Madras High Court
Principal Commissioner Of Income ... vs M/S.Envestor Ventures Ltd on 18 January, 2021
TCA.No.16 of 2021
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED: 18.01.2021
CORAM :
The Honourable Mr.Justice T.S.SIVAGNANAM
and
The Honourable Ms.Justice R.N.MANJULA
Tax Case Appeal No.16 of 2021
Principal Commissioner of Income Tax,
Corporate Circle-2(1),
Room No.511, 5th Floor,
Chennai - 600 034. ...Appellant
Vs
M/s.Envestor Ventures Ltd.,
Shriram House, First Floor,
No.4, Burkit Road,
T.Nagar, Chennai - 600 017.
PAN: AARCS0789A ...Respondent
APPEAL under Section 260A of the Income Tax Act, 1961 against the
order dated 27.09.2019 made in ITA.No.568/Chny/2019 on the file of the
Income Tax Appellate Tribunal, Madras 'C' Bench for the assessment year
2015-16.
For Appellant: Mr.Karthik Ranganathan
Senior Standing Counsel
For Respondent: Mr.R.Sivaraman
1/30
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TCA.No.16 of 2021
JUDGMENT
(Delivered by T.S.Sivagnanam,J)
This appeal has been filed by the Revenue under Section 260A of the
Income Tax Act, 1961 ('the Act' for brevity) challenging the order dated
27.09.2019 made in ITA.No.568/Chny/2019 on the file of the Income Tax
Appellate Tribunal, Madras 'C' Bench ('the Tribunal' for brevity) for the
assessment year 2015-16.
2. The Revenue has raised the following substantial questions of law
for consideration:
"1. Whether on the facts and in
circumstances of the case, the Tribunal was right
in restricting the disallowance u/s14A of the Act
by relying on the following decisions wherein the
quantum of disallowance u/s14A of the Act was
not the subject matter?
(i) State Bank of Patiala [2018]99 taxmann.com
(ii) M/s.Redington (India) Ltd [2017]77
taxmann.com 257
2. Whether on the facts and in
circumstances of the case, the Tribunal was right
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in restricting the disallowance u/s14A of the Act to
the extent of exempt income earned during the
relevant previous year, when section 14A of the
Act does not permit any such restriction?
3. Whether on the facts and in
circumstances of the case, the Tribunal was
correct and justified in deleting the addition made
to the books profits computed u/s115JB being
expenditure incurred to earn exempt income even
though clause (f) Explanation 1 to section 115JB
of the Income Tax Act specifically provides for it?"
3. We have heard Mr.Karthik Ranganathan, learned Senior Standing
Counsel appearing for the appellant/Revenue and Mr.R.Sivaraman, learned
counsel on behalf of the respondent/assessee.
4. The substantial questions of law raised for consideration were
answered against the Revenue in the case of Marg Ltd. vs Commissioner of
Income Tax ([2020] 120 taxmann.com 84 (Madras)). The operative
portion of the judgment reads as follows:
"9. A Co-ordinate Bench of this Court, in the case of
CIT v. Tidel Park Ltd. [TCA Nos.732 & 733 of 2018
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TCA.No.16 of 2021
decided on 7-7-2020], has relied upon the decisions
of the Delhi High Court in the case of Joint
Investments (P.) Ltd. v. CIT [2015] 59 taxmann.com
295/233 Taxman 117/372 ITR 694 (Delhi) and CIT v.
Taikisha Engg. India Ltd. [2015] 54 taxmann.com
109/229 Taxman 143/370 ITR 338 (Delhi) and
Bombay High Court decision in the case of Godrej &
Boyce Mfg. Co Ltd. v. Dy. CIT [2010] 194 Taxman
203/328 ITR 81 and categorically held that the
Assessing Officer was not justified in making
excessive disallowance beyond the dividend income
declared by the Assessee.
10. A Division Bench of Karnataka High Court, to
which one of us (Vineet Kothari,J) was a party, held
in the case of Pragathi Krishna Gramin Bank v. Jt
CIT [2018] 95 taxmann.com 41 256 Taxman 349
(Kar.) that disallowance under section 14A beyond
and in excess of actual exempted income is per se
asburd and hypothetical and it cannot be so made.
The relevant extract of the said Karnataka High
Court judgment is quoted below for ready reference:
"6. Drawing the attention of the Court
towards Rule 8D of the Income-tax Rules,
1962, the learned counsel for assessee has
urged that the amount of disallowance
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TCA.No.16 of 2021
under Section 14A of the Act read with Rule
8D of the Rules, cannot exceed the total
expenditure claimed by the assessee for
earning such exempted income. He
submitted that in the present case the
assessee earned "dividend income" from the
SLR investments made by it, which is
exempted from income tax to the extent of
Rs. 1,80,30,965/- for the assessment year
2011-12 but the learned Assessing Authority
vide the aforesaid order has disallowed the
expenditure to the extent of Rs.
2,48,85,000/- which is exfacie illegal and
impermissible. He also submits that the
expenditure incurred to earn the exempted
income in the form of Dividend was really
not incurred by the Bank during the year
but the said computation of expenses of Rs.
2,48,85,000/- was made as per the direction
of Assessing Authority in terms of Rule 8D
of the Rules with a clear submission made
by the assessee that no expenditure deserves
to be disallowed in the hands of assessee
Bank under section 14A of the Act r/w rule
8D of the Rules but ignoring such factual
submissions as well as the provisions of law,
the assessing authority has disallowed the
said sum and unfortunately the Appellate
Authorities have also casually upheld the
said findings.
7. On the other hand, Sri Y.V.Raviraj
learned counsel for the Revenue urged
before the Court that though the
disallowance in excess of the dividend
income earned by the assessee to the extent
of Rs. 1,80,30,965/- may not be justified, but
the assessee himself has computed the said
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figure of Rs. 2,48,85,000/-; in terms of rule
8D of the Rules and had supplied the same
to the assessing authority and therefore the
assessing authority was justified in
disallowing the same.
8. We are not impressed with the said
contention raised by the learned counsel for
Revenue. The said disallowance, under
section 14A of the Act r/w Rule 8D of the
Rules, of the expenditure incurred to earn
an exempted income has to be computed in
accordance with rule 8D of the Rules, which
in essence stipulates that the expenditure
directly relatable to the earning of such
exempted income, can only be disallowed
under section 14A of the Act.
9. The assessee in the present case had
claimed that he had not incurred any
expenditure for earning of the said dividend
income on such statutory SLR investments
made by it. The amount of investments itself
cannot be considered as an expenditure for
earning an exempted income viz., the
dividends. The computation of disallowance
under section 14A of the Act has to be made
as per Rule 8D of the Rules.
10. Therefore, on the basis of actual
expenditure incurred by the assessee for
earning such exempted income or an
average estimated basis, on the basis of the
total value of investments was required to
be computed by the assessing authority. We
do not find, any such computation on the
part of the assessing authority in this
regard. Apparently, the expenditure, so
calculated to the extent of Rs. 2,48,85,000/-
which was disallowed by Assessing
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Authority is far in excess of the dividend
income of Rs. 1,80,30,965/-. The same
prima facie appears to be incorrect. While
the assessee claimed that no expenses was
incurred in this regard, the assessing
authority has disallowed the said
expenditure even in excess of the dividend
income itself. The said calculations do not
appear to be computed in accordance with
Rule 8D of the Rules. We do not find any
rational basis for the same.
11. The obligation is cast upon the
assessing officer under section 14A of the
Act to determine the said amount of
expenditure incurred for earning the
exempted income of dividends.
12. The provision of section 14A of the Act
and rule 8D of the Rules are quoted below
for reference;
"Expenditure incurred in relation to income
not includible in total income.
14A. (1) For the purposes of computing the
total income under this Chapter, no
deduction shall be allowed in respect of
expenditure incurred by the assessee in
relation to income which does not form part
of the total income under this Act.
(2) The Assessing Officer shall determine
the amount of expenditure incurred in
relation to such income which does not form
part of the total income under this Act in
accordance with such method as may be
prescribed, if the Assessing Officer, having
regard to the accounts of the assessee, is
not satisfied with the correctness of the
claim of the assessee in respect of such
expenditure in relation to income which
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does not form part of the total income under
this Act.
(3) The provisions of sub-section (2) shall
also apply in relation to a case where an
assessee claims that no expenditure has
been incurred by him in relation to income
which does not form part of the total income
under this Act: Provided that nothing
contained in this section shall empower the
Assessing Officer either to reassess under
section 147 or pass an order enhancing the
assessment or reducing a refund already
made or otherwise increasing the liability of
the assessee under section 154, for any
assessment year beginning on or before the
1st day of April, 2001".
Rule 8D: Method for determining amount of
expenditure in relation to income not
includible in total income.
8D. (1) Where the Assessing Officer, having
regard to the accounts of the assessee of a
previous year, is not satisfied with -
(a) the correctness of the claim of
expenditure made by the assessee; or
(b) the claim made by the assessee that no
expenditure has been incurred, in relation
to income which does not form part of the
total income under the Act for such previous
year, he shall determine the amount of
expenditure in relation to such income in
accordance with the provisions of sub-
rule(2).
(2) The expenditure in relation to income
which does not form part of the total income
shall be the aggregate of following
amounts, namely:—
(i) the amount of expenditure directly
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TCA.No.16 of 2021
relating to income which does not form part
of total income; and
(ii) an amount equal to one percent of the
annual average of the monthly averages of
the opening and closing balances of the
value of investment, income from which
does not or shall not form part of total
income:
Provided that the amount referred to in
clause (i) and clause (ii) shall not exceed
the total expenditure claimed by the
assessee (3) [deleted w.e.f. 2-6-2016]"
Rule 8D has been amended from time to
time.
The aforesaid quoted Rule is from the latest.
The said Rule 8D as applicable for
Assessment Years 2011-12 & 2013-14 will
be relevant.
[Note: The pre-amendment Rule 8D(2), (3)
are also quoted here for the sake of
completeness.
60. Substituted by the IT (Fourteenth Amdt.)
Rules, 2016, w.e.f. 2-6-2016. Prior to its
substitution, sub-rule (2) read as under:
(2) The expenditure in relation to income
which does not form part of the total income
shall be the aggregate of following
amounts, namely:—
(i) the amount of expenditure directly
relating to income which does not form part
of total income; and
(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, an amount computed in
accordance with the following formula,
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namely:-
AXB
C
Where A = amount of expenditure by way of
interest other than the amount of interest
included in clause (i) incurred during the
previous year;
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;
C = the average of total assets 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 per cent 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."
61. Omitted by the IT (Fourteenth Amdt.)
Rules, 2016, w.e.f. 2-6-2016. Prior to its
omission, sub-rule (3) read as under:
'(3) For the purpose of this rule, the "total
assets" shall mean, total assets as
appearing in the balance sheet excluding
the increase on account of revaluation of
assets but including the decrease on
account of revaluation of assets.'
13. The manner in which the aforesaid
disallowance has been made by the
assessing authority and has been upheld by
the appellate authorities leaves much to the
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desired and the same cannot be sustained
and therefore the matter deserves to be
remanded back to the Assessing Authority.
14. We make it clear that the expenditure for
earning exempted income has to have a
reasonable proportion to the income, so
earned, going by the common financial
prudence. Therefore, even if the Assessing
Authority has to make an estimate of such
an expenditure incurred to earn exempted
income, it has to have a rational nexus with
the amount of income earned itself.
Disallowance under section 14A of Rs.
