AI Drafter 
TaxTMI 
TaxTMI 
2017 (9) TMI 1973
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....been utilized for the purpose of earning exempt income. 3. On the facts and circumstances of the case and in law, the ld CIT(A) has erred in deleting the above addition holding that there is no interest bearing funds attracted towards tax free investments ignoring the fact that the assessee company has extended interest/ dividend free loan to subsidiary company and high interest amount is debited to P&L Account on borrowed loans." 3. Facts stated briefly are that assessee is a company engaged in the business of developing wireless Internet solutions for mobile operators and providing support services during the year. It filed its return of income on 26/09/2009 showing income of Rs. 1 770 7930/-. Though assessee has not earned any exempt income, Ld. AO invoked the provisions of section 14 A for making disallowance heirs assessee has shown in investment during the year. Before the Ld. assessing officer assessee objected to the disallowance on several counts. However, the Ld. assessing officer rejected the contention of the assessee and applied provisions of rule 8D of the income tax rules, 1962 to disallow expenses as per the provisions of section 14 A of the income ....
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....e tax-free income. In view of this we agree with the contention of the Ld. authorised representative that in absence of any exempt income earned by the assessee during the year the disallowance under section 14 A of the act can not be made. We draw support from the recent decision of the Hon'ble Delhi High Court reported in 84 Taxmann.com 16 (Delhi) in Principal Commissioner of Income-tax v. IL & FS Energy Development Company Ltd. wherein Hon'ble high court has considered the whole issue on this aspect as under:- "3. The question of law sought to be urged by the Revenue is whether the ITAT erred in deleting the disallowance made by the Assessing Officer ('AO') of the sum of Rs. 4,00,78,074/- from the returned income of the Assessee under Section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 ('Rules'). 4. The facts 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....
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.... funds would have gone towards making investments. Even the Assessee admitted that the balance amount of loans of Rs. 175 crores could have been utilized for making investments. Consequently, the application of Rule 8D (2)(ii) of the Rules by the AO could not be said to be erroneous. (iv) The CIT (A) reduced the disallowance to Rs. 4,00,78,074/-. The CIT (A) also reduced the interest disallowed from Rs. 29,03,54,953/- to Rs. 6,11,80,756/-. 8. The ITAT, by the impugned order dated 7th November 2016, allowed the Assessee's appeal and held as under: (i) The Assessee had made investments in various companies amounting to Rs. 5,29,38,26,780/-. Out of said investments, an amount of Rs. 35,70,40,000/- was invested in fully convertible debentures which could yield no tax-free income. (ii) When the Assessee did not earn any exempt income, there could not be any disallowance. Further, when the Assessee had made investments 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 3....
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....tion 14A were inserted with effect from 1st April, 2007 to provide for methodology for computing of disallowance under Section 14A. However, the actual methodology was provided in terms of Rule 8D only from 24th March 2008. There was a further amendment to Rule 8D with effect from 2nd June 2016 limiting the disallowance the aggregate of the amount of expenditure directly relating to income which does not form part of total income and an amount equal to one per cent of the annual average of the monthly average of the opening and closing balances of the value of investment, income from which does not form part of the total income. It is also provided that the amount shall not exceed the total expenditure claimed by the Assessee. 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....
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.... be triggered. 19. In the considered view of the Court, this will be a truncated reading of Section 14 A and Rule 8D particularly when Rule 8D (1) uses the expression 'such previous year'. Further, it does not account for the concept of 'real income'. It does not note that under Section 5 of the Act, the question of taxation of 'notional income' does not arise. As explained in Commissioner of Income Tax v. Walfort Share and Stock Brokers Pvt. Ltd [2010] 326 ITR 1 (SC), the mandate of Section 14A of the Act is to curb the practice of claiming deduction of expenses incurred in relation to exempt income being taxable income and at the same time avail of the tax incentives by way of exemption of exempt income without making any apportionment of 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 ....
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....lly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of s. 57(iii) and that purpose must be making or earning of income. s. 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There is in fact nothing in the language of s. 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the language of s. 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure." 21. There is merit in the contention of Mr. Vohra that the decision of the Supreme Court in Rajendra Prasad Moody (supra) was rendered in the context of allowability of deduction under Section 57(iii) of the Act, where the expression used is "for the purpose of making or earning such income." Section 14A of the Act on the other&....