Interesting case: Disallowance under section 14A for Expenditure against exempt income if No dividend income is not claimed as exempt by assessee

Short Overview: Where assessee had not claimed any exempt income during relevant assessment year, disallowance under section 14A was not warranted because in the absence of any tax-free income, the corresponding expenditure could not be taken into consideration for disallowance.

Assessee earned exempt dividend income during the relevant assessment year. AO made disallowance under section 14A. CIT(A) and Tribunal deleted disallowance made by AO holding that no disallowance under section 14A could be made in absence of exempt income.

it is hald that : The fact that assessee had not claimed any exempt income during the relevant assessment year was accepted by revenue. If for the relevant assessment year, the assessee did not earn any tax-free income, the corresponding expenditure incurred could not be taken into consideration for disallowance. Thus, disallowance under section 14A was rightly deleted by Tribunal.

Decision: In assessee’s favour.

Referred: CIT v. Chettinad Logistics Pvt. Ltd. (2017) 80 Taxmann.com 221(Mad) : 2017 TaxPub(DT) 1144 (Mad-HC), Principal CIT v. India Gelatine and Chemicals Ltd. (2016) 66 Taxmann.com 356 (Guj) : 2015 TaxPub(DT) 3530 (Guj-HC), Joint Investments Pvt. Ltd. v. CIT (2015) 372 ITR 692 (Del) : 2015 TaxPub(DT) 1375 (Del-HC), CIT v. Corrtech Energy Pvt. Ltd. (2014) 45 Taxmann.com. 116 (Guj) : 2014 TaxPub(DT) 2072 (Guj-HC).

 

IN THE GUJARAT HIGH COURT

J.B. PARDIWALA AND A.C. RAO, JJ.

Principal CIT v. Greenland Infracon (P) Ltd.

R/Tax Appeal No. 238 of 2019

9 July, 2019

Appellant by: M.R. Bhatt, Senior Advocate with Mauna M. Bhatt

Opponent (s) by: None

J.B. Pardiwala, J.

1. This tax appeal under section 260A of the Income Tax Act, 1961, is at the instance of the revenue and is directed against the order passed by the Income Tax Appellate Tribunal, ‘C’ Bench, Ahmedabad, in the ITA No.2039/Ahd/2016 dt. 14-11-2018 for the assessment year  2012-13.

2. The revenue has proposed the following question of law:

“A. Whether the appellate Tribunal has erred in law and on facts in holding that no disallowance under section 14A of the Act can be made in obsence of exempt income ?

B. Whether the appellate Tribunal has erred in law and on facts in upholding the decision of Commissioner(Appeals) deleting the suomotu disallowance made by the assessee ?”

3. The findings recorded by the Tribunal are as under :

“6. We have carefully considered the rival submissions and perused the orders of the authorities below. The substantive question arises in the revenue’s appeal is to ascertain the correctness of the action of the Commissioner(Appeals) in refusing to endorse the action of the assessing officer for resorting to disallowance under section 14A of the Act. Two broad issues emerges in the context of the case; (i) whether the disallowance under section 14A is maintainable where admittedly no exempt income i.e. dividend was earned by the assessee in the relevant assessment year  and (ii) whether the Commissioner(Appeals) was justified in going beyond the return of income and remove the disallowance which the assessee itself has made while filing the return of income. In other words, whether the action of the Commissioner(Appeals) in bringing down the income returned by the assessee and granting relief on the issues not raised at the time of filing original return of income or by way of revised return at a subsequent stage is justified in law or not.

7. The first issue framed above appears quite simple as we see. While adjudicating the issue, we take note of CBDT Circular No. 5/2014 dt. 11-2-2014 which seeks to emphasize that all expenses pertaining to an exempt income is required to be disallowed notwithstanding the fact that no corresponding tax free income has been earned during the financial year. Notwithstanding the aforesaid circular, various Courts have held that section 14A of the Act disallowance cannot be kicked when there was no exempt income earned by the assessee as is the case in the present appeals. Hon’ble Delhi High Court in Principal CIT v. IL & FS Energy Development Company Ltd. (2017) 84 Taxman.com 186(Delhi) : 2017 TaxPub(DT) 3890 (Del-HC) and the Hon’ble Madras High Court in CIT v. Chettinad Logistics (P.) Ltd. (2017) 80 Taxmann.com 221(Mad) : 2017 TaxPub(DT) 1144 (Mad-HC) have expressed a clear disagreement with CBDT Circular and held that where there is no exempt income in relevant year there cannot be a disallowance of expenditure under section 14A of the Act. Similar proposition has been laid down by the Hon’ble Gujarat High Court in the case of Corrtech Energy (P.) Ltd (2014) 45 Taxmann.com. 116 (Guj) : 2014 TaxPub(DT) 2072 (Guj-HC) and Principal CIT v. India Gelatine and Chemicals Ltd. (2016) 66 Taxmann.com 356 (Guj) : 2015 TaxPub(DT) 3530 (Guj-HC). The aforesaid judicial fiat was reiterated by the Hon’ble Delhi High Court in the case of Joint Investments Pvt. Ltd. v. CIT (2015) 372 ITR 692 (Del) : 2015 TaxPub(DT) 1375 (Del-HC) wherein Hon’ble Delhi High Court has categorically ruled that disallowance under section 14A of the Act cannot exceed the amount of tax exempt income. Notably, the SLP filed against the decision of Hon’ble Madras High Court in Chettinad Logistics (supra) has been dismissed by Hon’ble Supreme Court in CIT v. Chettinad Logistics (P.) Ltd. (2018) 95 Taxmann.com 250 (SC) : 2018 TaxPub(DT) 4126 (SC). Hence, in conformity with the judicial precedents, we find substantial merit in the conclusion drawn by the Commissioner(Appeals) which essentially holds that section 14A of the Act can be triggered only if assessee seeks to square off expenditure against the income which does not form part of total income under the Act and section 14A of the Act cannot be invoked where no exempt income was earned in the relevant assessment years. In consonance with the judicial precedents, we do not see any infirmity in the conclusion drawn by the Commissioner(Appeals) for nonapplicability of section 14A of the Act in the facts of the case.

8. We shall now turn to the second issue raised on behalf of the revenue regarding propriety of the action of the Commissioner(Appeals) in granting relief on the disallowance (suo moto made by the assessee) beyond the return of income and in the absence of any formal revised return. The Commissioner(Appeals) has discussed this aspect in very great detail in para 2.5 to 2.28 of its order. We are not inclined to reiterate the findings of the Commissioner(Appeals). However, we fully endorse the observations of the Commissioner(Appeals) which essentially holds that the mistake or inadvertence on the part of the assessee whereby an income not taxable has been wrongly offered for tax, will not operate as any kind of estoppel against the assessee and regardless of whether the revised return was filed or not. Once the assessee is in a position to show that it has been over assessed under the provisions of the Act even on account of assessee’s own mistake or otherwise, the revenue is under duty to assess correct income.”

4. Thus, it appears that the Tribunal concurred with the findings recorded by the Commissioner(Appeals) that section 14A of the Act can be invoked only if the assessee seeks to square off the expenditure against the income which does not form part of the total income under the Act, and in such circumstances, section 14A of the Act could not have been invoked, more particularly, when no exempt income was earned in the relevant assessment years.

5. The Tribunal has relied on various decisions including the decision of this Court in the case of Corrtech Energy Private Ltd. (2014) 45 Taxmann.com 116 (Gujarat) : 2014 TaxPub(DT) 2072 (Guj-HC).

6. The Tribunal also concurred with the findings recorded by the Commissioner(Appeals) that the mistake or inadvertence on the part of the assessee whereby an income not taxable is wrongly offered for tax will not operate as any kind of estoppel against the assessee regardless whether the revised return was filed or not. If the assessee is in a position to show that it has been over assessed on account of his own mistake, the revenue is obliged to assess the correct income.

7. Having regard to the concurrent findings recorded by the two revenue authorities, we are not inclined to disturb such findings.

8. In our view, there is no substantial question of law involved in the present tax appeal.

9. In view of the above, this tax appeal fails and is hereby dismissed.