DCIT, New Delhi V. M/s. Raglan Infrastructure Ltd., New Delhi

ITA 4720/DEL/2014

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 4941 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-09-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Next Hearing Date: 20-06-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 28-08-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Source of fund; Retrospective amendment; Question of law
• Section: 14A; 115JB; 6

Judgement Text

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH F: NEW DELHI BEFORE SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER AND SMT BEENA A PILLAI, JUDICIAL MEMBER ITA NO. 4720/DEL/2014 (ASSESSMENT YEAR: 2009 - 10 ) DCIT, CIRCLE - 15(1), NEW DELHI VS. RAGLAN INFRASTRUCTURE LTD, F - 31, DB GUPTA MARKET, KAROL BAGH, NEW DELHI PAN:AAACR6973J (APPELLANT) (RESPONDENT) REVENUE BY : SHRI ATIQ AHMAD, SR. DR ASSESSEE BY: SHRI KAPIL GOEL, ADV SHRI MUKUL GUPTA, ADV DATE OF HEARING 12/07 / 2017 DATE OF PRONOUNCEMENT 01 / 0 9 / 2017 O R D E R PER PRASHANT MAHARISHI , A. M. 1. THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF THE LD CIT(A) - XVIII, NEW DELHI DATED 12.06.2014 FOR THE ASSESSMENT YEAR 2009 - 10. 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1. ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS. 9711237/ - U/S 14A OF THE ACT IGNORING THE FACT THAT THE ASSESSEE COMPANY DID NOT SPECIFICALLY POINTED OUT ANY EXPENDITURE WHICH IS ATTRIBUTAB LE TO EXEMPT INCOME. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT(A) HAS ERRED IN DELETING THE ABOVE ADDITION IGNORING THE FACT THAT THE COMMON BANK ACCOUNT/ SOURCE OF FUNDS AS WELL AS MANPOWER AND INFRASTRUCTURE HAS BEEN UTILIZED FOR THE PURPOSE OF EARNING EXEMPT INCOME. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT(A) HAS ERRED IN DELETING THE ABOVE ADDITION HOLDING THAT THERE IS NO INTEREST BEARING FUNDS ATTRACTED TOWARDS TAX FREE INVESTMENTS IGNORING THE FACT THAT THE ASSESSEE COMPANY HAS EXTENDED INTEREST/ DIVIDEND FREE LOAN TO SUBSIDIARY COMPANY AND HIGH INTEREST AMOUNT IS DEBITED TO P&L ACCOUNT ON BORROWED LOANS. 3. FACTS STATED BRIEFLY ARE THAT ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF DEVELOPIN G WIRELESS INTERNET SOLUTIONS FOR MOBILE OPERATORS AND PROVIDING SUPPORT SERVICES DURING THE YEAR. IT FILED ITS RETURN OF INCOME ON 26/09/2009 SHOWING INCOME OF RS. 1 770 7930/ . THOUGH ASSESSEE HAS NOT EARNED ANY EXEMPT INCOME, LD. AO INVOKED THE PROVISIO NS OF SECTION 14 A FOR MAKING PAGE 2 OF 9 DISALLOWANCE HEIRS ASSESSEE HAS SHOWN IN INVESTMENT DURING THE YEAR. BEFORE THE LD. ASSESSING OFFICER ASSESSEE OBJECTED TO THE DISALLOWANCE ON SEVERAL COUNTS. HOWEVER , THE LD. ASSESSING OFFICER REJECTED THE CONTENTION OF THE A SSESSEE AND APPLIED PROVISIONS OF RULE 8D OF THE INCOME TAX RULES, 1962 TO DISALLOW EXPENSES AS PER THE PROVISIONS OF SECTION 14 A OF THE INCOME TAX ACT, AMOUNTING TO RS. 9 711237/ . 