Appeal details
Counselvise Citation
[2023] 100 COUNSELVISE.COM (IT) 6593 (ITAT-BANGALORE)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
1 month(s) 18 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
11-10-2023
Appeal Filed By
Assessee
Order Result
PartlyAllowed
Bench Allotted
A
Next Hearing Date
11-10-2023
Assessment Year
2016-2017
Appeal Filed On
23-08-2023
Judgement Text
ITA No.626/Bang/2023 Bharat Electronics Limited, Bangalore IN THE INCOME TAX APPELLATE TRIBUNAL “A’’ BENCH: BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA No.626/Bang/2023 Assessment Year: 2016-17 Bharat Electronics Limited Registered Office Outer Ring Road Nagawara Bangalore 560 045 PAN NO : AAACB5985C Vs. ACIT Large Payers Tax Unit Circle-1 Bengaluru APPELLANT RESPONDENT Appellant by : Ms. Richa, A.R. Respondent by : Sri Subramanian S., D.R. Date of Hearing : 12.10.2023 Date of Pronouncement : 12.10.2023 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: This appeal by assessee is directed against order of NFAC passed u/s 250 of the Income Tax Act, 1961 (hereinafter called as “the Act’) for the assessment year 2016- 17 dated 26.6.2023. The only ground in this appeal is with regard to disallowance made u/s 14A r.w.s. Rule 8D(2)(iii) of the Income Tax Rules at Rs.23,73,977/- in the assessment year under consideration. The assessee has received dividend of Rs.3.9 Crores from GEBE Private Limited which is claimed as exempt u/s 10(34) of the Act. The ld. AO applied the formula under Rule 8D(2)(iii) of the I.T. Rules and computed the disallowance as follows: Investment as on 31.3.2015 Rs.191148000 Investment as on 31.3.2016 Rs.758451000 Average value of Investments Rs.474799500 ITA No.626/Bang/2023 Bharat Electronics Limited, Bangalore Page 2 of 19 Disallowance under rule 8D(2)(iii) = 0.5% of average value of investments = 474799500*0.5/100 Rs.23,73,997/- 2. On appeal, NFAC confirmed the same. Against this assessee is in appeal before us. 3. The ld. A.R. submitted that the assessee had the investment of 26,00,000 equity shares totaling Rs. 2,60,00,000/- in its joint venture company GE BE Private Limited, Bangalore. During the year under consideration, the assessee has received a dividend income of Rs. 3.90 crores from GE BE Private Ltd., and the said dividend income was exempted under Section 10(34) of the Act. In this regard, she reiterated that the assessee is engaged in the business of electronics and it was only the idle funds, which were invested in GE- BE(P) Ltd. She submitted that the impugned investment was made in the earlier years and no fresh investment was made in the year under consideration. It had huge share capital, reserves, and surpluses, which did not carry any interest. The assessee has not made any disallowance under Section 14A of the Act relating to this exempt income as it is pertinent to note that the assessee did not incur any expenditure related to earning such income. She further submitted that the investment of Rs. 2,60,00,000/- in the GE-BE (P) Ltd has been made in earlier years and in the year under consideration, no expenditure as such has been incurred relating to earning the dividend income. She further submitted that the assessee had sufficient surplus funds to make the investment which is evident from the audited financials furnished during the assessment proceedings. Accordingly, they have not taken any loans or borrowing to make such investments. Further, the assessee has not sought any professional holding expertise for making such investment decisions, so that assessee has not incurred any ITA No.626/Bang/2023 Bharat Electronics Limited, Bangalore Page 3 of 19 administrative expenses per se of any nature whatsoever to make the investments in shares and earn the dividend income thereon. However, she submitted that the learned Assessing Officer has invoked the provisions of section 14A r.w. rule 8D mechanically made a disallowance of Rs. 23,73,997/- on presumption without there being establishing any nexus. Moreover, she submitted that the learned Assessing Officer made a disallowance on the annual average of the value of the total investments, without limiting it to investments pertaining only to GE BE Limited even when no actual expenditure was incurred by the assessee relating to the exempt income. Further, the learned CIT(A) has confirmed the disallowance of Rs. 23,73,997/-made by the learned Assessing Officer. The Disallowance of expenditure cannot be made on a Notional Basis: 3.1 She further submitted that the assessee has not incurred any expenditure in connection with the dividend income earned for the said assessment year. However, the learned CIT(A) has erred in making disallowance under section 14A r.w. rule 8D, and erred in disallowing an anticipated amount that is not in accordance with rule 8D She further submitted that the Assessing Officer has stated the reason for making the disallowance under section 14A of the Act that “It is pertinent to note that the investments flow from a common pool of funds, viz., the current or cash credit accounts. The business receipts and payments as well as investments are made from these accounts. Therefore, it cannot be assumed that the investments were made exclusively out of non-interest bearing or surplus funds.” 3.2 She submitted that the learned Assessing Officer himself has stated that the only such expenses that cannot be allocated to any specific head of income and are non-identifiable can be considered for invoking rule 8D. In this regard, she submitted that the learned Assessing Officer, hence, has failed to demonstrate the correct ITA No.626/Bang/2023 Bharat Electronics Limited, Bangalore Page 4 of 19 reason for invoking rule 8D. The reason stated by the Assessing Officer itself is invalid and non-existent as the Assessee has not incurred any interest expenditure which is unattributable. The interest expenditure is clearly identifiable and is mostly towards the trade payables and finance lease costs since there are no other borrowings held by the Assessee. She reiterated that the assessee does not have any long-term or short-term borrowed funds for the said year. 3.3 In this regard, the ld. A.R. for the assessee placed reliance on the decision of the Karnataka High Court in the case of CIT Vs Syndicate Bank [2020] 422 ITR 0298(Karn) wherein it was held as below- “From a perusal of Section 14A of the Act, it is evident that for the purposes of computing the total income under this chapter, no deduction shall be allowed in respect of the expenditure incurred by the assessee in relation to the income which does not form part of his total income under the Act. The expenditure, the return on investment, and the cost of requisition are distinct concepts. Therefore, the word 'incurred' in Section 14A of the Act has to be read in the context of the scheme of the Act and if so read, it is clear that it disallows certain expenditures incurred to earn exempt income from being deducted from other incomes which is includable in the total income for the purposes of chargeability to the tax. It is equally well settled that expenditure is a payout. In order to attract the applicability of section 14A of the Act, there has to be a payout and return of investment or a payback is not such a debit item. In the instant case, the assessee has admittedly not incurred any expenditure. This case pertains to income on dividends, which by no stretch of the imagination can be treated to be an expenditure to attract the provisions of Section 14A of the Act. In view of the aforesaid enunciation of law by the Supreme Court, the first substantial question of law framed by this court is answered in favor of the assessee and against the revenue.” 3.4 She further placed reliance on the decision of the Bombay High Court in the case of CIT Vs Reliance Industries Ltd reported in (2011) 339 ITR 0632 (BOM) wherein it was held as below- “The Tribunal in appeal observed that: "The assessee has earned dividend income only from three companies. There is no fact of having incurred any expenditure for the purpose of earning the dividend income. The ITA No.626/Bang/2023 Bharat Electronics Limited, Bangalore Page 5 of 19 disallowance, in our view, is misconceived and the same is deleted in the light of the same order".” 3.5 Further she relied on the decision of Madras High Court in the case of Celebrity Fashion Ltd. [2020] 428 ITR 470 (Madras) which dealt with the issue of disallowance under Section 14A of the Act and held as below - “Only expenditure, which is incurred in relation to earning tax-exempt income, is disallowed under Section 14A. Provisions of Section 14A cannot be extended to disallow the expenditure, which is assumed to have been incurred for earning tax-free income.” 3.6 She submitted that in the decision in the case of Godrej & Boyce Manufacturing Co. Ltd. v. Dy. CIT & Anr. (2017) 394 ITR 449 (SC), the Hon’ble Court has observed that “what cannot be denied is that the requirement for attracting the provisions of Section 14A(1) of the Act is proof of the fact that the expenditure sought to be disallowed/deducted had actually been incurred in earning the dividend income.” 3.7 She further submitted that the Delhi High Court in the case of Wimco Seedlings Ltd [2007] 107 ITD 267 (Delhi) observed that the expression ‘expenditure incurred’ refers to actual expenditure and not to some imagined expenditure. If no expenditure is incurred in relation to the exempt income, no disallowance can be made under Section 14A. 3.8 Similarly, the ld. A.R. for the assessee submitted that the Tribunal in the case of DLF Ltd ITA Nos.236&384/2010 held that the expenditure which is incurred in relation to earning tax-free income can be disallowed and the section cannot be extended to disallow even expenditure that is assumed to have been incurred for earning tax-free income. ITA No.626/Bang/2023 Bharat Electronics Limited, Bangalore Page 6 of 19 3.9 The ld. A.R. submitted that the ld. Authority cannot disallow expenditure on an assumption basis when no expenditure is actually incurred by the assessee in relation to earning exempt income. Accordingly, the first condition to apply provisions of section 14A of the Act is that the assessee must have incurred expenditure that can be said to be related to exempt income. No fresh investment was made in the year under consideration: 3.10 She submitted that the impugned investment made were in the earlier years and no fresh investments were made in the year under consideration and thus, no expenditure was made for earning dividend income. Moreover, there is no nexus between interest bearing borrowings and investment from which exempt income is earned. The Assessee had huge share capital, reserves and surpluses which do not carry any interest. Further the interest-bearing loan has no relation in respect to this investment. The same is kept on record by the assessee which is evident from Page 10 of the Annual Report placed as Annexure- 1. 3.11 Therefore, she submitted that making any disallowance of any expenditure for earning exempt income under section 14A on presumption without there being any nexus is unwarranted. In this regard, she placed reliance on the case of Commissioner of Income- tax -III vs Gujarat Narmada Valley Fertilizers Co. Ltd [2014] 42 taxmann.com 270 (Gujarat), the relevant extract is produced herein below– “Both the authorities have also noted faultlessly that the dividend income which was earned out of the investments made in the earlier years and there was no investment made in the year under consideration. With the availability of the huge interest-free funds in the form of share capital, reserves, etc., the Assessing Officer had not correctly applied the provisions of law to the issue” Only the investments yielding non-taxable income have to be considered, and not all investments: ITA No.626/Bang/2023 Bharat Electronics Limited, Bangalore Page 7 of 19 3.12 Without prejudice to the above, the ld. A.R. submitted that the learned Assessing Officer made the disallowance under rule 8D(2)(iii) of Rs.23,73,997/- by incorrectly calculating such disallowance under rule 8D(2)(iii). She reiterated that rule 8D(2)(iii) postulated that in the calculation of the disallowance amount, "an amount equal to one-half percent of the value of the investment, income from which does not or shall not form part of the total income" should be taken into consideration. Thus, it is not all investment but only that which is expressly spelled out in rule 8D(2)(iii) read with section 14A is to be reckoned for the purpose of calculation of the required average percentage. 3.13 Having said this, at the outset, she submitted that it is relevant to reproduce Section 14A of the Act and rule 8D rules for ready reference - 14A. (1) 77[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 prescribed78, 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: ITA No.626/Bang/2023 Bharat Electronics Limited, Bangalore Page 8 of 19 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. 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 relating to income which does not form part of total income; (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, namely: - A x B/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; ITA No.626/Bang/2023 Bharat Electronics Limited, Bangalore Page 9 of 19 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 percent of the average of the value of the 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. (3) For the purposes 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.” 3.14 Thus, she submitted that it is apparent that Section 14A of the Act deals with expenses incurred to earn exempt income, such as dividend income. It provides that no deduction on expenditure incurred by the assessee in relation to exempt income (income not forming part of the total income) shall be allowed. Section 14A(2) provides that if the learned Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the assessee’ s claim for the expenditure incurred in relation to exempt income, then in such a case the Assessing Officer has to determine the quantum of disallowance as per the method prescribed i.e., in accordance to rule 8D of the rules. 3.15 Further, she submitted that Sub-rule 2 of rule 8D, which prescribes the method of determining the expenditure in relation to exempt income, imbibes three limbs as follows - • Rule 8D(2)(i): Under this first limb, all direct expenditures that have been incurred for earning tax-exempt income are disallowed. ITA No.626/Bang/2023 Bharat Electronics Limited, Bangalore Page 10 of 19 • Rule 8D(2)(ii): Under the second limb, interest expenditure with respect to monies borrowed for making investments to earn dividend income is disallowed. • Rule 8D(2)(iii): Under the third limb, investments w.r.t exempted income earned is to be disallowed. If an investment has yielded exempt income in a particular year, only then it will need to be used in the computation of 0.5% of the average value of investments for the purposes of rule 8D(2)(iii). 3.16 In other words, she submitted that in the instant case, the learned CIT(A), instead of adopting the average value of investment of which income is not part of the total income i.e., the value of tax- exempt investment, chose to factor in the total investment itself. 3.17 In this regard, the ld. A.R. placed reliance on the judicial pronouncement of Delhi High Court in the case of ACB India Ltd. v. Astt. CIT [2015] 62 taxmann.com 71/235 Taxman 22/374 ITR 108 (Delhi) wherein it was held that for the purpose of Section 14A, instead of taking into account total investment, investment attributable to the dividend (exempt income) was required to be adopted and thereafter disallowance was to have arrived. She further submitted that a similar issue came before the Hon’ble Supreme Court in the case of Pr. CIT v. India bulls Capital Services Ltd [2020] 114 taxmann.com 647 wherein the SLP of revenue was dismissed upholding the validity of judgment in ACB India Ltd.’s (supra) stating that where the assessee in his return has himself apportioned expenditure, but the AO was not accepting the said apportionment, in that eventuality, the Assessing Officer will have to record its satisfaction to this effect. No no such satisfaction has been recorded by the AO to come to the conclusion to invoke the provisions of Section 14A (2), and the disallowance is directed to be deleted. ITA No.626/Bang/2023 Bharat Electronics Limited, Bangalore Page 11 of 19 3.18 Further, she submitted aht various courts on different occasions have also held that investments which not yielded income cannot be considered, and investments that yielded income only be considered for computing the disallowance: • Welspun India Ltd. v. Dy. CIT (2019) 69 ITR 617 (Mum) (Trib.) • PTC India Ltd. v. DCIT (2019) 69 ITR 37(SN.) (Delhi) (Trib.) • ACIT v. Paras Buildtech (India) (P.) Ltd. (2018)62 ITR 284 (Delhi) (Trib.) • ACIT v. Vireet Investment Pvt. Ltd. (2017) 165 ITD 27 / 58 ITR 313 / 154 DTR 241/188 TTJ 1 (SB) (Delhi) (Trib.) • Dy.CIT v. Diamond Co. Ltd. (2017) 162 ITD 131 (Kol.) (Trib.) • Yashoda Health Care Services P. Ltd. v. DCIT (2017) 54 ITR 26 (Hyd.) (Trib.) • Electrosteel Castings Ltd. v. DCIT (2017) 53 ITR 5 (Kol.) (Trib.) 3.19 Further, she submitted that the assessee has made disallowance only considering the investments that have generated exempt income which is accepted in the ITAT order passed in the assessee’s own case has ITA No. 395/Bang/2023 for the AY 2014-15 wherein it was held that only investment that has generated exempt income should be taken into consideration while calculating disallowance under section 14A of the Act. 3.20 She reproduced the extract of the ITAT order in the assessee’s own case has ITA No. 395/Bang/2023 for the AY 2014-15 stating that the disallowance under section 14A of the Act is to be calculated by taking into consideration only the investment that has generated exempt income as below for our quick reference- “7. We have heard the rival submissions and perused the material on record. We are of the view that only investment yielding non-taxable income has to be considered and not all the investments. This proposition has been held correct by the Hon'ble Delhi High Court in the case of ACB India Ltd., Vs. ACIT (supra). The Hon'ble Delhi High Court had held that for the purpose of section 14A, instead of ITA No.626/Bang/2023 Bharat Electronics Limited, Bangalore Page 12 of 19 taking into account total investment, the investment attributable to the dividend (exempt income) was only required to be adopted and thereafter the disallowance was to arrive. The relevant finding of the Hon'ble Delhi High Court in the case of ACB India Ltd., Vs. ACIT (supra) reads as follows: "8. The Assessing Officer, instead of adopting the average value of investment of which income is not part of the total income, i.e., the value of tax-exempt investment, chose to factor in the total investment itself. Even though the Commissioner of Income-tax (Appeals) noticed the exact value of the investment which yielded taxable income he did not correct the error but chose to apply his own equity. Given the record that had to be done so to substitute the figure of Rs. 38,61,09,287 with the figure of Rs. 3,53,26,800 and, thereafter, arrive at the exact disallowance of .05 percent." 8. A similar view was taken by the Hon'ble Delhi High Court in the case of PCIT Vs. Indiabulls Capital Services Ltd., in ITA No.181/2019 (judgment dated 26.02.2019). The SLP filed by the Revenue against Hon'ble Delhi High Court's judgment in the case of PCIT Vs. Indiabulls Capital Services Ltd., (supra) was dismissed by the Hon'ble Apex Court [reported in (2020)] 114 taxmann.com 647. In view of the aforesaid judicial pronouncement, we hold that while calculating disallowance under section 14A of the Act, only investment that have generated exempt income should be taken into consideration. 9. Before concluding, it is also to be mentioned that explanation inserted by Finance Act, 2022, has been held to be prospective by the judgment of the Hon'ble Delhi High Court in the case of PCIT Vs. Era Infrastructure (India) Ltd., (2022) 141 taxmann.com 289. In light of the aforesaid reasoning and judicial pronouncements, we delete the disallowance made under section 14A of the Act, amounting to Rs.4,69,055/-. It is ordered accordingly. 10.In the result, appeal filed by the assessee is allowed.” 3.21 She submitted that similar judgment was passed on the disallowance under section 14A of the Act in the assessee’s own case wherein it was held that the disallowance under section 14A of the Act should be calculated by taking into consideration only the investments which have yielded exempt income. ITA No.626/Bang/2023 Bharat Electronics Limited, Bangalore Page 13 of 19 3.22 She also reproduced the extract of this Tribunal order in the assessee’s own case in ITA No. 394/Bang/2023 for the AY 2012-13 which is reproduced below: - “The Ld. CIT(A) has dealt with this issue in detail however he has not considered the issue completely as per Rule 8D(2)(iii). The disallowance should be calculated as per Rule 8D(2)(iii) considering only the investments in which the assessee has received exempt income. In similar issue in the assessee's own case for the AY 2014-15 in ITA NO. 395/Bang/2023 order dated 30.08.2023 the co-ordinate bench has decided as under: - 7. We have heard the rival submissions and perused the material on record. We are of the view that only investment yielding non-taxable income has to be considered and not all the investments. This proposition has been held correct by the Hon'ble Delhi High Court in the case of ACB India Ltd., Vs. ACIT (supra). The Hon'ble Delhi High Court had held that for the purpose of section 14A, instead of taking into account total investment, the investment attributable to dividend (exempt income) was only required to be adopted and thereafter the disallowance was to be arrived. The relevant finding of the Hon'ble Delhi High Court in the case of ACB India Ltd., Vs. ACIT (supra) reads as follows: "8. The Assessing Officer, instead of adopting the average value of investment of which income is not port of the total income, i.e., the value of tax-exempt investment, chose to factor in the total investment itself. Even though the Commissioner of Income-tax (Appeals) noticed the exact value of the investment which yielded taxable income he did not correct the error but chose to apply his own equity. Given the record that had to be done so to substitute the figure of Rs. 38,61,09,287 with the figure of Rs. 3,53,26,800 and, thereafter, arrive at the exact disallowance of .05 per cent." 8. A similar view was taken by the Hon'ble Delhi High Court in the case of PCIT Vs. Indiabulls Capital Services Ltd., in ITA No.181/2019 (judgment dated 26.02.2019). The SLP filed by the Revenue against Hon'ble Delhi High Court's judgment in the case of PCIT Vs. Indiabulls Capital Services Ltd., (supra) was dismissed by the Hon'ble Apex Court [reported in (2020)] 114 taxmann.com 647. In view of the aforesaid judicial pronouncement, we hold that while calculating disallowance under section 14A of the Act, only investments that have generated exempt income should be taken into consideration. ITA No.626/Bang/2023 Bharat Electronics Limited, Bangalore Page 14 of 19 9. Before concluding, it is also to be mentioned that the explanation inserted by Finance Act, 2022, has been held to be prospective by the judgment of the Hon'ble Delhi High Court in the case of PCIT Vs. Era Infrastructure (India) Ltd., (2022) 141 taxmann.com 289. In light of the aforesaid reasoning and judicial pronouncements, we delete the disallowance made under section 14A of the Act, amounting to Rs.4,69,055/-. It is ordered accordingly. .................................................. 12. Respectfully following the above judgment in the assessee's own case, we order accordingly. This issue is allowed for statistical purposes. 13. In the result, the appeal filed by the assessee is allowed W for statistical purposes.” 3.33 Thus, she submitted that while calculating the disallowance under section 14A, only the investments that have generated exempt income should be taken into consideration. In other words, if an investment has not yielded any exempt income during a given period, the associated expenses or deductions related to that investment may not be eligible for disallowance. Therefore, the investments which are not capable of yielding the dividend income need to be excluded while calculating the exact disallowance under section 14A of the Act. Effect of Explanation inserted in section 14A by Finance Act 2022 3.34 Further, she submitted that the ld. CIT (A) has wrongly alleged that even if there are no exempt income disallowances required to be made. In this regard, the learned CIT (A) drew support from the amendment to Section 14A of the Act by Finance Act 2022 by way of the insertion of an Explanation. The Notes on clauses explaining the intention behind the insertion of Explanation to Section 14A states as under- “It is also proposed to insert an Explanation to the said section to clarify that notwithstanding anything to the contrary contained in this Act, the provisions of the said section shall apply and shall be deemed to have been always applied in a case where the income, not forming part of the total income, has not accrued or arisen or ITA No.626/Bang/2023 Bharat Electronics Limited, Bangalore Page 15 of 19 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 form part of the total income. This amendment will take effect from 1st April, 2022.” 3.35 The ld. A.R. for the assessee reproduced the Clauses 4, 5, 6 & 7 of the Memorandum of Finance Bill, 2022 which provides the following guidelines: "4. In order to make the intention of the legislation clear and to make it free from any misinterpretation, it is proposed to insert an Explanation to section 14A of the Act to clarify 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 exempt income 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 exempt income. 5. This amendment will take effect from 1st April 2022. 6. It is also proposed to amend sub-section (1) of the said section, so as to include a non-obstante clause in respect of other provisions of the Income- tax Act and provide that no deduction shall be allowed in relation to exempt income, notwithstanding anything to the contrary contained in this Act. 7. This amendment will take effect from 1st April 2022 and will accordingly apply in relation to the assessment year 2022-23 and subsequent assessment years." 3.36 Thus, she submitted that the Memorandum of the Finance Bill, 2022 reveals that it explicitly stipulates that the amendment made to Section 14A will take effect from 1st April 2022 and will apply in relation to the assessment year 2022-23 and subsequent assessment years. 3.36 She further submitted that the learned CIT (A) in its order relied on the decision of Williamson Financial Services Ltd. [2022] 140 taxmann.com 164/196 ITD 422 (Guwahati ITAT Guwahati Bench in ACIT v. - Trib.), which observed as under – ITA No.626/Bang/2023 Bharat Electronics Limited, Bangalore Page 16 of 19 “In order to remove the prevailing doubts about the interpretation of the provisions of section 14A and to overcome the interpretation given by the various High Courts regarding the applicability of provisions of section 14A and to make the intention of the legislation clear and to make it free from any misinterpretation, the Parliament has brought in an Explanation to section 14A. Further, sub-section (1) of section 14 has been amended so as to include a non obstante clause to provide that no direction shall be allowed in relation to exempt income, notwithstanding anything contrary contained in the Act.” 3.37 She submitted that it was held in this decision of ITAT Guwahati Bench that this explanation is clarificatory in nature and will, therefore, be applicable retrospectively as it effective from 01- 04-2022. However, it is pertinent to mention that the view held by ITAT Guwahati Bench in the above case is not approved by Hon'ble Delhi High Court in Pr. CIT v. Era Infrastructure (India) Ltd. [2022] 141 taxmann.com 289/288 Taxman 384 where it was held, following the judgment of Hon'ble Supreme Court in Sedco Forex International Drill Inc. v. CIT [2005] 149 Taxman 352/12 SCC 717 (SC), that the amendment of Section 14A, which is "for removal of doubts" cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood. Therefore, the Explanation is held prospective. The decision of Hon'ble Delhi High Court in Era Infrastructure Ltd. (supra) was followed in following cases – • Dy. CIT v. Lodha Developers Ltd. [2022] 143 taxmann.com 442 (Mum. - Trib.); • Asst. CIT v. Bajaj Capital Ventures (P.) Ltd. [2022] 140 taxmann.com 1/196 ITD 24 (Mum. - Trib.) 3.38 Thus, in view of the submissions made above, the ld. A.R. for the assessee humbly submitted that there cannot be any disallowance under Section 14A of the Act because no expenditure has been incurred on the exempt income earned during the year. Given the above, she submitted that the assessee has rightly made no disallowance under Section 14A of the Act r.w. rule 8D in its ITA No.626/Bang/2023 Bharat Electronics Limited, Bangalore Page 17 of 19 return of income and she humbly submitted that disallowance to the tune of Rs. 23,73,997/- on total investments is unjustified. 3.39 Therefore, the ld. A.R. submitted before this Tribunal that it is clear from the aforementioned submission that the disallowance under section 14A r.w. rule 8D cannot be made on a notional basis and the contention of the learned Assessing Officer in disallowing 0.5% of the Average total investments is not valid. However, she submitted that even if, the disallowance has to be made, the amount of disallowance to be made as per section 14A read with rule 8D cannot exceed 0.5% of the investments from which exempt income is earned. Therefore, the total disallowance even if to be made should be restricted to only Rs. 1,30,000/-(Rs.2,60,00,000*0.5%) as also held by this Tribunal in the assessee’s own case as mentioned above. 4. The ld. D.R. submitted that Rule 8D(2)(iii) of the I.T. Rules is mandatorily applicable to assessee’s case since the assessee has earned exempt income at Rs.3.9 Crores. 5. We have heard the rival submissions and perused the materials available on record. In this case, it is an admitted fact that assessee has earned exempt income of Rs.3.90 crores. As such, as rightly pointed out by the ld. D.R., the ld. AO has to apply Rule 8D(2)(iii) of the I.T. Rules to compute the disallowance u/s 14A of the Act. However, the investment yielding non-taxable income has to be considered and not all the investment. This proposition has been held correct by the Hon’ble Delhi High Court in the case of ACB India Ltd., Vs. ACIT (supra). The Hon’ble Delhi High Court had held that for the purpose of section 14A, instead of taking into account total investment, the investment attributable to dividend (exempt income) was only required to be adopted and thereafter the ITA No.626/Bang/2023 Bharat Electronics Limited, Bangalore Page 18 of 19 disallowance was to be arrived. The relevant finding of the Hon’ble Delhi High Court in the case of ACB India Ltd., Vs. ACIT (supra) reads as follows: “8. The Assessing Officer, instead of adopting the average value of investment of which income is not part of the total income, i.e., the value of tax exempt investment, chose to factor in the total investment itself. Even though the Commissioner of Income-tax (Appeals) noticed the exact value of the investment which yielded taxable income he did not correct the error but chose to apply his own equity. Given the record that had to be done so to substitute the figure of Rs. 38,61,09,287 with the figure of Rs. 3,53,26,800 and, thereafter, arrive at the exact disallowance of .05 per cent.” 5.1 A similar view was taken by the Hon’ble Delhi High Court in the case of PCIT Vs. Indiabulls Capital Services Ltd., in ITA No.181/2019 (judgment dated 26.02.2019). The SLP filed by the Revenue against Hon’ble Delhi High Court’s judgment in the case of PCIT Vs. Indiabulls Capital Services Ltd., (supra) was dismissed by the Hon’ble Apex Court [reported in (2020)] 114 taxmann.com 647. In view of the aforesaid judicial pronouncement, we hold that while calculating disallowance under section 14A of the Act, only investment that have generated exempt income should be taken into consideration. 5.2 Further, same view was taken by this Tribunal in assessee’s own case in ITA No.395/Bang/2023 dated 30.8.2023. Accordingly, we remit the issue to the file of ld. AO for limited purpose of re- computation of disallowance u/s 14A of the Act r.w. Rule 8D(2)(iii) of the I.T. Rules. It is needless to make it clear that while applying Rule 8D(2)(iii), an amount equal to one half percent of the average of the value of the investment that have generated exempted income should be taken into consideration and not the total investment. ITA No.626/Bang/2023 Bharat Electronics Limited, Bangalore Page 19 of 19 6. In the result, the appeal of the assessee is partly allowed for statistical purposes. Order pronounced in the open court on 12 th Oct, 2023 Sd/- (Beena Pillai) Judicial Member Sd/- (Chandra Poojari) Accountant Member Bangalore, Dated 12 th Oct, 2023. VG/SPS Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(Judicial) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore.
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