DEPUTY COMMISSIONER, DELHI V. ELAN INDIA PRIVATE LIMITED, HARYANA

ITA 2539/DEL/2023

AI Insights

The case involves an appeal by the Deputy Commissioner of Income Tax (DCIT) against Elan India Private Limited concerning the disallowance made under Section 14A of the Income Tax Act, 1961. The primary issue was whether the CIT(A) erred in deleting the addition of Rs. 2,43,20,351 under Section 14A read with Rule 8D, which was initially disallowed by the Assessing Officer (AO) due to alleged diversion of business funds to earn exempt income. The CIT(A) reversed the AO's decision, leading to the revenue's appeal to the Tribunal. The Tribunal's decision was influenced by the absence of any exempt income earned by the assessee during the year and the retrospective application of the amendment to Section 14A by the Finance Act, 2022, which was deemed not applicable in this case.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 474645 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-03-2025
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2019-2020
• Other Referred Cases: PCIT Vs. IL & FS Energy Development Company Ltd., M/s Cheminvest Ltd. Vs. CIT, PCIT Vs. Era Infrastructure (India) Ltd., CIT Vs. Sahara India Financial Corporation Ltd., PCIT vs OIL Industries Development Board
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SURENDER PAL
• Assessee Lawyers: DIVYANSH JAIN; PLACING
• Keywords: Question of law; Search and seizure; Earning of tax free income; Rule 8D
• Section: 147; 250; 132; 153A; 14A

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘B’: NEW DELHI BEFORE SHRI MAHAVIR SINGH, VICE PRESIDENT AND SHRI MANISH AGARWAL, ACCOUNTANT MEMBER ITA No.2539/Del/2023 (ASSESSMENT YEAR 2019-20) Dy. CIT, Delhi. Vs. Elan India Private Limited, 3rd floor, Golf View Corporate Tower, Golf Course Road, Sector-42, Gurgaon Haryana-122002. PAN:AAECE2979H (Appellant) (Respondent) Assessee by Shri Divyansh Jain, Adv. Department by Shri Surender Pal, CIT-DR Date of Hearing 20/03/2025 Date of Pronouncement 20/03/2025 O R D E R PER MANISH AGARWAL, AM: This is an appeal filed by the revenue against the order of the ld. Commissioner of Income Tax (Appeals) [CIT(A), in short] New Delhi- 24 dated 28.02.2023 in Appeal No. CIT(A), Delhi-24/10572/2018-19 passed u/s 250 of the Income Tax Act, 1961 (the Act, In short) for AY 2019-20 2. Brief facts of the case are that assessee is a private limited company belong to Elan group wherein a search and seizure action 2 ITA No.2539 /Del/2023 DCIT vs. Elan India Pvt. Ltd. was carried out u/s 132 of the Act on 29.05.2018. Assessee was also covered in search and accordingly the proceedings u/s 153A were also initiated in its case. The return of income for the year under appeal was originally filed on 24.10.210 declaring total loss of Rs. 2,96,97,322/-. The ld.AO has observed that assessee has made investments in equity shares to the tune of Rs.10 crores in group company namely Elan Buildcon Pvt. Ltd. and also claimed expenditure of Rs. 2,33,20,351/- being interest paid on borrowed funds however, no disallowance u/s 14A was made. 3. According to AO assessee has filed the return of income declaring Loss and by making investment in the sister concerns, assessee has diverted the business funds to earn exempt income. Accordingly, he invoked the provisions of section 14A and by applying Rule 8D has made the disallowance of Rs.2,43,20,351/-. In first appeal, ld. CIT(A) has allowed the appeal of the assessee by placing reliance on the judgements of jurisdictional high court wherein it has been held that when no exempt income is earned, no disallowance could be made u/s 14A of the Act. Aggrieved by such order, revenue is in appeal before the Tribunal. 4. The revenue has taken following grounds of appeal:- “1. Whether CIT(A) has erred in law and facts on deleting the addition of Rs. 2,43,20,351/- u/s 14A read with rule 8D of the Income Tax Act, 1961. 2. Whether CIT(A) has erred in law and facts, when the parliament has brought amendment to section 14A, brought by Finance Act 2022, which is applicable retrospectively as per Income Tax Act, 1961. 3 ITA No.2539 /Del/2023 DCIT vs. Elan India Pvt. Ltd. 3. Whether CIT(A) has erred in law and facts, when the issue of section 14A disallowance, is pending adjudication before the Supreme Court in the SLP filed in the case of PCIT Vs. IL & FS Energy Development Company Ltd. 4. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal.” 5. Before us, ld. CIT-DR submitted that the assessee has made a sizable investment of Rs. 10.00 crores in the sister concern though its share capital was of Rs. 10,00,000/- and Reserves and Surplus are in negative and long term borrowings of Rs. 6,24,90,031/- and short terms borrowings of Rs. 6,04,24,897/- were shown in Balance Sheet. He further submits that the AO observed that if the negative figure of reserve and surpluses taken out of the borrowed funds it leaves an amount of around Rs.10 Crores in the hands of the assessee which is the amount it has invested in the shares of the sister concern. This investment of Rs.10 Crores is thus clearly made out of the borrowed funds on which an interest of Rs. 2,33,20,351/- has been paid. Therefore, the assessee has incurred finance cost on such investment and since the investment in sister concern would yeild exempt income therefore, the AO has rightly invoked the provisions of section 14A of the Act. 6. Ld. CIT DR further submits that section 14A stood amended by Finance Act, 2022 through which an ‘Explanation’ is inserted in section 14A, according to which even if no income is accrued or arise and if the assessee has incurred certain expenditure, the provisions of section 14A are applicable and such amendment is applicable retrospectively. 4 ITA No.2539 /Del/2023 DCIT vs. Elan India Pvt. Ltd. 7. He also submits that the SLP of the revenue against the order of Hon’ble Delhi high court in the case of PCIT Vs. IL & FS Energy Development Company Ltd. is pending before the Hon’ble Supreme Court thus the action of ld. CIT(A) in deleting the disallowance is contrary to the provisions of law and therefore, ld. CIT DR prayed for the restoration of the order of the AO. 8. On the other hand, Ld. AR submitted supported the order of the ld. CIT(A) and submits that neither any exempted income was received/receivable during the year nor any claim of exempted income was made. Therefore, Section 14A of the Act is not applicable and hence no disallowance under Rule 8D can be made. To support his contentions, ld. AR relied on the decision in the case of M/s Cheminvest Ltd. Vs. CIT reported in 378 ITR 33 (Delhi) as has been relied upon by the ld. CIT(A). 9. Regarding the retrospective application of the amendment in section 14A made by Finance Act, 2022, ld.AR submits that ld. CIT(A) has relied upon the judgement of Hon’ble jurisdictional high court in the case of PCIT Vs. Era Infrastructure (India) Ltd. reported in (2022) 448 ITR 674 (Delhi) wherein the Hon’ble jurisdictional high court has held the said amendment is prospective and cannot be applied retrospectively. With regard to the revenue’s ground of the pending SLP before Hon’ble Supreme court in the case of M/s IL & FS Development Company Ltd., ld. AR brought to our notice that Hon’ble Supreme court has already dismissed the SLP of the Revenue in Diary No. 12145/2018 in SLP(C) No. 002292/2019 vide order dt. 5 ITA No.2539 /Del/2023 DCIT vs. Elan India Pvt. Ltd. 19.02.2024. He also produced before us a copy of the SLP dismissal order by the Hon’ble Apex court which is placed on record. He further placed reliance on the recent judgement of Hon’ble jurisdictional high court in the case of CIT Vs. Sahara India Financial Corporation Ltd. reported in (2024) 168 Taxmann.com 165 (Delhi) wherein the Hon’ble court by following its own judgement in Cheminvest Ltd. (supra) has held that when no exempt income is claimed by the assessee, no disallowance could be made u/s 14A of the Act. Further the Hon’ble court by following its own judgement in the case of CIT Vs. Era Infrastructure (Supra) has held that amendment in section 14A vide Finance Act, 2022 is prospective in nature and cannot be applied retrospectively. Ld. AR accordingly prayed that the disallowance made has rightly been deleted by ld. CIT(A) and he prayed accordingly. 10. We have heard the rival submissions and perused the material available on record. A perusal of assessment order shows that the AO has considered the amount of investment made in sister entity for making addition u/s.14A of the Act. 11. The provisions of Sections 14A of the Act, as amended by Finance Act, 2022 reads as under:- [Expenditure incurred in relation to income not includible in total income. 14A. (1) Notwithstanding anything to the contrary contained in this Act, 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 6 ITA No.2539 /Del/2023 DCIT vs. Elan India Pvt. Ltd. the claim of the assessee in respect of such expenditure in relation to income which 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. Explanation.—For the removal of doubts, it is hereby clarified that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not forming part of the total income. 