4. THE ASSESSEE AGGRIEVED WITH THE ORDER OF THE LD. ASSESSING OFFICER PREFER RED AN APPEAL BEFORE THE LD. CIT A, WHO DELETED THE DISALLOWANCE HOLDING THAT THE INVESTMENTS HAVE BEEN MADE IN EARLIER YEARS AND NOT IN THIS ASSESSMENT YEAR. FURTHER WITH RESPECT TO THE CREDIT FACILITIES, HE HELD THAT NO INVESTMENTS HAVE BEEN MADE OUT OF THOSE CREDIT FACILITIES. THEREFORE AGGRIEVED WITH THE ORDER OF THE LD. CIT A, REVENUE IS IN APPEAL BEFORE US. 5. LD. DEPARTMENTAL REPRESENTATIVE RELIED HEAVILY ON THE ORDER OF THE LD. ASSESSING OFFICER AND SUBMITTED THAT IN THIS ASSESSMENT YEAR, THE DISALLO WANCES CORRECTLY MADE BY APPLYING THE RULE 8D OF THE INCOME TAX RULES, 1962 AS ASSESSEE HAS INVESTMENTS WHICH ARE YIELDING INCOMES WHICH ARE EXEMPT. 6. THE LD. AUTHORISED REPRESENTATIVE SUBMITTED THAT THERE IS NO EXEMPT INCOME EARNED DURING THE YEAR AND THERE FORE NO DISALLOWANCE CAN BE MADE UNDER SECTION 14 A OF THE INCOME TAX ACT. FOR THIS HE RELIED UPON THE COMPUTATION OF TOTAL INCOME. ALTERNATIVELY HE ALSO ARGUED THAT THE REASON SATISFACTION RECORDED BY THE LD. ASSESSING OFFICER THAT THERE IS ANY EXPENDITUR E WHICH IS BEEN INCURRED BY THE ASSESSEE FOR THE PURPOSE OF EARNING EXEMPT INCOME. 7. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS. THE ASSESSEE HAS RAISED TO PLEAS THAT NO DISALLOWANCE UNDER SECTION 14 A OF THE INCOME TAX ACT SHOULD HAVE BEEN MADE FOR THE PURPOSE THAT (1) THE REASON EXEMPT INCOME EARNED DURING THE YEAR,(2) THERE IS N O SATISFACTION RECORDED BY THE LD. ASSESSING OFFICER. WE HAVE CAREFULLY PERUSED THE COMPUTATION OF TOTAL INCOME AND WE FOUND THAT THERE IS NO EXEMPT INCOME EARNED BY THE ASSESSEE DURING THE YEAR. FURTHER MORE, THE EXPRESSION GIVEN BY THE ASSESSEE BEFORE TH E LD. ASSESSING OFFICER THAT INVESTMENT MADE BY THE ASSESSEE WERE ONLY RS. 1 5652 9018/ WHEREAS THE SHAREHOLDERS FUNDS AVAILABLE WITH THE ASSESSEE ARE RS. 2 6275 1170. THEREFORE, THE AMOUNT OF INVESTMENT MADE BY THE ASSESSEE FOR EARNING TAX - FREE INCOME A RE MUCH MORE THAN THE SHAREHOLDERS FUND AVAILABLE WITH IT. THE LD. ASSESSING OFFICER HAS NOT RECORDED ANY SATISFACTION PAGE 3 OF 9 WITH RESPECT TO THE EXPLANATION OF THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED BY IT AND WHICH IS DEMONSTRATED BY SHOWING THAT THE AMOUNT OF SHAREHOLDERS FUND AVAILABLE WITH THE THE ASSESSEE ARE MORE THAN THE AMOUNT THAT IS INVESTED WHICH CAN POSSIBLY EARN THE TAX - FREE INCOME. IN VIEW OF THIS WE AGREE WITH THE CONTENTION OF THE LD. AUTHORISED REPRESENTATIVE THAT IN ABSENCE OF ANY EXE MPT INCOME EARNED BY THE ASSESSEE DURING THE YEAR THE DISALLOWANCE UNDER SECTION 14 A OF THE ACT CAN NOT BE MADE. WE DRAW SUPPORT FROM THE RECENT DECISION OF THE HONBLE DELHI HIGH COURT REPORTED IN 84 TAXMANN.COM 16 (DELHI) IN PRINCIPAL COMMISSIONER OF IN COME - TAX V. IL & FS ENERGY DEVELOPMENT COMPANY LTD. WHEREIN HONBLE HIGH COURT HAS CONSIDERED THE WHOLE ISSUE ON THIS ASPECT AS UNDER: - 3. THE QUESTION OF LAW SOUGHT TO BE URGED BY THE REVENUE IS WHETHER THE ITAT ERRED IN DELETING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER ('AO') OF THE SUM OF RS. 4,00,78,074/ - FROM THE RETURNED INCOME OF THE ASSESSEE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF THE INCOME TAX RULES, 1962 ('RULES'). 4. THE FACTS ARE THAT THE RESPONDENT - ASSESSEE IS A COMPANY ENGAGE D IN PROVISION OF CONSULTANCY SERVICES. ON 26TH SEPTEMBER 2011, THE ASSESSEE FILED ITS RETURN AT A LOSS OF RS. 2,42,63,176/ - . THE ASSESSEE WAS ASKED TO EXPLAIN WHY DISALLOWANCE SHOULD NOT BE MADE UNDER SECTION L4A OF THE ACT READ WITH RULE 8D OF THE RULES FOR THE PURPOSE OF NORMAL COMPUTATION OF BOOK PROFIT FOR THE PURPOSE OF MINIMUM ALTERNATIVE TAX ('MAT') UNDER SECTION 115JB OF THE ACT. 5. THE RESPONSE OF THE ASSESSEE WAS THAT IT HAD MADE INVESTMENT IN MUTUAL FUNDS AND THAT NO INTEREST BEARING FUNDS WERE INVESTED TO EARN TAX FREE INCOME. IT ACCORDINGLY PLEADED THAT NO DISALLOWANCE UNDER SECTION 14A OF THE ACT WAS CALLED FOR. 6. HOWEVER, THIS PLEA WAS REJECTED BY THE AO WHO RELIED ON THE DECISION OF THE SPECIAL BENCH OF THE ITAT DELHI IN CHEMINVEST LTD. V. ITO [2009] 121 ITD 318 (DELHI)(SB) WHEREIN IT WAS HELD THAT SECTION 14A WOULD APPLY EVEN IF DURING THE AY IN QUESTION, THE INVESTMENT HAS NOT ACTUALLY YIELDED ANY EXEMPT INCOME. THE AO, BY THE ASSESSMENT ORDER DATED 20TH FEBRUARY 2014, MADE AN ADDITION OF RS.15,44,43,369/ - TO THE INCOME OF THE ASSESSEE. THE AO HELD THAT THE ASSESSEE HAD MADE INVESTMENTS IN SHARES TO THE TUNE OF RS.5,29,38,26,780/ - FOR THE PURPOSES OF EARNING DIVIDEND INCOME NOT CHARGEABLE TO THE TAX. THE AO NOTED THAT, EVEN IN THE TAX AUDIT REPORT, THE AUDITORS HAD CALCULATED DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D IN THE SUM OF RS. 5,89,22,873/ - , WHICH INCLUDED DIRECT EXPENSES OF RS. 1,12,025/ - . PAGE 4 OF 9 7. THE APPEAL FILED BY THE ASSESSEE WAS DISPOSED OF BY THE COMMISSIONER OF INCOME (APPE AL) ['CIT (A)'] BY AN ORDER DATED 20TH MARCH 2015 OBSERVING AS UNDER: ( I ) THE OPENING BALANCE IN THE INVESTMENT OF THE APPELLANT COMPANY, AS ON 31ST MARCH 2010 WAS RS.44.98 LAKH . THE BULK OF THE INVESTMENT WAS MADE DURING THE YEAR IN THE EQUITY SHARES OF ONGC TRIPURA POWER COMPANY LIMITED IN THE SUM OF RS. 402,32,17,980/ - , HIMACHAL SORANG POWER LIMITED IN THE SUM OF RS.35,70,40,000/ - AND, SE POWER PRIVATE LTD IN THE SUM OF RS. 28 ,99,60,000/ - . ( II ) IN TERMS OF THE DECISION OF ITAT DELHI (SPECIAL BENCH) IN CHEMINVEST LTD. ( SUPRA ), SECTION 14A WOULD APPLY EVEN WHERE THE INVESTMENTS DO NOT GIVE RISE TO EXEMPT INCOME PERTAINING TO THE AY IN QUESTION. FURTHER, THE CENTRAL BOARD OF D IRECT TAXES ('CBDT') BY CIRCULAR NO. 5/2014 DATED 11TH FEBRUARY 2014 CLARIFIED THE ABOVE POSITION. ( III ) ON FACTS, IT COULD NOT BE HELD CATEGORICALLY THAT THE ASSESSEE USED SIGNIFICANT AMOUNT OF ITS OWN FUNDS ONLY TOWARDS INVESTMENTS WHILE THE BORROWED FUNDS WERE USED ONLY TOWARDS FIXED ASSETS AND LOANS AND ADVANCES GIVEN BY THE ASSESSEE. SOME AMOUNT OF THE B ORROWED FUNDS WOULD HAVE GONE TOWARDS MAKING INVESTMENTS. EVEN THE ASSESSEE ADMITTED THAT THE BALANCE AMOUNT OF LOANS OF RS. 175 CRORES COULD HAVE BEEN UTILIZED FOR MAKING INVESTMENTS. CONSEQUENTLY, THE APPLICATION OF RULE 8D (2)(II) OF THE RULES BY THE AO COULD NOT BE SAID TO BE ERRONEOUS. ( IV ) THE CIT (A) REDUCED THE DISALLOWANCE TO RS. 4,00,78,074/ - . THE CIT (A) ALSO REDUCED THE INTEREST DISALLOWED FROM RS. 29,03,54,953/ - TO RS. 6,11,80,756/ - . 8. THE ITAT, BY THE IMPUGNED ORDER DATED 7TH NOVEMBER 2016, ALLOWED THE ASSESSEE'S APPEAL AND HELD AS UNDER: ( I ) THE ASSESSEE HAD MADE INVESTMENTS IN VARIOUS COMPANIES AMOUNTING TO RS. 5,29,38,26,780/ - . OUT OF SAID INVESTMENTS, AN AMOUNT OF RS. 35,70,40,000/ - WAS INVESTED IN FULLY CONVERTIBLE DEB ENTURES WHICH COULD YIELD NO TAX - FREE INCOME. PAGE 5 OF 9 ( II ) WHEN THE ASSESSEE DID NOT EARN ANY EXEMPT INCOME, THERE COULD NOT BE ANY DISALLOWANCE. FURTHER, WHEN THE ASSESSEE HAD MADE INVESTMENTS IN SHARES OF SUBSIDIARY COMPANIES AND JOINT VENTURES FOR THE PURPOSES OF BUSINESS AND NOT FOR EARNING EXEMPTED DIVIDEND I NCOME, THERE COULD NOT BE ANY DISALLOWANCE. THIS COURT, IN CHEMINVEST LTD. V. COMMISSIONER OF INCOME TAX [2015] 378 ITR 33 (DEL), REVERSED THE DECISION OF THE SPECIAL BENCH OF THE ITAT AND HELD THAT SECTION 14A OF THE INCOME TAX ACT WOULD NOT APPLY IF THE ASSESSEE HAD NOT RECEIVED ANY EXEMPT INCOME IN THE YEAR IN QUESTION. THE GUJARAT HIGH COURT HAD, IN CIT V. CORRTECH ENERGY PVT. LTD. [2015] 372 ITR 97 (GUJ) HELD LIKEWISE. THE ASSESSEE HELD INTEREST FREE FUNDS IN THE FORM OF SHARE CAPITAL, SHARE APPLICATIO N MONEY AND RESERVE PAID SURPLUS, WHICH EXCEEDED THE AMOUNT INVESTED BY THE ASSESSEE. CONSEQUENTLY, THE QUESTION OF DISALLOWANCE OF ANY EXPENDITURE INCURRED TO EARN EXEMPT INCOME DURING THE AY IN QUESTION DID NOT ARISE. 9. MR. ZOHEB HOSSAIN, LEARNED SENIO R STANDING COUNSEL FOR THE REVENUE, SUBMITTED THAT, IN CHEMINVEST LTD. ( SUPRA ), THIS COURT HAD NO OCCASION TO CONSIDER THE CBDT CIRCULAR NO. 5/2014 DATED 11TH FEBRUARY 2014 WHICH CLARIFIED THAT SECTION 14A WOULD APPLY EVEN WHEN EXEMPT INCOME WAS NOT EARNED IN A PARTICULAR AY. ACCORDING TO HIM, THE OTHER DECISIONS OF THIS COURT IN CIT - IV V. TAIKISHA ENGINEERING INDIA (P.) LTD. [2015] 370 ITR 338 (DELHI) AND CIT - IV V. HOLCIM INDIA PVT. LTD. [2014] 272 CTR (DELHI) 282 DID NOT ACTUALLY DISCUSS THE ABOVE CIRCULA R OF THE CBDT AND, THEREFORE, WOULD BE DISTINGUISHABLE. 10. MR. HOSSAIN FURTHER SUBMITTED THAT THERE WAS NOTHING IN SECTION 14A OF THE ACT WHICH SUGGESTED THAT EXEMPT INCOME HAD TO NECESSARILY BE EARNED IN THE AY IN QUESTION FOR THE APPLICABILITY OF THE SA ID PROVISION. HE SUBMITTED THAT IF THE INTERPRETATION PLACED ON SECTION 14 A OF THE ACT BY THE ABOVE CBDT CIRCULAR WAS NOT ACCEPTED, THE VERY PURPOSE OF SECTION 14A WOULD BE DEFEATED. HE REFERRED TO THE DECISIONS OF THE ITAT IN ACIT V. RATAN HOUSING DEVELO PMENT LTD. (ORDER DATED 23RD MAY 2008 OF ITAT LUCKNOW) RELAXO FOOTWEAR LTD. V. ADDL. CIT [2012] 50 SOT 102 (DEL). 11. AT THE OUTSET, IT REQUIRES TO BE NOTICED THAT WE ARE CONCERNED WITH THE AY 2011 - 12 AND, THEREFORE, THE QUESTION OF THE APPLICABILITY OF RU LE 8D, WHICH WAS INSERTED WITH EFFECT FROM 24TH MARCH 2008, IS NOT IN DOUBT. PAGE 6 OF 9 12. SECTION 14A OF THE ACT, WHICH WAS INSERTED WITH RETROSPECTIVE EFFECT FROM 1ST APRIL 1962, PROVIDES FOR DISALLOWANCE OF THE EXPENDITURE INCURRED IN RELATION TO INCOME EXEMPTED FROM TAX. FROM 11TH MAY 2001, A PROVISO WAS INSERTED IN SECTION 14A TO CLARIFY THAT IT COULD NOT BE USED TO REOPEN OR RECTIFY A COMPLETED ASSESSMENT. SUB - SECTIONS (2) AND (3) OF SECTION 14A WERE INSERTED WITH EFFECT FROM 1ST APRIL, 2007 TO PROVIDE FOR METH ODOLOGY FOR COMPUTING OF DISALLOWANCE UNDER SECTION 14A. HOWEVER, THE ACTUAL METHODOLOGY WAS PROVIDED IN TERMS OF RULE 8D ONLY FROM 24TH MARCH 2008. THERE WAS A FURTHER AMENDMENT TO RULE 8D WITH EFFECT FROM 2ND JUNE 2016 LIMITING THE DISALLOWANCE THE AGGRE GATE OF THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME AND AN AMOUNT EQUAL TO ONE PER CENT OF THE ANNUAL AVERAGE OF THE MONTHLY AVERAGE OF THE OPENING AND CLOSING BALANCES OF THE VALUE OF INVESTMENT, INCOME F ROM WHICH DOES NOT FORM PART OF THE TOTAL INCOME. IT IS ALSO PROVIDED THAT THE AMOUNT SHALL NOT EXCEED THE TOTAL EXPENDITURE CLAIMED BY THE ASSESSEE. 13. IN THE ABOVE BACKGROUND, THE KEY QUESTION IN THE PRESENT CASE IS WHETHER THE DISALLOWANCE OF THE EXPEN DITURE WILL BE MADE EVEN WHERE THE INVESTMENT HAS NOT RESULTED IN ANY EXEMPT INCOME DURING THE AY IN QUESTION BUT WHERE POTENTIAL EXISTS FOR EXEMPT INCOME BEING EARNED IN LATER AYS. 14. IN THE EXPLANATORY MEMORANDUM TO THE FINANCE ACT 2001, BY WHICH SECTION 14A WAS INSERTED WITH EFFECT FROM 1ST APRIL 1962, IT WAS CLARIFIED THAT 'EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABLE TO THE EARNED INCOME OF TAXABLE INCOME' . THE OBJECT BEHIND SECTION 14A WAS TO PROVIDE THAT ' NO DEDUCTION SHALL BE MADE IN RESPECT OF ANY EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE INCOME TAX ACT' . 15. WHAT IS TAXABLE UNDER S ECTION 5 OF THE ACT IS THE 'TOTAL INCOME' WHICH IS NEITHER NOTIONAL NOR SPECULATIVE. IT HAS TO BE 'REAL INCOME'. THE SUBSEQUENT AMENDMENT TO SECTION 14A DOES NOT PARTICULARLY CLARIFY WHETHER THE DISALLOWANCE OF THE EXPENDITURE WOULD APPLY EVEN WHERE NO EXE MPT INCOME IS EARNED IN THE AY IN QUESTION FROM INVESTMENTS MADE, NOT IN THAT AY, BUT EARLIER AYS. 16. RULE 8D (1) OF THE RULES IS HELPFUL, TO SOME EXTENT, IN UNDERSTANDING THE ABOVE ISSUE. IT READS AS UNDER: '8D. (1) WHERE THE ASSESSING OFFICER, HAVING RE GARD 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 PAGE 7 OF 9 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 ACCO RDANCE WITH THE PROVISIONS OF SUB - RULE (2).' 17. THE WORDS 'IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT FOR SUCH PREVIOUS YEAR' IN THE ABOVE RULE 8 D (1) INDICATES A CORRELATION BETWEEN THE EXEMPT INCOME EARNED IN THE A Y AND THE EXPENDITURE INCURRED TO EARN IT. IN OTHER WORDS, THE EXPENDITURE AS CLAIMED BY THE ASSESSEE HAS TO BE IN RELATION TO THE INCOME EARNED IN 'SUCH PREVIOUS YEAR'. THIS IMPLIES THAT IF THERE IS NO EXEMPT INCOME EARNED IN THE AY IN QUESTION, THE QUEST ION OF DISALLOWANCE OF THE EXPENDITURE INCURRED TO EARN EXEMPT INCOME IN TERMS OF SECTION 14A READ WITH RULE 8D WOULD NOT ARISE. 18. THE CBDT CIRCULAR UPON WHICH EXTENSIVE RELIANCE IS PLACED BY MR. HOSSAIN DOES NOT REFER TO RULE 8D (1) OF THE RULES AT ALL BUT ONLY REFERS TO THE WORD 'INCLUDIBLE' OCCURRING IN THE TITLE TO RULE 8D AS WELL AS THE TITLE TO SECTION 14A. THE CIRCULAR CONCLUDES THAT IT IS NOT NECESSARY THAT EXEMPT INCOME SHOULD NECESSARILY BE INCLUDED IN A PARTICULAR YEAR'S INCOME FOR THE DISALLOW ANCE TO BE TRIGGERED. 19. IN THE CONSIDERED VIEW OF THE COURT, THIS WILL BE A TRUNCATED READING OF SECTION 14 A AND RULE 8D PARTICULARLY WHEN RULE 8D (1) USES THE EXPRESSION 'SUCH PREVIOUS YEAR'. FURTHER, IT DOES NOT ACCOUNT FOR THE CONCEPT OF 'REAL INCOME '. IT DOES NOT NOTE THAT UNDER SECTION 5 OF THE ACT, THE QUESTION OF TAXATION OF 'NOTIONAL INCOME' DOES NOT ARISE. AS EXPLAINED IN COMMISSIONER OF INCOME TAX V. WALFORT SHARE AND STOCK BROKERS PVT. LTD [2010] 326 ITR 1 (SC), THE MANDATE OF SECTION 14A OF T HE ACT IS TO CURB THE PRACTICE OF CLAIMING DEDUCTION OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME BEING TAXABLE INCOME AND AT THE SAME TIME AVAIL OF THE TAX INCENTIVES BY WAY OF EXEMPTION OF EXEMPT INCOME WITHOUT MAKING ANY APPORTIONMENT OF EXPENSES I NCURRED IN RELATION TO EXEMPT INCOME. CONSEQUENTLY, THE COURT IS NOT PERSUADED THAT IN VIEW OF THE CIRCULAR OF THE CBDT DATED 11TH MAY 2014, THE DECISION OF THIS COURT IN CHEMINVEST LTD. ( SUPRA ) REQUIRES RECONSIDERATION. 