2,48,85,000/- as expenses to earn exempted
Dividend income of Rs. 1,80,30,965/- is per
se absurd and hypothetical. The
disallowance under section 8D cannot
exceed the expenses claimed by assessee
under the Proviso to Rule 8D. Therefore,
where the assessee claimed that assessee
did not incur any such expenditure during
the year in question to earn Dividends of
Rs. 1,80,30,965/-, the burden was upon the
assessing authority to compute the interest
on such borrowed funds which were
dedicatedly used for investment in securities
to earn such exempted Dividend income.
The disallowance under section 14A cannot
be a wild guesswork bereft of ground
realities. It has to have a reasonable and
close nexus with the factually incurred
expenses. It is not deemed disallowance
under section 14A of the Act but an
enabling provision for assessing authority
to compute the same on the given facts and
figures in the regularly maintained Books of
Accounts. The assessing authority also
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could not have called upon the Assessee
himself to undertake the exercise of
computing the disallowance under section
8D of the Rules. Such abdication of duty in
not permissible in law. Since no such
exercise has been undertaken by the
assessing authority, the case calls for a
remand.
15. In this view of the matter, the findings of
all the three authorities below for Section
14A of the Act are set aside and the matter
is remanded back to the Assessing Authority
for re-computing the disallowance of
expenditure, if any, under section 14A of the
Act, in accordance with law. (Emphasis
Supplied) "
11. Affirming the view of the Punjab and Haryana
High Court in the case of Pr. CIT v. State Bank of
Patiala [2017] 88 taxmann.com 667, the Hon'ble
Supreme Court in the case of Maxopp Investment
Ltd.(supra) held in paragraphs 40 and 41 as under:
"40 We note from the facts in the State Bank
of Patiala cases that the AO, while passing
the assessment order, had already restricted
the disallowance to the amount which was
claimed as exempt income by applying the
formula contained in rule 8D of the Rules
and holding that section 14A of the Act
would be applicable. In spite of this exercise
of apportionment of expenditure carried out
by the AO, CIT(A) disallowed the entire
deduction of expenditure. That view of the
CIT(A) was clearly untenable and rightly set
aside by the ITAT. Therefore, on facts, the
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Punjab and Haryana High Court has arrived
at a correct conclusion by affirming the view
of the ITAT, though we are not subscribing to
the theory of dominant intention applied by
the High Court. It is to be kept in mind that
in those cases where shares are held as
'stock-in-trade', it becomes a business
activity of the assessee to deal in those
shares as a business proposition. Whether
dividend is earned or not becomes
immaterial. In fact, it would be a quirk of
fate that when the investee company declared
dividend, those shares are held by the
assessee, though the assessee has to
ultimately trade those shares by selling them
to earn profits. The situation here is,
therefore, different from the case like Maxopp
Investment Ltd. where the assessee would
continue to hold those shares as it wants to
retain control over the investee company. In
that case, whenever dividend is declared by
the investee company that would necessarily
be earned by the assessee and the assessee
alone. Therefore, even at the time of investing
into those shares, the assessee knows that it
may generate dividend income as well and as
and when such dividend income is generated
that would be earned by the assessee. In
contrast, where the shares are held as stock-
in-trade, this may not be necessarily a
situation. The main purpose is to liquidate
those shares whenever the share price goes
up in order to earn profits. In the result, the
appeals filed by the Revenue challenging the
judgment of the Punjab and Haryana High
Court in State Bank of Patiala also fail,
though law in this respect has been clarified
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hereinabove.
41 Having regard to the language of section
14A(2) of the Act, read with rule 8D of the
Rules, we also make it clear that before
applying the theory of apportionment, the AO
needs to record satisfaction that having
regard to the kind of the assessee, suo moto
disallowance under section 14A was not
correct. It will be in those cases where the
assessee in his return has himself
apportioned but the AO was not accepting
the said apportionment. In that eventuality, it
will have to record its satisfaction to this
effect. Further, while recording such a
satisfaction, nature of loan taken by the
assessee for purchasing the shares/making
the investment in shares is to be examined by
the AO.
(Emphasis Supplied)"
12. Another Bench of Madras High Court in the case
of CIT v. Chettinad Logistics (P.) Ltd. [2017] 80
taxmann.com 221 248 Taxman 55 wherein the
Division Bench of the Court followed another
Division Bench judgment in the case of Redington
(India) Ltd. v. Addl. CIT [2017] 77 taxmann.com 257
(Mad.) and held that the view of the Central Board
of Direct Taxes in Circular No. 5 of 2014 dated 11-2-
2014, which has been relied by the Tribunal in the
impugned order cannot be upheld and the
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disallowance under section 14A of the Act cannot go
beyond the extent of exempted income itself.
Paragraph 12.3 of the said judgment is quoted below
for ready reference.
"12.3 The reasoning of the Division Bench is
contained in the following part of the
judgment:
"4. The admitted position is that no exempt
income has been earned by the assessee in
the financial year relevant to the assessment
year in issue. The order of assessment
records a finding of fact to that effect. The
issue to be decided thus lies within the short
compass of whether a disallowance in terms
of s.14A of the Act read with rule 8D of the
Rules can be contemplated even in a
situation where no exempt income has
admittedly been earned by the assessee in the
relevant financial year.
7. Per contra, Sri.T.Ravikumar appearing on
behalf of the revenue drew our attention to
the marginal notes of s.14 A pointing out that
the provision would apply not only where
exempted income is 'included' in the total
income, but also where exempt income is
'includable' in total income.
8. He relied upon a Circular issued by the
Central Board of Direct taxes in Circular No.
5 of 2014 dated 11-2-2014 to the effect that
s.14A was intended to cover even those
situations whether there is a possibility of
exempt income being earned in future. The
Circular, at paragraph 4, states that it is not
necessary for exempt income to have been
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included in the income of a particular year
for the disallowance to be triggered.
According to the Learned Standing Counsel,
the provisions of s.14A are made applicable,
in terms of sub section (1) thereof to income
'under the act' and not 'of the year' and a
disallowance under s.14A r.w. Rule 8D can
thus be effected even in a situation where a
tax payer has not earned any taxable income
in a particular year.
9. We are unable to subscribe to the
aforesaid view. The provisions of section 14A
were inserted as a response to the judgments
of the Supreme Court in Commissioner of
Income-tax v. Maharashtra Sugar Mills
Limited [1971] 82 ITR 452 and Rajasthan
State Ware Housing Corporation v.
Commissioner of Income-tax [2000] 242 ITR
450/109 taxmann.com 145 (SC) in terms of
which, expenditure incurred by an assessee
carrying on a composite business giving rise
to both taxable as well as non-taxable
income, was allowable in entirety without
apportionment. It was thus that s.14A was
inserted providing that no deduction shall be
allowable in respect of expenditure incurred
in relation to the earning of income exempt
from taxation. As observed by the Supreme
Court in the judgment in the case of
Commissioner of Income-tax v. Walfort Share
and Stock Brokers (P) Ltd. [2010] 326 ITR 1'
.... The mandate of s.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
an exemption of exempt income without
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making any apportionment of expenses
incurred in relation to exempt income.'
10. The provision this is clearly relatable to
the earning of actual income and not
notional or anticipated income. The
submission of the Department to the effect
that s.14A would be attracted even to exempt
income 'includable' in total income would
entail the assessment of notional income,
assumed to be exempt in the future, in the
present assessment year. The computation of
total income in terms of s.5 of the Act is on
real income and there is no sanction in law
for the assessment of admittedly notional
income, particularly in the context of
effecting a disallowance in connection
therewith.
11. The computation of disallowance in terms
of Rule 8D is by way of a determination
involving direct as well as indirect
attribution. Thus, accepting the submission
of the Revenue would result in the imposition
of an artificial method of computation on
notional and assumed income. We believe
this would be carrying the artifice too far.
(Emphasis is ours)"
13. Mr. Senthil Kumar, seeks to distinguish
the judgment in M/s.Redington (India)
Limited case based on the fact that Rule 8D
had not kicked-in by AY 2007-08, which was
the AY being considered in the said case."
13. The provisions of Section 14A themselves are
very clear and without recording satisfaction by the
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Assessing Authority that the expenditure incurred to
earn exempted income, as computed by the Assessee
is not acceptable for the specified reasons, the
Assessing Authority cannot even resort to
computation of such disallowance under rule 8D of
the Rules. Despite this being the position of law
crystal clear and there being no other contrary view
from any other High Court, one fails to understand
how the Tribunal in the impugned order could still
take a view contrary to this legal position and
uphold the disallowance under Rule 8D read with
section 14A of the Act, much beyond the quantum of
exempted income of dividend earned by the Assessee
in this year. The misconception of the Assessing
Authority as well as Tribunal appear to have arisen
because they have read Rule 8D providing for
computation method of disallowance in isolation, as
if it were an island provision or stand alone charging
provision and they assumed that the disallowance as
computed under Rule 8D is to be taxed as a notional
income of the Assessee. This is absolutely
impermissible in law. The reach of computation
provision, namely Rule 8D cannot be read beyond
the parent provision of Section 14A itself, which
itself is not a charging provision, but a restriction on
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allowance of expenditure incurred to earn exempted
income. The Assessing Authority has to mandatorily
record his satisfaction with regard to the
proportionate disallowance of expenditure under
section 14A of the Act as made by the Assessee that it
is not satisfactory for such cogent reasons as
specified and therefore, the same is liable to be
rejected and therefore, the computation method
under Rule 8D can be invoked as a legislative way
out to compute the quantum of disallowance.
Unfortunatley, the Revenue Authority and the
Tribunal have read Rule 8D without context and as
an independent provision of disallowance, as if it
was an island provision of law and the disallowance
computed as per Rule 8D of the Rules can go beyond
the exempted income itself and can be added as a
taxable income in the hands of the Assessee. Such an
interpretation put by Revenue Authorities is pathetic,
to say the least.
14. It is well settled that the Rule cannot go beyond
the main parent provision. Therefore, what has been
provided as computation method in Rule 8D cannot
go beyond the roof limit of section 14A itself under
any circumstances. The Courts have time and again
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reiterated this correct, reasonable and clear position
of law. But, merely to somehow make more
disallowance and impose tax on the hypothetical
income of the Assessee, in contrast to the concept of
"real income" to be taxed as per section 5 of the
Income-tax Act, the authorities under the Income-tax
Act keep on adopting such absurd procedures. The
disallowance to this extent, if it was to have its way,
will constitute a hypothetical 'income' taxable in the
hands of the Assessee, which could never be the
intention of section 14A of the Act, providing for a
proportionate disallowance of expenditure incurred
to earn the exempted income.
15. The expenditure incurred to earn any income has
to be always below the extent of income itself and
bear a reasonable proportion thereto, as the
commercial prudence does not permit any one to
spend more and earn less. The investment in shares
of which dividend is earned and dividend being
exempted income, the expenditure incurred for
earning such dividend in the form of interest on the
borrowed funds, which are employed to buy such
shares can obviously be not more than the dividend
itself and even if the interest paid on such borrowed
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funds is more than the actual dividend earned during
the year in question, the disallowance of interest
cannot go beyond the amount of dividend itself. As
such, interest paid on borrowed funds by the
Assessee does not constitute 'income of Assessee for
that year'. Section 14A has been introduced not to
allow expenditure incurred to earn such exempted
income in the form of dividend as an allowable
expenditure against the exempted income of the
Assessee and therefore, obviously the disallowance
too cannot exceed the extent of dividend itself. The
Tribunal itself in many such cases has upheld the
disallowance under section 14A only to the extent of
2% of the Dividend income or other exempted
income even if Assessee claimed that no expenditure
was incurred to earn such Dividend income and even
appeals filed by the Assessee against such 2%
disallowance have been dismissed by this Court.
Therefore, such an inconsistent approach on the part
of the Tribunal cannot be sustained.
16. The contention raised on behalf of the Revenue
by Mr. Karthik Ranganathan that even if the dividend
income is not earned in the present year, since the
investment is made for the strategic purposes to have
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control over the subsidiary companies, whenever in
future a huge dividend can be declared, it will be
earned by the Assessee and in that future year, the
Assessee will not have incurred any expenditure to
earn that income and therefore, a larger
disallowance under rule 8D should be allowed, is
only an ingenuity of argument covered by the
absurdity thereof. The disallowance of expenditure
incurred for the year in question only can be
considered under section 14A of the Act and no such
hypothetical earning in future as against no
expenditure incurred for that, is envisaged under
section 14A of the Act.
17. With respect to the learned counsel for the
Revenue, we cannot accept such unfounded and
imaginary situtations and submissions. The nature of
investment has nothing to do with section 14A of the
Act. It is the exempted income in the form of dividend
which forms the cap or roof limit for disallowance.
Firstly, the Assessee has to apportion the expenditure
incurred in the form of interest on borrowed funds if
any or the expenditure incurred by him to earn such
dividend income, which is exempt from tax and if at
all the Assessing Authority is not satisfied with that
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TCA.No.16 of 2021
declaration of the assessee, after recording such
reasonable and cogent satisfaction only, he can
resort to the computation method under Rule 8D of
the Rules and compute such disallowance with a
caveat that under no circumstances, the
disallowance can exceed the amount of dividend
income earned, received or accrued to the Assessee
in the present year, which was taxable but for the
exemption as per the provisions of the Act. If no
dividend income is declared by the investee company
or subsidiary company as the case may be, the
disallowance computed under Rule 8D cannot be
taxed as a "hypothetical income" of the Assessee, by
providing a negative figure beyond the dividend
income earned during that year, to be added to the
taxable income of the Assessee. That will make the
mockery of the concept of "real income" of the
Assessee being taxed and it is the bedrock of the
Income Tax Act itself.
18. The computation of disallowance made by the
Assessing Authority and upheld by the Tribunal, as
given in paragraph 6 of its impugned order, are
quoted below for ready reference:
"6. We have heard both the parties and
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TCA.No.16 of 2021
perused the material on record. The assessee
made total investment in the assessment year
2009-10 as follows:
Subsidiaries Rs. 2,38,89,48,500/-
UTI Infrastructure
Advantage Fund series Rs. 10,00,000/-
Investment in sister
concerns Rs. 1,59,39,000/-
6.1 For the assessment year 2010-11, the
total investment is as follows:
Subsidiaries Rs. 4,35,42,53,360/-
UTI Infrastructure
Advantage Fund Series Rs. 10,00,000/-
Investment in sister
concerns Rs. 1,59,39,000/-
6.2 For the assessment year 2011-12, the
total investment is as follows:
Subsidiaries Rs. 5,17,41,16,895/-
UTI Infrastructure
Advantage Fund series Rs. 8,53,000/-
Investment in sister
concerns Rs. 1,59,39,000/-
6.3 In this case, the assessee made average
investment which yields no income or
exempted income is as follows:
2009-10 Rs. 1,96,32,20,750/-
2010-11 Rs. 3,39,69,83,166/-
2011-12 Rs. 4,78,02,04,127/-
The AO disallowed 0.5% of the average
investment as follows:
2009-10 Rs. 98,16,104/-
2010-11 Rs. 1,69,84,915/-
2011-12 Rs. 2,39,01,020/-
The assessee divident income received and
claimed as exempt for these assessment years
are as follows:
2009-10 Rs. 41,024/-
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TCA.No.16 of 2021
2010-11 NIL
2011-12 Rs. 74,00,00/-
19. Obviously such disallowance has far exceeded
the exempted income in the form of dividends even
though computed at the rate of 0.5% of the average
investment made by the Assessee. In our opinion, the
same is not permissible at all, because this average
disallowance as computed under Rule 8D could be
disallowed only if Assessee had actually earned
Dividend income in excess of such amount of
disallownace, that too after recording reasons for
rejecting the apportionment of expenditure so
incurred or claim that no such expenditure was
incurred to earn that much of Dividend income was
validly rejected by the Assessing Authority. We do not
find any such reasons even recorded by the Assessing
Authority in the present case.
20. Before parting, we may also note with reference
to the Table of disallowance voluntarily made by the
Assessee, which is part of the Paper Book before us
for the four assessment years in question. In the
Table quoted in the beginning of the order, shows
that the Assessee himself computed and offered the
disallowance beyond the exempted income in the
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TCA.No.16 of 2021
particular year, namely AY 2009-10, as against the
dividend income of Rs. 41,042/- and the Assessee
himself computed disallowance under Rule 8D of the
Rules to the extent of Rs. 2,38,575/-, which was
increased to Rs. 98,16,104/- by the Assessing
Authority. Similarly, for AY 2012-13, against Nil
dividend income, the Assessee himself computed
disallowance at Rs. 8,50,000/-, which was increased
to Rs. 2,61,96,790/-.
21. We cannot approve even the larger disallowance
proposed by the Assessee himself in the computation
of disallowance under Rule 8D made by him. These
facts are akin to the case of Pragati Krishna Gramin
Bank (supra) decided by Karnataka High Court. The
legal position, as interpreted above by various
judgments and again reiterated by us in this
judgment, remains that the disallowance of
expenditure incurred to earn exempted income
cannot exceed exempted income itself and neither the
Assessee nor the Revenue are entitled to take a
deviated view of the matter. Because as already
noted by us, the negative figure of disallowance
cannot amount to hypothetical taxable income in the
hands of the Assessee. The disallowance of
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TCA.No.16 of 2021
expenditure incurred to earn exempted income has to
be a smaller part of such income and should have a
reasonable proportion to the exempted income
earned by the Assessee in that year, which can be
computed as per Rule 8D only after recording the
satisfaction by the Assessing Authority that the
apportionment of such disallowable expenditure
under section 14A made by the Assessee or his claim
that no expenditure was incurred is validly rejected
by the Assessing Authority by recording reasonable
and cogent reasons conveyed to Assessee and after
giving opportunity of hearing to the Assessee in this
regard.
22. We, therefore, dispose of the present appeal by
answering question of law in favour of the Assessee
and against the Revenue and by holding that the
disallowance under rule 8D of the IT Rules read with
Section 14A of the Act can never exceed the
exempted income earned by the Assesee during the
particular assessment year and further, without
recording the satisfaction by the Assessing Authority
that the apportionment of such disallowable
expenditure made by the Assessee with respect to the
exempted income is not acceptable for reasons to be
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TCA.No.16 of 2021
assigned the Assessing Authority, he cannot resort to
the computation method under Rule 8D of the
Income-tax Rules, 1962.
23. The appeal is accordingly disposed of. No costs."
5. Thus, by following the above decision, the present Tax Case
Appeal is dismissed and the substantial questions of law are answered
against the Revenue. No costs.
(T.S.S.,J.) (R.N.M.,J.)
18.01.2021
Index: Yes/No
Internet:Yes/No
Speaking Judgment/Non speaking Judgment
hvk
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TCA.No.16 of 2021
To
1. The Income Tax Appellate Tribunal,
Madras 'C' Bench.
2. Principal Commissioner of Income Tax,
Corporate Circle-2(1),
Room No.511, 5th Floor,
Chennai - 600 034.
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TCA.No.16 of 2021
T.S.SIVAGNANAM,J
AND
R.N.MANJULA,J
hvk
TCA.No.16 of 2021
18.01.2021
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