12. The title of 14A, i.e. “Expenditure incurred in relation to income not includible in total income” itself speaks about the existence of exempt income and then only a particular expenditure can be treated as incurred “in relation to” such income. Under the Income Tax Act, expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. Thus, Section 14A is applicable if the assessee has income which is not includible in its total income and further assessee has incurred certain expenditure to earn such income. In the instant case, the assessee has not earned any exempt income on such investments thus the provisions of section 14A are not attracted as well as applicable. The language of section 14A is not at all ambiguous and in fact very clear and by virtue of the same, only expenditure actually incurred in relation to income not includible in total income shall be disallowed. In no way, it could be interpreted that it seeks to disallow expenses incurred in the year in relation to 7 ITA No.2539 /Del/2023 DCIT vs. Elan India Pvt. Ltd. exempt income in future years, as it would be completely against the well recognized “matching concept.” Therefore, disallowance u/s 14A can be made only when assessee has actually earned exempt income. Further the Hon’ble Jurisdictional High Court in the case of Cheminvest Ltd. (supra), has held that no disallowance u/s 14A can be made in a year in which no exempt income has been earned or received by the appellant. We also note that similar view has been taken by the Hon’ble le Delhi High Court in its subsequent decision in case of PCIT vs OIL Industries Development Board [2019] 103 taxmann.com 325 (Delhi) and also in the case of Sahara India (supra). Therefore, on the issue that no disallowance could be made when no exempt income is claimed, we are in agreement with the view taken by the ld. CIT(A) in the present case where admittedly the assessee is having no exempt income. 13. Regarding the retrospectivity of the amendment made in section 14A by the Finance Act, 2022, we find that the Hon’ble jurisdictional High Court in the case of Era Infrastructure (supra) and further in the case of Sahara India Financial (supra) has held that the said amendment is prospective in nature and cannot be applied retrospectively. The relevant observation of the Hon’ble Court in the case of Sahara India is as under: “8. The learned counsel appearing for Revenue has also drawn the attention of this Court to the explanation to Section 14A of the Act, which was inserted by virtue of the Finance Act, 2022. The said explanation is set out below: \"Explanation. For the removal of doubts, it is hereby clarified that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have 8 ITA No.2539 /Del/2023 DCIT vs. Elan India Pvt. Ltd. always applied in a case where the income, not forming part of the total income under this Act, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not forming part of the total income.\" 9. Concededly, the said explanation is applicable prospectively and thus, would be inapplicable to the assessment year in question (AY 2016-17). It is relevant to note that this Court had in Principal Commissioner of Income-tax (Central) v. Era Infrastructure (India) Ltd. [2022] 141 taxmann.com 289/288 Taxman 384/448 ITR 674 (Delhi) held that the explanation would be applicable only prospectively and would have no retrospective operation. 10. In the given facts of this case, where the assessee does not have any exempt income in the relevant assessment year, there is no allegation that any expenditure has been incurred on account of exempt income that would accrue or arise in future years. Thus, even if we accept which we do not that the explanation to Section 14A of the Act as introduced by the Finance Act, 2022 was applicable retrospectively, the same would have no application in the given facts. 11. In view of the above, we do not find that any substantial question of law arises for our consideration. 12. The appeal is, accordingly, dismissed. Pending applications, if any, stand disposed of.” Thus this argument of the revenue is also dismissed. 14. With regard to the last argument that the SLP of the revenue on similar issue of 14A in the case of IL&FS Development Company is pending before the Hon’ble Supreme court, we find that the said SLP is also dismissed thus this argument is also is of no help to the revenue. 15. We, therefore, following the aforesaid decisions of the Hon’ble Supreme court and jurisdictional High Court, is of the considered view that no disallowance can be made u/s 14A in a year where no 9 ITA No.2539 /Del/2023 DCIT vs. Elan India Pvt. Ltd. exempt income has been earned or received by the assessee. In the instant case admittedly there was no dividend income which has accrued and claimed exempt therefore, the provisions of section 14A cannot be invoked. In the result, the findings, of the ld. CIT(A), in so far as invocation of section 14A is concerned, are confirmed who has rightly deleted the disallowance of Rs. 2,43,20,351/-. All the grounds taken by the revenue are dismissed. 16. In the result appeal of the revenue is dismissed. Order is pronounced in the open court on 20.03.2025. Sd/- Sd/- (MAHAVIR SINGH) (MANISH AGARWAL) VICE PRESIDENT ACCOUNTANT MEMBER Dated: 26/03/2025 PK/Ps Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI "