SMART HYDEL POWER LTD , MUMBAI V. THE ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE 14(3)(2), MUMBAI

ITA 1951/MUM/2023

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Smart Hydel Power Ltd. appealed against the order of the Commissioner of Income-tax (Appeals)-3, Gurgaon, which confirmed the assessed income and disallowed certain expenses under section 14A of the Income Tax Act, 1961. The main contention was regarding the application of rule 8D for disallowing expenses related to investments that did not yield any exempt income during the assessment year 2017-18. The Tribunal examined the applicability of the retrospective amendment to section 14A and found that no exempt income was earned by the assessee during the year, leading to the decision to set aside the disallowance.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 123617 (ITAT-MUMBAI)
• Duration Of Justice: 3 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-09-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Next Hearing Date: 03-09-2023
• Assessment Year: 2017-2018
• Appeal Filed On: 25-05-2023
• Other Referred Cases: Cheminvest Limited Vs ITO, ACIT v. William Son Financial Services Ltd., PCIT Central v. Era Infrastructure (India) Ltd.
• Laws Referred To: Income-tax Act, 1961, Income Tax Rules, 1962
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NAYANJYOTI NATH
• Keywords: Opportunity of being heard; Principle of natural justice; Earning of tax free income; Commercial expediency; Rule 8D; Set aside
• Section: 143(3); 14A; 115JB; 250

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “G” MUMBAI BEFORE SHRI OM PRAKASH KANT (ACCOUNTANT MEMBER) AND SHRI PAVAN KUMAR GADALE (JUDICIAL MEMBER) ITA No. 1951/MUM/2023 Assessment Year: 2017-18 Smart Hydel Power Ltd. 513/A, 5 th floor, Kohinoor City, Kirol Road, Kurla (West) Mumbai-400070. Vs. The ACIT Circle 14(3)(2), 455, 4 th floor, Aayakar Bhavan, Maharishi Karve Road, Mumbai-400020. PAN No. AAXCS 0696 Q Appellant Respondent Assessee by : None Revenue by : Mr. Nayanjyoti Nath, CIT-DR Date of Hearing : 04/09/2023 Date of pronouncement : 05/09/2023 ORDER PER OM PRAKASH KANT, AM This appeal has been preferred by the assessee against order dated 27.03.2023 passed by the Ld. Commissioner of Income-tax (Appeals)-3, Gurgaon [in short ‘the Ld. CIT(A)’] for assessment year 2017-18, raising following grounds: 1.0. GROUND NO. 1: 1.1. The learned Commissioner of Income Tax (Appeals) 3, Gurgaon (the Hor'ble CIT(A)) has erred in law and in facts and in circumstances of the case in confirming the assessed income at Rs.1,41,84,940 (being business loss) as against income of Rs.1,97.78,157 (being business loss) declared by the Appellant in the return of income filed for the assessment year under consideration. 2.0. GROUND NO. 2: The Hon'ble CIT(A) has erred in law and in facts and in circumstances of the case in passing the order under section 250 of the Act without giving reasonable opportun assessment order is against the principle of natural justice and hence required to be set aside. GROUND No. 3: The Hon'ble CIT(A) has erred in law and in facts and in circumstances of the case in making disallowance of expenses of Rs. 55,93,217, under section 14A of the Act by applying Rule 8D of Income tax Rules, 1962 ('the Rules), for various grounds mentioned below: a) The Hon'ble CIT(A) has erred in law and in facts and in circumstances of the case in not considering the fact that the investment in shares are made out of commercial expediency in subsidiaries and associates. b) The Hon'ble CIT(A) ought to have appreciated t Appellant has not earned any exempt income during the assessment year under consideration and hence the provisions of section 14A of the Act read with Rule 8D of the Rules are c) The Hon'ble CIT(A) has erred in law and in f of the case in stating that the Explanation to section 14A of the Act added by Finance d) The learned CIT(A) has erred in law and in facts and in circumstances of the case in disallowing Amoun average of monthly average of opening and closing balances of value of investment in shares without proving nexus of expenses incurred with investments and / or earning of exempt income and hence disallowance of such expenses under e) The Hon'ble CIT(A) has erred in law and in facts and in circumstances of the case in making disallowance of demat charges of Rs.12,081 by stating that it is directly incurred in relation to earning of exempt income and hence disallowance of such expenses under section 14A of the Act is required to be deleted. Each of the above grounds of appeal is independent and without prejudice to the other grounds of appeal. 2. Briefly stated facts of the case are th return of income electronically on 27.10.2017 declaring total loss of Rs. Nil under the normal provisions of the Income 2.0. GROUND NO. 2: The Hon'ble CIT(A) has erred in law and in facts and in circumstances of the case in passing the order under section 250 of the Act without giving reasonable opportunity of being heard to the Appellant. The said assessment order is against the principle of natural justice and hence required to be set aside. GROUND No. 3: CIT(A) has erred in law and in facts and in circumstances of the case in making disallowance of expenses of Rs. 55,93,217, under section 14A of the Act by applying Rule 8D of Income tax Rules, 1962 ('the Rules), for various grounds mentioned below: Hon'ble CIT(A) has erred in law and in facts and in circumstances of the case in not considering the fact that the investment in shares are made out of commercial expediency in subsidiaries and The Hon'ble CIT(A) ought to have appreciated the fact that the Appellant has not earned any exempt income during the assessment year under consideration and hence the provisions of section 14A of the Act read with Rule 8D of the Rules are not applicable. The Hon'ble CIT(A) has erred in law and in facts and in circumstances of the case in stating that the Explanation to section 14A of the Act added by Finance Act. 2022 is retrospective in nature. The learned CIT(A) has erred in law and in facts and in circumstances of the case in disallowing Amount equal to 1% of annual average of monthly average of opening and closing balances of value of investment in shares without proving nexus of expenses incurred with investments and / or earning of exempt income and hence disallowance of such expenses under section 14A of the Act is required to be deleted. The Hon'ble CIT(A) has erred in law and in facts and in circumstances of the case in making disallowance of demat charges of Rs.12,081 by stating that it is directly incurred in relation to earning of empt income and hence disallowance of such expenses under section 14A of the Act is required to be deleted. Each of the above grounds of appeal is independent and without prejudice to the other grounds of appeal.” Briefly stated facts of the case are that the assessee filed its return of income electronically on 27.10.2017 declaring total loss of Rs. Nil under the normal provisions of the Income-tax Act, 1961 (in Smart Hydel Power Ltd. 2 ITA No. 1951/Mum/2023 The Hon'ble CIT(A) has erred in law and in facts and in circumstances of the case in passing the order under section 250 of the Act without ity of being heard to the Appellant. The said assessment order is against the principle of natural justice and hence CIT(A) has erred in law and in facts and in circumstances of the case in making disallowance of expenses of Rs. 55,93,217, under section 14A of the Act by applying Rule 8D of Income tax Rules, 1962 Hon'ble CIT(A) has erred in law and in facts and in circumstances of the case in not considering the fact that the investment in shares are made out of commercial expediency in subsidiaries and he fact that the Appellant has not earned any exempt income during the assessment year under consideration and hence the provisions of section 14A of the acts and in circumstances of the case in stating that the Explanation to section 14A of the Act The learned CIT(A) has erred in law and in facts and in t equal to 1% of annual average of monthly average of opening and closing balances of value of investment in shares without proving nexus of expenses incurred with investments and / or earning of exempt income and hence disallowance section 14A of the Act is required to be deleted. The Hon'ble CIT(A) has erred in law and in facts and in circumstances of the case in making disallowance of demat charges of Rs.12,081 by stating that it is directly incurred in relation to earning of empt income and hence disallowance of such expenses under section Each of the above grounds of appeal is independent and without at the assessee filed its return of income electronically on 27.10.2017 declaring total loss of tax Act, 1961 (in short ‘the Act’) and book profit at loss of Rs.2,59,88,220/ return of income filed by the scrutiny assessment order dated 14.12.201 of the Act, the Assessing Officer made disallowance u/s 14A r.w.r. 8D of Income-tax Rules, 1962(in short ‘the Rules’) Rs.55,93,217/- for the purpose of computation of the normal provisions of the Act computing the book profit u/s 115JB of the Act. On further appeal, the Ld. CIT(A), though upheld the disallowance u/s 14A r.w.r. 8D Rules for the purpose of total income under the Act however deleted the addition of disallowance u/s 14A for the purpose of computation of the book profit u/s 115JB of the Act. 3. Aggrieved the assessee is in appeal before the Tribunal by way of raising grounds as reproduced above. 4. In the grounds the only issue in dispute involved is in respect of sustaining of the disallowance u/s 14A of Rules while computing income under normal provisions of the Act. 5. We find that despite notifying none attended on behalf of the assessee, and therefore, we issue in dispute and perused t appeal is according decided 5.1 We find that in the shares, which could earn exempted income in the form of dividend short ‘the Act’) and book profit at loss of Rs.2,59,88,220/ return of income filed by the assessee was selected for the scrutiny assessment order dated 14.12.2019 passed u/s 143(3) he Assessing Officer made disallowance u/s 14A r.w.r. tax Rules, 1962(in short ‘the Rules’) for the purpose of computation of the normal provisions of the Act and also added the same while computing the book profit u/s 115JB of the Act. On further appeal, though upheld the disallowance u/s 14A r.w.r. 8D the purpose of total income under normal the Act however deleted the addition of disallowance u/s 14A for the purpose of computation of the book profit u/s 115JB of the Act. Aggrieved the assessee is in appeal before the Tribunal by way f raising grounds as reproduced above. In the grounds the only issue in dispute involved is in respect of sustaining of the disallowance u/s 14A of the Act r.w.r. 8D of the Rules while computing income under normal provisions of the Act. t despite notifying none attended on behalf of the assessee, and therefore, we heard submission of the issue in dispute and perused the relevant material on record appeal is according decided expartee qua the assessee. in the case, the assessee made investment in shares, which could earn exempted income in the form of dividend Smart Hydel Power Ltd. 3 ITA No. 1951/Mum/2023 short ‘the Act’) and book profit at loss of Rs.2,59,88,220/-. The the assessee was selected for scrutiny. In 9 passed u/s 143(3) he Assessing Officer made disallowance u/s 14A r.w.r. tax Rules, 1962(in short ‘the Rules’) amounting to for the purpose of computation of the income under and also added the same while computing the book profit u/s 115JB of the Act. On further appeal, though upheld the disallowance u/s 14A r.w.r. 8D normal provisions of the Act however deleted the addition of disallowance u/s 14A for the purpose of computation of the book profit u/s 115JB of the Act. Aggrieved the assessee is in appeal before the Tribunal by way In the grounds the only issue in dispute involved is in respect the Act r.w.r. 8D of the Rules while computing income under normal provisions of the Act. t despite notifying none attended on behalf of the heard submission of the ld DR on the he relevant material on record. the qua the assessee. assessee made investment in shares, which could earn exempted income in the form of dividend but not made any suo the Act in respect of the expenditure incurred for exempted income on the ground that no exempted income was earned during the year under consideration. The Assessing officer referred to the circular No. 5/ 2014 14A read with rule 8D has to be made even no exempted income is earned in any particular year. He also ITAT in the case of Cheminvest Limited Vs ITO 317 ITR 86(AT), where in it is held that disallowance u/s 14A can be made even if no exempt income is actually earned during the year. The Assessin officer accordingly, disallowance amounting to Rs. 55,93,217/ mainly sustained the disallowance introduced by way of Finance Act, 2022 wherein Explanation has been added to clarify no exempt income accrued/received during the year under consideration. The Ld. CIT(A) has noted that such Explanation has been held to be retrospective ACIT v. William Son Financial Services Ltd. (2022) 140 taxmann.com 164. Court in the case of Ltd. [2022] 141 taxmann.com 289 (Delhi) amendment is prospective in nature and not applicable in respect of assessment year prior to AY 2021 feel appropriate to follow suo-moto disallowance in terms of section 14A of the Act in respect of the expenditure incurred for exempted income nd that no exempted income was earned during the year under consideration. The Assessing officer referred to the circular No. 5/ 2014 wherein it is stated that disallowance u/s 14A read with rule 8D has to be made even no exempted income is n any particular year. He also referred to the decision of the Cheminvest Limited Vs ITO 317 ITR 86(AT), where in it is held that disallowance u/s 14A can be made even if no exempt income is actually earned during the year. The Assessin officer accordingly, invoking rule 8D of Rules disallowance amounting to Rs. 55,93,217/-. The Ld. CIT(A) has mainly sustained the disallowance in view of the amendment introduced by way of Finance Act, 2022 wherein Explanation has to clarify that disallowance shall be applicable even exempt income accrued/received during the year under consideration. The Ld. CIT(A) has noted that such Explanation has been held to be retrospective by the ITAT Gowhati ACIT v. William Son Financial Services Ltd. (2022) 140 However, we find that the Hon’ble Delhi High Court in the case of PCIT Central v. Era Infrastructure (India) Ltd. [2022] 141 taxmann.com 289 (Delhi) has held that said prospective in nature and not applicable in respect of assessment year prior to AY 2021-22. In such circumstances, we feel appropriate to follow the decision of the Hon’ble Delhi High Smart Hydel Power Ltd. 4 ITA No. 1951/Mum/2023 disallowance in terms of section 14A of the Act in respect of the expenditure incurred for exempted income nd that no exempted income was earned during the year under consideration. The Assessing officer referred to the CBDT wherein it is stated that disallowance u/s 14A read with rule 8D has to be made even no exempted income is to the decision of the Cheminvest Limited Vs ITO 317 ITR 86(AT), where in it is held that disallowance u/s 14A can be made even if no exempt income is actually earned during the year. The Assessing Rules computed he Ld. CIT(A) has the amendment introduced by way of Finance Act, 2022 wherein Explanation has shall be applicable even if exempt income accrued/received during the year under consideration. The Ld. CIT(A) has noted that such Explanation has ITAT Gowhati in the case of ACIT v. William Son Financial Services Ltd. (2022) 140 However, we find that the Hon’ble Delhi High PCIT Central v. Era Infrastructure (India) has held that said prospective in nature and not applicable in respect of circumstances, we the decision of the Hon’ble Delhi High Court in the case of Cheminvest Ltd disallowance could be made u/s 14A of the Act w income has been earned by the assessee. Since, in the instant case admittedly no exempted income has been earned and therefore, following the judicial precedent on the issue in dispute ci we set aside the finding of the Ld. CIT(A) on and delete the disallowance made u/s 14A r.w.r. 8D of the Rules. The grounds of appeal of the assessee are accordingly allowed. 6. In the result, the appeal of the assessee is al Order pronounced in the open Court on Sd/ (PAVAN KUMAR GADALE JUDICIAL MEMBER Mumbai; Dated: 05/09/2023 Rahul Sharma, Sr. P.S. Copy of the Order forwarded to 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. //True Copy// Cheminvest Ltd. vs CIT (378 ITR disallowance could be made u/s 14A of the Act wh income has been earned by the assessee. Since, in the instant case admittedly no exempted income has been earned and therefore, following the judicial precedent on the issue in dispute ci we set aside the finding of the Ld. CIT(A) on the issue in dispute the disallowance made u/s 14A r.w.r. 8D of the Rules. of appeal of the assessee are accordingly allowed. In the result, the appeal of the assessee is allowed. nounced in the open Court on 05/09/2023. Sd/- Sd/ PAVAN KUMAR GADALE) (OM PRAKASH KANT JUDICIAL MEMBER ACCOUNTANT MEMBER Copy of the Order forwarded to : BY ORDER, (Assistant Registrar) ITAT, Mumbai Smart Hydel Power Ltd. 5 ITA No. 1951/Mum/2023 378 ITR 33) that no here no exempt income has been earned by the assessee. Since, in the instant case admittedly no exempted income has been earned and therefore, following the judicial precedent on the issue in dispute cited above, the issue in dispute the disallowance made u/s 14A r.w.r. 8D of the Rules. of appeal of the assessee are accordingly allowed. lowed. /09/2023. Sd/- OM PRAKASH KANT) ACCOUNTANT MEMBER BY ORDER, (Assistant Registrar) ITAT, Mumbai