TaxTMI 
TaxTMI 
2022 (7) TMI 485
X X X X Extracts X X X X
X X X X Extracts X X X X
....O, assessee carried the matter before CIT(A) who vide order dated 29.03.2019 granted substantial relief to the assessee. Aggrieved by the order of CIT(A), Revenue is now in appeal and has raised the following grounds: "1. On the facts and in the circumstances of the case and in law the Ld. CIT(A) has erred in deleting the addition of Rs. 11,37,85,368/- u/s. 14A of the Act. 2. The appellant craves, leave or reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of appeal." 4. On the date of hearing, none appeared on behalf of the assessee nor any adjournment application was filed. The case file further reveal that the notice of hearing was sent to the assessee at the address stated in Form No. 36 but the same was returned undelivered by the postal authorities with remark "Left". Assessee has not placed on record its current address. Considering the aforesaid facts and the fact that the issue has been decided by CIT(A) after considering the various decisions cited therein including the decision of Jurisdictional High Court, we proceed to dispose of the appeal ex parte qua the assessee and after ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o operation as soon as the dividend income is claimed as exempt. It is further held that for making disallowance u/s. 14A, the precondition is satisfaction of assessing officer that voluntary disallowance made by assessee is unreasonable and unsatisfactory and in absence of such satisfaction, disallowance is not justified. It is further held by Hon'ble Court in another case namely CIT Vs. Om Prakash Khaitan 376 ITR 390 that even if satisfaction is recorded, no disallowance can be made if no nexus between expenditure incurred and income not forming part of total income has been established by AO. In the case Cheminvest Ltd. vs. CIT 378 ITR 33, Hon'ble Court, after reversing the decision of Spl. Bench, opined that if no exempt income was earned by the assessee in the relevant assessment year and since the genuineness of expenditure incurred was not in doubt, no disallowance could be made u/s. 14A of the Act. In a decision dated 16.08.2017 in the case of II & FS Energy Development Vs. Pr. CIT-04 ITA No. 520/2017, Jurisdictional High Court has again deliberated on the issue and after discussing the decision of CIT Vs. Rajendra Prasad Moody of Hon'ble Supreme Court & CBDT Ci....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Section 14A of the Income-tax Act, 1961 ('Act') was inserted into the Income Tax Act, 1961 vide Finance Act 2001, with retrospective application from 1.4.1962. It provides for disallowance of expenditure in relation to income not "includible" in total income. Over a period of time, there have been several cases decided on this issue by various High Courts and the Hon. Supreme Court along with clarifications by the CBDT. CBDT issued a Circular No. 5/2014 on 11th February 2014, clarifying, inter alia, as follows:- "A controversy has arisen in certain cases as to whether disallowance can be made by invoking section 14A of the Act even in those cases where no income has been earned by an assessee which has been claimed as exempt during the financial-year. 2. It is pertinent to mention that section 14A of the Act was introduced by the Finance Act, 2001 with retrospective effect from 01.04.1962. The purpose for introduction of section 14A, with retrospective effect since inception of the Act was clarified vide Circular No. 14 of 2001 as under: "Certain incomes are not includible while computing the total income, as these are exempt under ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... dividends can be disallowed under section 14A and rule 8D. (ii) The dominant purpose for which investment into shares is made by assessee, may not be relevant as section 14A applies irrespective of whether shares are held to gain control or as stock-in-trade. However, where shares are held as stock-in-trade, main purpose is to trade in those shares and earn profits there from and, in process, certain dividend is also earned which is tax exempt under section 10(34); expenditure attributable to exempt dividend income will have to be apportioned to be disallowed under section 14A. (iii) Rule8D is prospective in nature and could not have been made applicable in respect of assessment years prior to 2007 when this rule was inserted. (iv) Theory of Apportionment of Expenditure between taxable and non taxable income has in principle, which was widened by the SC in the case of Walfort Share & Stock Brokers Pvt. Ltd. ( (2010) 326 ITR 1), has now been upheld by the SC in the above case of Maxopp. 3. Crux of the issue - Section 14A(1) says that no deduction shall be allowed in respect of expenditure incurred in relation to income which does not form part of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ble partly to the exempt income and partly to the taxable income. In the absence of section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. "The mandate of section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of section 14A is that certain incomes are not includible while computing total income as these are exempt under certain provisions of the Act." (ii) The issue, thus, considered in perspective, is not if the income not forming the part of the total income (the tax-exempt income) is earned or not, but if expenditure relatable to such income has been incurred. If such expenditure stands incurred, section 14A(1) becomes applicable. (iii) The decision by the Apex Court in the case of CIT v. Walfort Share & Stock Brokers (P.) Ltd. (supra) stands followed in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2017] 81 taxmann.co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er it has resulted in any income (whether tax-exempt or non-exempt). The principle is well-settled, representing a fundamental concept of taxation, i.e., the allowability (or otherwise) of an expenditure would not depend upon whether it has in fact resulted in an income, i.e., positive income, which is in any case a matter subsequent, and that the mere fact that expenditure stands incurred for the purpose is sufficient for its admissibility, as explained by the Apex Court in CIT vs. Rajendra Prasad Moody [1978] 115 ITR 519 (SC). 4. The Apex Court was in that case examining the true interpretation of section 57(iii), which employed the words 'any expenditure (not being in the nature of capital expenditure) laid out or expended for the purpose of making or earning such income', the question of law raised before it reading as under:- "Whether, on the facts and in the circumstances of the case, interest on money borrowed for investment in shares which had not yielded any dividend is admissible under s. 57(iii)?" 5. The revenue's contention in the above case was that the making or earning of income was a sine qua non to the admissibility of the exp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the Bank and invests that loan in shares/stocks, dividend earned there from is not taxable. Normally, interest paid on the loan would be expenditure incurred for earning dividend income. Such an interest would not be allowed as deduction as it is an expenditure incurred in relation to dividend income which itself is spared from tax net. There is no quarrel up to this extent." 7. The Hon'ble Supreme Court, in the judgment in the case of Maxopp Investment Ltd. reported in [2018] 91 taxmann.com 154 (SC), has also affirmed the view that the dominant purpose for which investment into shares is made by assessee may not be relevant as section 14A applies irrespective of whether shares are held to gain control or as stock-in-trade. 8. In sum, the principle that it is the net income, i.e., net of expenditure relatable thereto, which is subject to tax and, correspondingly, not liable to tax, i.e., where it does not form part of the total income, is well established. It follows, therefore, that once an income is liable (or not liable) to tax, all expenditure relatable thereto is to be reckoned, and it matters little that the said expenditure has indeed resulted in a posi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ls for consideration is as to whether the dominant purpose test, which is pressed into service by the assessees would apply while interpreting Section 14A of the Act or we have to go by the theory of apportionment. We are of the opinion that the dominant purpose for which the investment into shares is made by an assessee may not be relevant. No doubt, the assessee like Maxopp Investment Limited may have made the investment in order to gain control of the investee company. However, that does not appear to be a relevant factor in determining the issue at hand. Fact remains that such dividend income is non-taxable. In this scenario, if expenditure is incurred on earning the dividend income, that much of the expenditure which is attributable to the dividend income has to be disallowed and cannot be treated as business expenditure. Keeping this objective behind Section 14A of the Act in mind, the said provision has to be interpreted, particularly, the word 'in relation to the income' that does not form part of total income. Considered in this hue, the principle of apportionment of expenses comes into play as that is the principle which is engrained in Section 14A of the Act. Thi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e, therefore, dismissed. 36. There is yet another aspect which still needs to be looked into. What happens when the shares are held as 'stock-in-trade' and not as 'investment', particularly, by the banks? On this specific aspect, CBDT has issued circular No. 18/2015 dated November 02, 2015. 36. This Circular has already been reproduced in Para 19 above. This Circular takes note of the judgment of this Court in Nawanshahar case wherein it is held that investments made by a banking concern are part of the business or banking. Therefore, the income arises from such investments is attributable to business of banking falling under the head 'profits and gains of business and profession'. On that basis, the Circular contains the decision of the Board that no appeal would be filed on this ground by the officers of the Department and if the appeals are already filed, they should be withdrawn. A reading of this circular would make it clear that the issue was as to whether income by way of interest on securities shall be chargeable to income tax under the head 'income from other sources' or it is to fall under the head 'profits and gains o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n'ble SC in Maxopp Investment Ltd. ( 2018 ) ( 402 ITR 640 ) settles many issues in favour of Revenue. Once the AO has done the ground work of recording the reasons/satisfaction, for rejecting the computation of expenses relating to exempt income by the assessee, the ground is open for the AO to use Rule 8D. Therefore, in view of the above judgments of Hon. Supreme Court, the disallowance made by the AO, after applying provisions of Section 14A read with Rule 8D(2)(iii), is appropriate and therefore may kindly be upheld. Submitted for kind consideration." 9. Learned DR thus supported the order of AO. 10. We have heard the Learned DR and perused the material available on record. The issue in the present ground is with respect to the disallowance u/s. 14A r.w.r. 8D of the IT Rules that was made by AO and deleted by CIT(A). We find that CIT(A) while deleting the addition made by the AO has noted that assessee has not earned any exempt income during the year under consideration. Before us, Revenue has not placed any material on record to demonstrate that the findings of the CIT(A) that assessee has not earned any exempt income is factually incorrect. We further find t....