TaxTMI 
TaxTMI 
2022 (10) TMI 571
X X X X Extracts X X X X
X X X X Extracts X X X X
....owance made under Rule 8D by not restricting the disallowance to 0.5% of those investment only where the assessee had earned exempt income?" RELEVANT FACTS 3. The relevant facts of the present case are that the assessee during the year had earned dividend income of Rs.12,92,735/- from three companies, namely, Tata Motors Ltd., Tata Consultancy Services Limited and Mundra Port. The details of the ledger account of the dividend income in the books of the assessee were filed before the Assessing Officer with letter dated 14th January, 2016. This dividend income formed part of the audited accounts under the head 'other income' - Schedule 19 of the balance sheet where dividend on non-current investment was shown at Rs.12,92,735/-. This schedule was part of the audited balance sheet and the dividend income of Rs.12,92,735/- was also duly shown in the computation of income filed with the return of income. 4. During the course of the assessment, the Assessing Officer raised the issue of disallowance under Section 14A. 5. In response thereto, the assessee filed a detailed reply dated 14th January, 2016 wherein it stated, "The assessee has shown dividend income of Rs,12,92,735/- ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... NIL iii. 0.5% of the average investments=0.5% of B 7,34,450/- Less: Amount already disallowed u/s 14A in return of income filed for AY 2013-14 1,29,274/- Disallowance Expenses 6,05,176/- A Total interest Opening of investment 5,15,64,939/- Closing of investment 24,22,14,939/- B Average value of the investment 14,68,89,939/- Opening value of the asset 3,55,66,43,5247/- Closing value of the asset 4,72,23,40,603/- C Average value of the asset 4,13,94,92,065 Disallowance u/s 14A of the IT Act 1961 (i+ii+iii) 6,05,176 Accordingly, Rs.6,05,176/- is disallowed and added back to the income of the assesee. (Addition of Rs.6,05,176/-)" 7. In appeal, the CIT(A) upheld the order of the Assessing Officer and took note of the above facts in para 4.2 of the order which reads as under:- "4.2. Perusal of Assessment order dated 04.03.2016 as well as submission of the appellant during appellant proceedings reveal that in the given year, the appellant earned dividend income of Rs. 12,92,735/- on account of investment in shar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....xempt income. Therefore, according to him, the assessee's submission that Assessing Officer should have restricted the disallowance to 0.5 percentage of only those investments where assessee has earned exempt income is a total misunderstanding of the principle behind Section 14A read with Rule 8D. 12. He also relies upon the CBDT Circular No.5/2014 dated 11th February, 2014 which according to him clarifies that Rule 8D read with Section 14A provides for disallowance even where no exempt income has been earned in a particular year. COURT'S REASONING ONLY THOSE INVESTMENTS ARE TO BE CONSIDERED FOR COMPUTING AVERAGE VALUE OF INVESTMENTS WHICH YIELDED EXEMPT INCOME DURING THE RELEVANT ASSESSMENT YEAR 13. Having heard learned counsel for the parties, this Court is of the view that while Section 14A is the charging Section, Rule 8D is a method/mechanism to determine the amount of expenditure incurred in relation to income, which does not form part of the total income of the assessee. By virtue of the charging Section, namely, Section 14A, the Assessing Officer has the power only to determine the amount of expenditure incurred in relation to such income which does not form par....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eld as under:- "2. The following substantial questions of law have been framed for consideration of this Court:- "1. Whether the Tribunal was correct in holding that the investment which yielded no exempt income was to be excluded while computing deduction u/s.14A when the Act as well as Rules framed do not provide for any such exception, and further such investment shall always remain in tax free territory?" xxx xxx xxx xxx 39.The first substantial question of law raised by the revenue in this appeal is whether the Tribunal was right in holding that the investment which yielded no exempt income was to be excluded while computing deduction under Section 14A when the Act as well as the Rules do not provide for any such exception. An identical question was raised by the revenue in the assessee's own case in T.C.A.No.241 of 2018 for the assessment year 2013-14. When the said tax case appeal was heard, we noted that the substantial question of law has to be answered in favour of the assessee in the light of the decision of the Hon'ble Division Bench in the case of M/s. Marg Limited vs. CIT, Chennai [T.C.A.Nos.41 to 43 and 220 of 2017 dated 30.09.20....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f law is with regard to the disallowance under Section 14A of the Act. The tribunal after noting several decisions has directed the assessing officer to compute the disallowance as per Rule 8D by taking into consideration only those shares which have yielded dividend income in the year under consideration. Though the Tribunal has noted the decision of the Tribunal in REI Agro Ltd. Vs. DCIT (2013) 35 taxmann.com 404, there are several other decisions on the said point and the machinery provision under Rule 8D can be applied only with regard to the shares which yielded dividend income in year under consideration. Therefore, we find that the tribunal rightly applied the legal principle and granted relief....." 21. Consequently, only those investments are to be considered for computing average value of investments which yielded exempt income during the relevant assessment year. RESPONDENT'S RELIANCE ON THE CBDT CIRCULAR NO.5/2014 IS UNTENABLE IN LAW AS THIS COURT IN PR.COMMISSIONER OF INCOME TAX-04 VS. IL & FS ENERGY DEVELOPMENT COMPANY LTD., 2017 (8) TMI 732 HAS HELD THAT THE SAID CIRCULAR CANNOT OVERRIDE THE EXPRESS PROVISIONS OF SECTION 14A READ WITH RULE 8D 22. The respond....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o be in relation to the income earned in 'such previous year'. This implies that if there is no exempt income earned in the AY in question, the question of disallowance of the expenditure incurred to earn exempt income in terms of Section 14A read with Rule 8D would not arise. 18. The CBDT Circular upon which extensive reliance is placed by Mr. Hossain does not refer to Rule 8D (1) of the Rules at all but only refers to the word "includible" occurring in the title to Rule 8D as well as the title to Section 14A. The Circular concludes that it is not necessary that exempt income should necessarily be included in a particular year's income for the disallowance to 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 ....