DCIT-3(2)(1), MUMBAI V. MILLENNIUM APPLIANCES, MUMBAI

ITA 1389/MUM/2023

AI Insights

The case involves the Department of Income Tax (Appellant) against M/s. Millennium Appliances India Ltd. (Respondent) concerning the disallowance made under section 14A of the Income-tax Act, 1961, for the assessment year 2016-17. The Assessing Officer had initially made a disallowance of ₹6,57,73,036 under section 14A after adjusting the suo moto disallowance made by the assessee. However, the CIT(A) deleted this disallowance, noting that the assessee had not earned any exempt income during the year and that the investments made were strategic business investments in subsidiary companies. The Revenue appealed against this decision, arguing that the CIT(A) erred in deleting the disallowance without considering the retrospective amendment to section 14A. The Tribunal, after considering the submissions and the financial records, upheld the CIT(A)'s decision, noting the absence of any exempt income and the strategic nature of the investments.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 123380 (ITAT-MUMBAI)
• Duration Of Justice: 4 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-09-2023
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 06-09-2023
• Assessment Year: 2016-2017
• Appeal Filed On: 24-04-2023
• Other Referred Cases: CIT vs Hero Cycles Ltd., Justice Sam P. Bharucha vs. ACIT, M/s J M Financials Limited vs. ACIT
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Earning of tax free income; Rule 8D
• Section: 14A; 115JB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “D”, MUMBAI BEFORE SHRI KULDIP SINGH, HON'BLE JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, HON'BLE ACCOUNTANT MEMBER ITA NO. 1389/MUM/2023 (A.Y: 2016-17) DCIT – 3(2)(1) Room No. 608, 6 th Floor Aayakar Bhavan, M.K. Road Mumbai - 400020 v. M/s. Millennium Appliances India Ltd., 17 th Floor, C Wing Mittal Court Nariman Point, Mumbai - 400021 PAN: AACCM7838D (Appellant) (Respondent) Assessee Represented by : None Department Represented by : Smt Mahita Nair Date of Conclusion of Hearing : 07.09.2023 Date of Pronouncement : 15.09.2023 O R D E R PER S. RIFAUR RAHMAN (AM) 1. This appeal is filed by the revenue against order of Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter in short “Ld.CIT(A)”] dated 24.02.2023 for the A.Y.2016-17. ITA NO. 1389/MUM/2023 (A.Y: 2016-17) M/s. Millennium Appliances India Ltd., Page No. | 2 2. At the outset, we observe that this appeal is filed by the Revenue and till now none appeared on behalf of the assessee and several RPAD notices were issued. None appeared on behalf of the assessee till date. Therefore, the bench proceeded to hear the case with the assistance of Ld.DR. 3. At the time of hearing, Ld.DR brought to our notice the relevant facts on record and we observe that in the assessment proceedings Assessing Officer noticed that assessee has made huge investments of ₹.192,29,27,453/- and also incurred financial costs of ₹. 41,48,88,235/-. In the computation of income, assessee has suomoto disallowed expenses u/s. 14A of Income-tax Act, 1961 (in short “Act”) of ₹.5,20,670/- which is administrative expenses. Assessing Officer observed that assessee has not disallowed under Rule 8D(2)(ii) and 8D(2)(iii) of I.T. Rules. Accordingly, notices were issued and in response assessee has submitted as under: - “4.1 With regards to above, the assessee submitted its reply vide letter dated 18.12.2018 which is reproduced as under. Investments made in AY 2016-17 are strategic business investments made with no intention to earn exempt Dividend income. During AY 2016-17 we have not earned any dividend income Kindly appreciate that no expenses was incurred by the company except administrative expenses pertaining to investment activity of Rs. 5,20,670/- which was suo moto disallowed u/s 14A rwr8D of ITA in its computation of Income for AY 2016-17. ITA NO. 1389/MUM/2023 (A.Y: 2016-17) M/s. Millennium Appliances India Ltd., Page No. | 3 In this regards we draw your goodselves kind attention to provisions of Section 14A of the Act which read as follows: "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. (emphasis applied) (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 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 From the above your goodselves will appreciate that levy of section 14A is based on two propositions: 1. Firstly, there should be proximate relationship between the expenditure incurred and the exempt income earned. 2. Secondly, if the assessing officer is not satisfied with correctness of the claim of the company with regard to its claim of expenditure in relation to exempt income, only then he can recompute the disallowance by applying Rule BD Proposition 1: Nexus between expenditure incurred and exempt income earned Your goodselves will appreciate that application of Rule BD is not mandatory and it can be applied only when the expenditure is incurred with a view to earn exempt income and there is apparent dominant and immediate connection between the expenditure incurred and exempt income earned. In the present case, we submit there is no such expenditure incurred to earn exempt income except expenses pertaining to investment activity of Rs. 4,97,310- The company has not made any fresh Investment during the year from which any exempt income is generated to the company which was disallowed in the Return of income. We submit here that "earning of ITA NO. 1389/MUM/2023 (A.Y: 2016-17) M/s. Millennium Appliances India Ltd., Page No. | 4 exempt income does automatically trigger the application of rule 8D. Such an understanding is incorrect appreciation of law. We bring your goodselves kind attention to the following judicial decisions: The Hon'ble High Court of Punjab and Haryana, in the case of CIT vs Hero Cycles Ltd. [2010] 323 ITR 518 (P&H) had struck down the applicability of section 14A where nexus between incurring of expenditure and earning of exempt income could not be established, in the case referred therein, the substantial question of low raised was: (i) whether on the facts and in law, the Hon'ble ITAT was legally justified in deleting the disallowance of Rs. 348,04,375- under section 14A of the income-tax Act, 1961 by ignoring the evidence relied on by the assessing officer and holding that a clear nexus has not been established that the interest bearing funds have been vested for investments generating tax free dividend income" While adjudicating on the case, the high court held as under, (Para 4) Whether, in a given situation, any expenditure was incurred which was to be disallowed, is a question of fact. The contention of the revenue that directly or indirectly some expenditure is always incurred which must be disallowed under section 14A and the impact of expenditure so incurred cannot be allowed to be set off against the business income which may nullify the mandate of section 14A, cannot be accepted. Disallowance under section 14A requires finding of incurring of expenditure where it is found that for earning exempted income no expenditure has been incurred, disallowance under section 14A cannot stand" (emphasis applied) Reliance is also placed on the judgment of ITAT Mumbai J Bench in the case of Justice Sam P. Bharucha vs. ACIT It appeal No. 3889 (Mumbai) of 2011/2012) 33 CCH 287 Mumbai Tribunal] wherein & was held that there should be proximate relation between the expenditure and the exempt income. Notional expenditure cannot be apportioned for earning exempt income. The relevant paragraph of the case is quoted below "Once such proximity relationships exist, the disallowance is to be effected in case the assessee had claimed that no expenditure has been incurred for earning the exempt income, it was for the assessing officer to determine as to ITA NO. 1389/MUM/2023 (A.Y: 2016-17) M/s. Millennium Appliances India Ltd., Page No. | 5 whether the assessee had incurred any expenditure in relation to income which did not form part of total income and if so to quantify the extent of disallowance. Thus, in order to disallow the expenditure under section 14A, there must be a live nexus between the expenditure incurred and the income not forming part of total income. No notional expenditure can be apportioned for the purpose of earning exempt income unless there is an actual expenditure in relation to earning the income not forming part of total income. If the expenditure is incurred with a view to earn taxable income and there is apparent dommant and immediate connection between the expenditure incurred and taxable income, then no disallowance can be made under section 14A merely because some tax exempt income is received by the assessee." (emphasis applied) Thus, applying the ratio decidendi as laid down in the above quoted judicial precedents, we submit that in the absence of establishment of nexus between the expenditure and the exempt income earned, no disallowance of expenditure may be made by mechanically invoking Rule 8D of ITR Kindly appreciate that the investments are in group business concerns cannot be included in calculating the said disallowance. These investments are in the group concern of the company, therefore, these are only passive investment made for the business purpose in the group concern and not for the purpose of earning any dividend or active investment. From the above judicial decisions your goodselves will appreciate that section 14A can be invoked only in presence of a live nexus or a proximate relation between the expenditure incurred and exempt income earned. In light of our above submissions, we submit before your goodselves to kindly not to make any addition under section 14A read with Rule 8D(2)(a) and (m) of the Rules For the above proposition that investment in group concem should be excluded while calculation of disallowance, we rely on Mumbai ITAT decision in case of M's J M Financials Limited vs. ACIT (ITA no. 4521/Mum/2012) where the hon'ble ITAT has held as follows: “8. ........... For the year under consideration the assessee has specifically raised a point before the AO that 97.82% of the investment is in the subsidiary companies and joint ITA NO. 1389/MUM/2023 (A.Y: 2016-17) M/s. Millennium Appliances India Ltd., Page No. | 6 venture companies and, therefore, no expenditure was incurred for maintaining the portfolio on these investments or for holding the same. The assessee has also pointed out that these investments are long term investment and no decision is required in making the investment or disinvestment on regular basis because these investments are strategic in nature in the subsidiary companies on long term basis and, therefore, no direct or indirect expenditure is incurred. We find that the department has not disputed this fact that out of the total investment about 98% of the investment are in subsidiary companies of the assessee and therefore, the purpose of investment is not for earning the dividend income but having control and business purpose and consideration. Therefore, prima facie the assessee has made out a case to show that no expenditure has been incurred for maintaining these long term investment in subsidiary companies. The AO has not brought out any contrary fact or material to show that the assessee has incurred any expenditure for maintaining these investments or portfolio of these investments........" (emphasis applied) In view of the above, we submit that no disallowance of interest expenditure under rule 80(2)(i) is warranted in instant case. Hence, in the light of our submissions we submit that no disallowance ought to be made on account of interest expenditure under Rule 8D(2)(i) and Administrative expenditure under rule 8D(2)(ii) of the Rules except Rs. 5,20,670/- which was suo moto disallowed in the return of Income.” 4. After considering the submissions of the assessee, the Assessing Officer rejected the same and by relying on the CBDT Circular 5/2014 and decisions of various courts he calculated the disallowance u/s. 14A of the Act of ₹.6,57,73,036/- after adjusting the suomoto disallowance made by the assessee. He also made adjustment of disallowance u/s. 14A in book ITA NO. 1389/MUM/2023 (A.Y: 2016-17) M/s. Millennium Appliances India Ltd., Page No. | 7 profits for section 115JB of the Act and determined the book profits at ₹.5,29,56,330/-. 5. Aggrieved with the above order assessee preferred an appeal before the Ld.CIT(A) and filed the detailed submissions before him. After considering the detailed submissions, Ld.CIT(A) deleted the addition by observing as under: - “7.3 In view of the above facts and respectfully following the judgments outlined in para 7.2 above, the disallowance u/s 14A rw Rule 8D of IT Rules of Rs. 6,57,73,036/- made by the AO is not sustainable and is hereby deleted as Appellant has not earned any Exempt income during the AY under consideration and these investments are purely Strategic business investments made in Subsidiary companies, Associates concerns and Foreign Companies. Grounds of Appeal No. 1 to 3 are allowed.” 6. Aggrieved with the above order revenue is in appeal before us and raised following grounds in its appeal: - “1. "Whether on the facts and the circumstances of the case, the Ld. CIT(A) erred in deleting the disallowance without considering the Explanation to Section 14A introduced with retrospective effect which clarifies that disallowance ought to be made even when no exempt income was earned during the year?" 2. "Whether the Ld. CIT(A) erred in deleting the disallowance by holding that there were sufficient own funds available without remanding the matter to the Assessing Officer for verification on the issue.?" 3. "Whether on the facts and in the circumstances of the case and in law, Ld. CIT(A), was right in directing the AO to compute the disallowance for the purpose of clause (f) of Explanation 1 section ITA NO. 1389/MUM/2023 (A.Y: 2016-17) M/s. Millennium Appliances India Ltd., Page No. | 8 115JB(2) without having resort to section 14A r.w.r. 8D of the Income-tax Rules while computing book profit u/s. 115JB" 4. "The appellant craves leave to amend, alter, delete or add grounds which may be necessary.” 7. Considered the submissions of the Ld. DR and material available on record, we observe that assessee has not earned any exempt income during the year, however, assessee has disallowed certain amount on suomoto basis. From the financial record brought to our notice by the Ld.DR, we observe that assessee has not earned any exempt income during the year and assessee also has debited financial expenditure to its Profit and Loss Account of ₹. 41,48,88,235/-. At the same time, we also observe that as per the balance sheet, assessee has own funds to the extent of ₹.358.83 crores and borrowings of ₹.219.89 Crores. We also observe that the borrowings made by the assessee are invested in its business and carries equivalent net current assets to the extent of ₹.218.53 Crores. It shows that assessee has utilized the borrowing funds for the purpose of its own business and the assessee has made non-current investments to the extent of ₹.192.29 Crores and made the investment from its own funds which does not have interest cost. Since assessee has not earned any exempt income as per the decision of the Vireet Investment (P) Ltd [82 taxmann.com 415] no disallowance can be made u/s. 14A of the Act. Respectfully following the above said decision, ITA NO. 1389/MUM/2023 (A.Y: 2016-17) M/s. Millennium Appliances India Ltd., Page No. | 9 we are inclined to uphold the order of the Ld.CIT(A). Accordingly, both the grounds raised by the revenue on deletion of disallowance u/s. 14A as well as adjustment made u/s. 115JB of the Act to the above effect are dismissed. Accordingly, appeal filed by the Revenue is dismissed. 8. In the result, appeal filed by the Revenue is dismissed. Order pronounced in the open court on 15 th September, 2023 Sd/- Sd/- (KULDIP SINGH) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai / Dated 15/09/2023 Giridhar, Sr.PS Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. //True Copy// BY ORDER (Asstt. Registrar) ITAT, Mum