20. IN M/S. REDINGTON ( INDIA ) LTD. V. THE ADDITIONAL COMMISSIONER OF INCOME TAX, COMPANY RANGE V, CHENNAI (ORDER DATED 23RD DECEMBER, 2016 OF THE HIGH COURT OF MADRAS IN TCA NO. 520 OF 2016), A SIMILAR CONTENTION OF THE REVENUE WAS NEGATED. THE COURT THERE DECLINED TO APPLY THE CBDT CIRCU LAR BY EXPLAINING THAT SECTION 14A IS 'CLEARLY RELATABLE TO THE EARNING OF THE ACTUAL INCOME AND NOT NOTIONAL INCOME OR ANTICIPATED INCOME.' IT WAS FURTHER EXPLAINED THAT, 'THE COMPUTATION OF TOTAL INCOME IN TERMS OF RULE 8D IS BY WAY OF A DETERMINATION IN VOLVING DIRECT AS WELL AS INDIRECT ATTRIBUTION. THUS, ACCEPTING THE SUBMISSION OF THE PAGE 8 OF 9 REVENUE WOULD RESULT IN THE IMPOSITION OF AN ARTIFICIAL METHOD OF COMPUTATION ON NOTIONAL AND ASSUMED INCOME. WE BELIEVE THUS WOULD BE CARRYING THE ARTIFICE TOO FAR.' 21. THE DECISIONS IN CIT V. M/S LAKHANI MARKETING INC. 2014 SCC ONLINE P&H 20357 , CIT V. WINSOME TEXTILE INDUSTRIES LIMITED [2009] 319 ITR 204 (P&H), CIT V. SHIVAM MOTORS ( P ) LTD. [2014]272 CTR (ALL) 277 HAVE ALL TAKEN A SIMILAR VIEW. THE DECISION IN TAIKISHA ENGINEERING INDIA PVT. LTD. ( SUPRA ) DOES NOT SPECIFICALLY DEAL WITH THIS ISSUE. 22. IT WAS SUGGESTED BY MR. HOSSAIN THAT, IN THE CONTEXT OF SECTION 57(III), THE SUPREME COURT IN COMMISSIONER OF INCOME TAX, WEST V. RAJENDRA PRASAD MOODY [1978] 115 ITR 519 ( SC ) EXPLAINED THAT DEDUCTION IS ALLOWABLE EVEN WHERE INCOME WAS NOT ACTUALLY EARNED IN THE AY IN QUESTION. THIS ASPECT OF THE MATTER WAS DEALT WITH BY THIS COURT IN M/S CHEMINVEST LTD. ( SUPRA ) WHERE IT REVERSED THE DECISION OF THE SPECIAL BENCH OF THE ITA T BY OBSERVING AS UNDER: '20. SINCE THE SPECIAL BENCH HAS RELIED UPON THE DECISION OF THE SUPREME COURT IN RAJENDRA PRASAD MOODY ( SUPRA ), IT IS CONSIDERED NECESSARY TO DISCUSS THE TRUE PURPORT OF THE SAID DECISION. IT IS NOTICED TO BEGIN WITH THAT THE ISSU E BEFORE THE SUPREME COURT IN THE SAID CASE WAS WHETHER THE EXPENDITURE UNDER SECTION 57 (III) OF THE ACT COULD BE ALLOWED AS A DEDUCTION AGAINST DIVIDEND INCOME ASSESSABLE UNDER THE HEAD 'INCOME FROM OTHER SOURCES'. UNDER SECTION 57 (III) OF THE ACT DEDUC TION IS ALLOWED IN RESPECT OF ANY EXPENDITURE LAID OUT OR EXPENDED WHOLLY OR EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNING SUCH INCOME. THE SUPREME COURT EXPLAINED THAT THE EXPRESSION 'INCURRED FOR MAKING OR EARNING SUCH INCOME', DID NOT MEAN THAT ANY I NCOME SHOULD IN FACT HAVE BEEN EARNED AS A CONDITION PRECEDENT FOR CLAIMING THE EXPENDITURE. THE COURT EXPLAINED: 'WHAT S. 57(III) REQUIRES IS THAT THE EXPENDITURE MUST BE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNING INC OME. IT IS THE PURPOSE OF THE EXPENDITURE THAT IS RELEVANT IN DETERMINING THE APPLICABILITY OF S. 57(III) AND THAT PURPOSE MUST BE MAKING OR EARNING OF INCOME. S. 57(III) DOES NOT REQUIRE THAT THIS PURPOSE MUST BE FULFILLED IN ORDER TO QUALIFY THE EXPENDIT URE FOR DEDUCTION. IT DOES NOT SAY THAT THE EXPENDITURE SHALL BE DEDUCTIBLE ONLY IF ANY INCOME IS MADE OR EARNED. THERE IS IN FACT NOTHING IN THE LANGUAGE OF S. 57(III) TO SUGGEST THAT THE PURPOSE FOR WHICH THE EXPENDITURE IS MADE SHOULD FRUCTIFY INTO ANY BENEFIT BY WAY OF RETURN IN THE SHAPE OF INCOME. THE PLAIN NATURAL CONSTRUCTION OF THE LANGUAGE OF S. 57(III) IRRESISTIBLY LEADS TO THE CONCLUSION THAT TO BRING A CASE WITHIN THE SECTION, IT IS NOT NECESSARY THAT ANY INCOME SHOULD IN FACT HAVE BEEN EARNED AS A RESULT OF THE EXPENDITURE.' 21. THERE IS MERIT IN THE CONTENTION OF MR. VOHRA THAT THE DECISION OF THE SUPREME COURT IN RAJENDRA PRASAD MOODY ( SUPRA ) WAS RENDERED IN THE CONTEXT OF ALLOWABILITY OF DEDUCTION UNDER SECTION 57(III) OF THE ACT, WHERE THE EXPRESSION USED IS 'FOR THE PURPOSE OF MAKING OR EARNING SUCH INCOME.' SECTION 14A OF THE ACT ON THE OTHER PAGE 9 OF 9 HAND CONTAINS THE EXPRESSION 'IN RELATION TO INCOME WHICH DO ES NOT FORM PART OF THE TOTAL INCOME.' THE DECISION IN RAJENDRA PRASAD MOODY ( SUPRA ) CANNOT BE USED IN THE REVERSE TO CONTEND THAT EVEN IF NO INCOME HAS BEEN RECEIVED, THE EXPENDITURE INCURRED CAN BE DISALLOWED UNDER SECTION 14A OF THE ACT.' 23. THE DECISIONS OF THE ITAT IN ACIT V. RATAN HOUSING DEVELOPMENT LTD. ( SUPRA ) AND RELAXO FOOTWEAR LTD. V. ADDL. CIT ( SUPRA ), TO THE EXTENT THAT THEY ARE INCONSISTENT WITH WHAT HAS BEEN HELD HEREINBEFORE DO NOT MERIT ACCEPTANCE. FURTHER, THE MERE FACT THAT I N THE AUDIT REPORT FOR THE AY IN QUESTION, THE AUDITORS MAY HAVE SUGGESTED THAT THERE SHOULD BE A DISALLOWANCE CANNOT BE DETERMINATIVE OF THE LEGAL POSITION. THAT WOULD NOT PRECLUDE THE ASSESSEE FROM TAKING A STAND THAT NO DISALLOWANCE UNDER SECTION 14 A O F THE ACT WAS CALLED FOR IN THE AY IN QUESTION BECAUSE NO EXEMPT INCOME WAS EARNED. 24. FOR ALL OF THE AFOREMENTIONED REASONS, THIS COURT IS OF THE VIEW THAT THE CBDT CIRCULAR DATED 11TH MAY 2014 CANNOT OVERRIDE THE EXPRESSED PROVISIONS OF SECTION 14A READ WITH RULE 8D. 8. IN VIEW OF THIS WE DO NOT FIND ANY MERIT IN THE APPEAL OF THE REVENUE. HENCE, GROUND NO. 1 TO 3 OF THE APPEAL OF THE REVENUE ARE DISMISSED. 9. IN THE RESULT APPEAL OF THE REVENUE IS DISMISSED. ORDER PRO NOUNCED IN THE OPEN COURT ON 0 1 / 0 9 / 2017 . - S D / - - S D / - ( BEENA A PILLAI ) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 0 1 / 0 9 / 2017 A K KEOT COPY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI