIT(A) held as under:- 4.3.2 However, I am inclined to accept the alternative plea of the appellant based on case-laws cited in para 4.2.1 above as well as the judgment of the Hon'ble Delhi High Court dated 02.09.2015 in the case of M/s.Cheminvest Ltd. v. CIT (ITA 749/2014) wherein it has been held that section 14A will not apply if no exempt income is received or receivable during the relevant prev....
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....these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i.e., gross income minus the expenditure, is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. (emphasis supplied). It is proposed to insert a new section 14A so as to clarify the intention of the Legislature since the inception of the Income-tax Act, 1961, 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 I.T.Act. The proposed amendment will take effect retrospectively from April 1, 1962, and will accordingly apply in relation to the A.Y. 1962-63 a....
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....evenue 2.1 The provisions of section 14A only reiterate the settled law about Matching Principle of Accountancy that current income Vs. Current expenditure and in case exempt income - no expenditure to be allowed at all - whether direct or indirect - otherwise the matching principle gets disturbed. (a) As per the basic principle of taxation the disallowance u/s. 14A is both direct and indirect expenditure and if an assessee claims that he has incurred no indirect expenditure- then as per mandate of Sec. 14A(2) and 14A(3) - he will have to demonstrate the same before A.O. who will determine it in accordance with the provisions of sec. 14A(2) and 14A(3) and record his dissatisfaction with assessee's method of computation vis-a-vis the method of computation stated in sec. 14A(3) r.w. Rule 8D. (b) This will apply to both the "normal profit/statutory profit" and also to the "book profit" because both have to be computed in accordance with the matching principle of accountancy which requires disallowance of both direct and indirect expenditure in relation to the exempt income. Also, section 115JB(1)(f) uses the same expression. 2.2 (a) The....
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....h has already borne full tax in the hands of the paying company vide the written submission under the heading 'Object of relief on inter-corporate dividends' filed by the learned counsel on behalf of the assessee in the course of the arguments. Now when an amount by way of dividend is received by the assessee from the paying company, the full amount of such dividend would have suffered tax in the assessment of the paying company and it is obvious, that, in order to encourage intercompany investments, the Legislature intended that this amount should not bear tax once again in the hands of the assessee either in its entirety or to a specified extent. But the amount but way of dividend which would otherwise suffer tax in the hands of the assessee, would be the amount computed in accordance with the provisions of the Act and not the full amount received from the paying company. Therefore, it is reasonable to assume that in enacting section 8OM, the Legislature intended to grant relief with reference to the amount of dividend computed in accordance with the provisions of the Act and not with reference to the full amount of dividend received from the paying company. It is difficu....
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....ere the gross total income of an assessee ....... includes any income by way of dividends from a domestic company' in the opening part of sub- section (1) of section 8OM refer only to the inclusion of the category of income and not to the quantum of such income and, therefore, the words 'such income by way of dividends' following upon the specification of this condition, cannot have reference to the quantum of the income included but must be held referable only to the category of the income included, that is, income by way of dividends from a domestic company. This was the same argument which found favour with the Court in Cloth Traders (P) Ltd.'s case (supra), but on fuller consideration, we do not think it is well founded. We may assume with the Court in Cloth Traders (P.) Ltd.'s case (supra) that the words 'where the gross total income of an assessee........ includes any income by way of dividends from a domestic company' are intended only to provide that a particular category of income, namely, income by way of - dividends from a domestic company should form a component part of gross total income, irrespective of what is the quantum of the income so ....
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....Act. 17. There is also one other strong indication in the language of sub- section [III) of section 8OM which clearly compels us to take the view that the deduction envisaged by that provision is required to be made with reference to the income by way of dividends computed in accordance with the provisions of the Act and not with reference to the full amount of dividend received by the assessee. This indication was also unfortunately lost sight of by the Supreme Court in Cloth Traders (P) Ltd.'s case (supra) presumably because it was not brought to the attention of the Supreme Court. The Supreme Court observed in Cloth Traders (P) Ltd.'s case (supra )that the whole of the income by way of dividends from a domestic company or 60 per cent of such income, as the case may be, would be deductible from the gross total income for arriving at the total income of the assessee. We are afraid this observation appears to have been made under some misapprehension, because what sub-section (1) of section 80M requires is that the deduction of the whole or a specified percentage must be made from 'such income by way of dividends' and not from the gross total incom....
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....sian Star Co. Ltd. (2010) 326 ITR 56 and overruled CIT v/s. Kalpataru Colours and Chemicals (2010) 192 Taxaman 435. At para 11 of that order Hon‟ble Apex Court considered the difference between income and receipt following the ratio of Distributors (Baroda) Pvt. Ltd. (Supra).The following ratio as per para 12 of Hon‟ble Supreme Court order in the case of ACG Associated Capsules Pvt. Ltd. is to be applied. "12. If we now apply Explanation (baa) as interpreted by us in this judgment to the facts of the case before us, if the rent or interest is a receipt chargeable as profits and gains of business and chargeable to tax under Section 28 of the Act, and if any quantum of the rent or interest of the assessee is allowable as are expense in accordance with Sections 30 to 44D of the Act and is not to be included in the profits of the business of the assessee as computed under the head "Profits and Gains of Business or Profession", ninety per cent of such quantum of the receipt of rent or interest will not be deducted under clause (1) of Explanation (baa) to Section 8OHHC, In other words, ninety per cent of not the gross rent or gross interest but only the net interest or net re....
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.... the Chapter VI of the Act with the title "aggregation of income" and "set off and carry forward of loss". The distinction of Sec.66 for inclusion of income as provided under Chapter VII though there is no income tax payable is to separate out such income from the Chapter III of the Act. However, sec.68, 69, 69A, 69B, 69C, 69D of the Act are deemed income where entire sum is treated as income without following /applying matching principle (ix) Sec. 14A though included in the Chapter IV of the Act i.e computation of total income but it is having heading as "expenditure incurred in relation to income not includable in total income". It is therefore to understand the heading it can bebroken as follows : Expenditure incurred In relation to Income Not includable in Total income It is therefore, the income which is not to be included in total income is the income computed under various head following matching principle under the Chapter III of the Act. (x) Sec. 14A (1) of the Act which was brought retrospectively, by the Finance Act 2001 can be understood by breaking the provision as follows: For the purpose....
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....with following words "no deduction under any other provision of this Act shall be allowed to the company or a shareholder in respect of the amount which has been charged to tax under sub-section (1) or the tax thereon". It is therefore, any expenditure relatable to dividend receipt is not allowable under any provision of the Act. There can be "Nil" dividend from any investment resulting into negative or Nil income by way of dividends u/s. 1034) of the Act required no allow ability of such expenditure if there. 2.4. Legal proposition a) The Hon'ble Supreme Court in the case of CIT Vs. Walfort Share & Stock Brokers 326 ITR 1 (SC) observed that the insertion of sec. 14A with retrospective effect reflects the serious attempt on the part of the Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income. The Supreme Court also clearly held that in the case of an income like dividend income which does not form part of the total income, any expenditure/deduction relatable to such (exempt or non-taxable) income, even if it ....
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....f a previous year, shall not claim a deduction in respect of the expenditure incurred in relation to earning such income. Section 14A is founded on a valid rationale that the basic principle of taxation is to tax net income, that is to say, gross income minus the expenditure. On that analogy as the Supreme Court observed in Walfort Share & Stock Brokers (P.) Ltd.'s case (supra), the exemption is also in respect of net income and expenses allowed can only be in relation to the earning of taxable income. Therefore, it cannot be said that an absurdity would result on the application of the literal interpretation of section 14A (Para 45)". i) The CBDT vide circular No.5/2013 dt.11.02.14 through a clarification in respect of disallowance of expenses under Rule 14 A of the Act clarified as follows: "SECTION 14A OF THE INCOME-TAX ACT, 1961, READ WITH RULE 8D OF THE INCOME-TAX RULES, 1962 - EXPENDITURE INCURRED IN RELATION TO INCOME MOT INCLUDIBLE IN TOTAL INCOME - CLARIFICATION ON DISALLOWANCE OF EXPENSES UNDER SECTION 14A IN CASES WHERE CORRESPONDING EXEMPT INCOME HAS NOT BEEN EARNED DURING THEFINANCIAL YEAR CIRCULAR No.5/2014 F.N.O.225/182/2013-ITA.II), DATED11-2-2....
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....on 14A, it is not material that assessee should have earned such exempt income during the financial year under consideration. 5. The above position is further substantiated by a language used in Rule 8D(2)(ii) & 8D(2) (iii) of I.T. Rules which are extracted below: "(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 of amount computed in accordance with the following formula, namely:- A*B/C Where... 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;" (iii) an amount equal to one-half percent 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." (Emphasis added) 6. Thus, in light of above, Central Board of Direct Taxes, in exercise of its powers under section 119 of ....