LEAYAN GLOBAL PVT.LTD,KANPUR V. ASSTT. COMMISSIONER OF INCOME TAX CIRCLE 2(3)(1), KANPUR

ITA 206/LKW/2022

AI Insights

The case involves Leayan Global Pvt Ltd, which appealed against the disallowance of Rs.49,12,160 by the Assessing Officer under Section 14A of the Income Tax Act, 1961. The disallowance was based on the assumption that the assessee had incurred expenses related to earning exempt income from investments in unquoted shares. However, the assessee contended that no exempt income was earned, and thus no related expenses should be disallowed. The Tribunal examined various judicial precedents and the specific provisions of the Income Tax Act and Rules, ultimately deciding in favor of the assessee.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 712227 (ITAT-LUCKNOW)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-07-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Assessment Year: 2017-2018
• Other Referred Cases: PCIT (Central) vs Era Infrastructure (India) Ltd, M/s. Leayan Global Pvt Ltd vs DCIT, M/s. Juhi Alloys Ltd. Vs DCIT-VI, CIT vs UP Electronics Corpn Ltd, Maxopp Investment Ltd vs CIT, PCIT, Central-1 vs Moonstar Securities Trading Finance Co. (P) Ltd, CIT vs Shivam Motors (P) Ltd, PCIT vs IL & FS Energy Development Company Ltd, PCIT vs Delhi International Airport (P) Ltd, AVH Resources India Pvt Ltd vs ACIT, Delhi, CIT vs Reliance Utilities & Power Ltd, HDFC Bank Ltd vs DCIT, PCIT vs Shapoorji Pallonji & Co. Ltd.
• Laws Referred To: Income Tax Act, 1961, Income Tax Rules, 1962
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AMIT KUMAR
• Assessee Lawyers: P.K. KAPOOR
• Keywords: Principle of natural justice; Earning of tax free income; Rule 8D
• Section: 14A

Judgement Text

"आयकर अपीलीय अधिकरण ‘ए’ न्यायपीठ, लखनऊ। IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW BENCH “A”, LUCKNOW श्री क ुल भारत, उपाध्यक्ष एवं श्री ननखखल चौिरी, लेखा सदस्य क े समछ BEFORE SHRI KUL BHARAT, VICE PRESIDENT AND SHRI NIKHIL CHOUDHARY, ACCOUNTANT MEMBER आयकर अपील सं/ ITA No.206/LKW/2022 ननिाारण वर्ा/ Assessment Year: 2017-18 Leayan Global Pvt Ltd. Plot No.119, 120, 121 Block P & T, Kalpi Road, Kanpur-208012. v. ACIT Circle-2(3)(1) Kanpur. PAN:AABCL8692B अपीलार्थी/(Appellant) प्रत्यर्थी/(Respondent) अपीलार्थी कक और से/Appellant by: Shri P.K. Kapoor, CA प्रत्यर्थी कक और से /Respondent by: Shri Amit Kumar, CIT(DR) सुनवाई कक तारीख / Date of hearing: 02 07 2025 घोर्णा कक तारीख/ Date of pronouncement: 29 07 2025 आदेश / O R D E R PER KUL BHARAT, VICE PRESIDENT.: This appeal, by the assessee, is directed against the order of the Learned Commissioner of Income tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi dated 28.09.2023, pertaining to the assessment year 2017-18. The assessee has raised the following grounds of appeal: - “1. The Id. CIT(A), has erred in law and on facts in upholding the disallowance of Rs.49,12,160/-, appears to have been made by the Id. Assessing Officer by invoking explanation below section 14A, reading as under: Explanation.—For the removal of doubts, it is hereby clarified that notwithstanding anything to the contrary contained in this Act, the Provisions of this section Shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has Printed from counselvise.com ITA No.206/LKW/2022 Page 2 of 10 been incurred during the said previous year in relation to such income not forming part of the total income. (2) disallowance in question had been made/upheld by the Authorities below, by making a reference to (i) instruction of CBDT issued vide its Circular no.5 of 2014; and (ii) provision contained in 8D(2)(ii) of the Income Tax Rules 1962; which have been erroneously referred to and applied in the instant case. the Boards instruction as well as Income-tax Rules referred to by the authorities below, are not applicable as in same, number of judicial pronouncements, to the effect that no disallowance under section 14A would be made, in the cases where there were no exempt income are available on record; 4. Even the instruction issued by CBDT, as has been referred to in the Order passed by the Id. CIT(A), should be treated to have been overruled by large number of case laws which are to the effect that no such disallowance under section 14A was called for and justified, where there was no accrual of ‘exempt income’ and/or claimed as ‘exempt income’; 5. the order appealed against is contrary to the facts, law applicable thereto and principles of natural justice.” 2. The facts giving rise to the present appeal are that in this case, the return of income declaring total income of Rs.9,75,48,650/- was filed through electronic mode on 31.10.2017. The assessee company is a private limited company duly incorporated under the Companies Act has been engaged in the business of manufacturing and sale of leather goods. The case was selected for complete scrutiny through Computer Assisted Scrutiny System (CASS). Accordingly, a notice u/s 143(2) of the Income Tax Act, 1961 (“Act”, for short) dated 14.08.2018 was issued and duly served upon the assessee within the time and manner prescribed under the Act. The Assessing Officer while framing the assessment observed that as per balance-sheet as on 31.03.2017, the assessee claimed investment in unquoted shares. He was of the view that the investment in such assets would accrue exempt income to the assessee. AO observed that the assessee company had debited Printed from counselvise.com ITA No.206/LKW/2022 Page 3 of 10 huge amount of administrative expenses including interest to the Profit & Loss Account. Therefore, he was of the opinion that the assessee ought to have made suo-moto disallowance as contemplated u/s 14A of the Act. Therefore, he called upon the assessee as to why in terms of provisions of Section 14A read with Rule 8D(2) of the Income Tax Rules, 1962 (“Rules”, for short) disallowance should not be made. The assessee duly replied the query and stated that the assessee has not earned any exempt income, therefore, no disallowance is called for. It was stated that the issue is well covered in favour of the assessee by the binding judicial pronouncements. The AO being not satisfied with the contention of the assessee that no expenditure was incurred by it in relation to the income which does not form part of the total income. Hence, he proceeded to compute the disallowance as per the method prescribed by Rule 8D of the Income Tax Rules, 1962 (Rules) (“Rules”, for short) and made addition of Rs.49,12,160/- in this regard. The assessee feeling aggrieved, carried the matter in appeal before the Ld. CIT(A) who also sustained the impugned disallowance. Aggrieved, the assessee is in appeal before this Tribunal. 3. The solitary effective ground in this appeal is against the impugned disallowance made by the assessing authority by invoking the provisions of Section 14A of the Act. 4. Apropos to the grounds of appeal, Ld. Counsel for the assessee vehemently argued that the authorities below grossly erred in making the disallowance and sustaining the same. Further, he contended that the Ld. CIT(A) in utter disregard to the binding precedents and without adverting to the applicability of such precedents sustained the impugned disallowance. He strongly placed reliance on the judgment of the Hon’ble Delhi Printed from counselvise.com ITA No.206/LKW/2022 Page 4 of 10 High Court rendered in the case of PCIT (Central) vs Era Infrastructure (India) Ltd (IT Appeal No.204 of 2022). Ld. Counsel has also placed reliance on various other judgments to buttress the contention that the Assessing Officer failed to record his satisfaction with regard to the claim of the assessee that there was no expenditure incurred in relation to the income which do no form total income and for this proposition, he has relied upon the following decisions of the Co-ordinate Benches are as under:- i. M/s. Leayan Global Pvt Ltd vs DCIT in ITA. No.768/LKW/2017 ii. M/s. Juhi Alloys Ltd. Vs DCIT-VI in ITA. No.410 & 411/LKW/2016 iii. CIT vs UP Electronics Corpn Ltd reported in (2017) 88 taxmann.com 696 (Alld) iv. Maxopp Investment Ltd vs CIT reported in (2018) 91 taxmann.com 154 (SC) v. PCIT, Central-1 vs Moonstar Securities Trading Finance Co. (P) Ltd reported in (2019) 105 taxmann.com 275 (SC) vi. CIT vs Shivam Motors (P) Ltd reported in (2015) 55 taxmann.com 262 (Alld) vii. PCIT-04 vs IL & FS Energy Development Company Ltd reported in (2017) 84 taxmann.com 186 (Del) viii. PCIT (Central vs Era Infrastructure (India) Ltd reported in (2022) 151 taxmann.com 289 (Del) ix. PCIT vs Delhi International Airport (P) Ltd, reported in (2022) 144 taxmann.com 80 (Del) x. AVH Resources India Pvt Ltd, vs ACIT, Delhi in ITA. No. 2570/Del/2022. xi. CIT vs Reliance Utilities & Power Ltd, reported in (2009) 313 ITR 340 (Bom) xii. HDFC Bank Ltd vs DCIT reported in (2016) 383 ITR 529 (Bom) xiii. PCIT vs Shapoorji Pallonji & Co. Ltd. Reported in (2020) 117 taxmann.com 625 (Bom) Further, he submitted that admittedly there is no exempt income by the assessee during the year under appeal. Therefore, in the light of the judgment of the Hon’ble Delhi Court rendered in the case of PCIT (Central) vs Era Infrastructure (India) Ltd (supra), no Printed from counselvise.com ITA No.206/LKW/2022 Page 5 of 10 disallowance was called for. He, therefore, prayed for deletion of addition. 5. On the other hand, the Ld. Departmental Representative for the Revenue opposed the submissions and supported the orders of the authorities below. Ld. DR submitted that the Ld. CIT(A) as well as the Assessing Officer have categorically stated that it is highly improbable that for managing such huge investment no expenditure was incurred by the assessee company. Further, he would submit that it is also pointed out by the authorities below that the assessee has claimed huge administrative expenses. Therefore, in view of the explanation to Section 14A of the Act, the assessee ought to have made suo- moto disallowance in respect of the expenditure which related to the earning of the exempt income. He, therefore, prayed that the finding of the authorities below may be sustained and the grounds raised by the assessee be rejected. 6. We have heard the Ld. Representatives of the parties and perused the material available on record. The only dispute in the present case is with regard to disallowance made by invoking the provisions of Section 14A of the Act. There is no dispute with regard to the fact that the assessee has not earned any exempt income during the relevant financial year. The claim of the assessee is that when he has not claimed any exempt income so there is no question of disallowance of expenditure in terms of Rule 8D of the Rules. In this background, we need to examine the correctness of the finding of the lower authorities. The Ld. CIT(A) sustained the disallowance of expenditure by observing as under: - “5.1 Held: I have considered the submissions made by the appellant on the basis of circumstances and facts of the case along with the order of the AO and perused the material available on record. The contention of the Printed from counselvise.com ITA No.206/LKW/2022 Page 6 of 10 appellant is basically that since there is no exempt income, no disallowance is called for u/s 14A of the Act. It is not out of place to mention that Section 14A has been amended by Finance Act, 2022 with effect from 01.04.2022 wherein the following explanation has been inserted: - Explanation.—For the removal of doubts, notwithstanding anything to the contrary contained in this Act, the provisions of this section Shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not forming part of the total income. The above explanation is explanatory in nature and is clearly applicable in the Case under consideration. The Assessing Officer in his order has underlined the following issues to highlight that no expense has been segregated and allocated to the earning of exempt income. In this context, the relevant extract of the assessment order is reproduced as under: “.....From the perusal of case laws cited by the assessee, it is noteworthy to mention here that the decisions in the cases cited by the assessee were delivered by various Hon'ble Courts with reference to the Rules as were existed prior to amendment in Rule 8D(2) substituted by the IT (Fourteenth Amdt.) Rules 2016 w.e.f. 02.06.2016. Therefore, the verdicts delivered in the cases quoted by the assessee are not applicable in the assessee’s case. Further the following points are worth mentioning:- The assessee does not maintain separate books of accounts for operation activities financing activities/investment activities. All the expenses are incurred through common pool of fund. Every income whether taxable or exempt requires expenses viz. finance cost, administrative expenses, etc. Since assessee has not maintained separate books of accounts and incurred expenditure through common pool, therefore, provisions as contained u/s 14A of the LT. Act, 1967 read with Rule 8D of I.T. Rules are attracted in this case. Hence, in view of the above, I am not satisfied with the correctness of the claim of the assessee that no expenditure was incurred by it in relation to income which does not form part of total income. The provisions in this regard are very clear, which describes as under:- Section 14A(1) of the Act provides that the expenditure incurred by the taxpayer in relation to the income which does not form part of the total income under the Act shall not be allowed as a deduction in computing the taxable income of the taxpayer. Section 14A(2) of the Act provides for determining the quantum of such expenditure which shall not be allowed as a deduction. That is the machinery provision in so far as Section 14A of the Act is concerned. In that provision, it has been provided that if the A.O. is not satisfied with the correctness of the computations made by the taxpayer, he/she shall compute the quantum in accordance with the method that may be Prescribed. For this matter, Rule 8D has already been prescribed. Section 14A(3) further provides that even in a case where the taxpayer claims that no expenditure was incurred, the tax authority has to presume the incurring of such expenditure as provided under Section 14A(2) read with Rule prescribed. Therefore, it becomes clear that even in a case where Printed from counselvise.com ITA No.206/LKW/2022 Page 7 of 10 the taxpayer claims that no expenditure was So incurred, the statute has provided for a presumptive expenditure which has to be disallowed by the force of the statute. Hence, as per the provisions of Act and the investment details submitted by the assessee company, inadmissible expenditure in this case is worked out in accordance with the Section 14A of the Act r.w. Rule 8D of the Income Tax Rules,1962.........” And accordingly, proceeding to workout disallowance @ 1% of the weighted average investment. 5.2 Surely, it cannot be the contention of the appellant that no managerial time or company resources were used to manage such huge investments. In view of the detailed fining of the Assessing Officer, the explanation inserted in the Finance Act, 2022 and no disallowance or suo moto bifurcation of expenses by the appellant, I find no reason to interfere with the order of the Assessing Officer and find the disallowance made u/s 14A of the Act made as reasonable and lawful. Accordingly, the order of the AO is upheld and appeal of the appellant on these grounds of appeal is dismissed.” 7. From the above finding, it is clear that the Ld. CIT(A) has not given any finding as to why the case laws relied by the assessee are not applicable on the facts of the present case. He has merely stated that the case laws as relied by the assessee pertain to pre-amendment when the explanation to Section 14A of the Act was not brought on statute book. In the present case, the assessment year is 2017-18 i.e. the year when the explanation was not inserted. The Hon’ble Delhi High Court rendered in the case of PCIT (Central) vs Era Infrastructure (India) Ltd (supra), after considering the entire law on the issue at hand, held as under: - “7. The aforesaid proposition of law has been reiterated by the Supreme Court in M.M Aqua Technologies Ltd. V. Commissioner of Income Tax, Delhi-III, [2021] 129 taxmann.com 145/282 Taxman 281/436 ITR 582. The relevant portion of the said judgment is reproduced hereinbelow:- \"22. Second, a retrospective provision in a tax act which is \"for the 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. This was stated in Sedco Forex International Drill. Inc. v. CIT, (2005) 12 SCC 717 as follows: 17. As was affirmed by this Court in Goslino Mario [(2000) 10 SCC 165] a cardinal principle of the tax law is that the law to be applied is that which is in force in the relevant assessment year unless otherwise provided expressly or by necessary implication. (See also Reliance Jute and Industries Ltd. v. Printed from counselvise.com ITA No.206/LKW/2022 Page 8 of 10 CIT [(1980) 1 SCC 139]. An Explanation to a statutory provision may fulfil the purpose of clearing up an ambiguity in the main provision or an Explanation can add to and widen the scope of the main section [See Sonia Bhatia v. State of U.P., (1981) 2 SCC 585]. If it is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time that the main provision came into force [See Shyam Sunder v. Ram Kumar, (2001) 8 SCC 24; Brij Mohan Das Laxman Das v. CIT, (1997) 1 SCC 352; CIT v. Podar Cement (P) Ltd., (1997) 5 SCC 482]. But if it changes the law it is not presumed to be retrospective, irrespective of the fact that the phrases used are \"it is declared\" or \"for the removal of doubts\". 18. There was and is no ambiguity in the main provision of Section 9(1)(ii). It includes salaries in the total income of an assessee if the assessee has earned it in India. The word \"earned\" had been judicially defined in S.G. Pgnatale [(1980) 124 ITR 391 (Guj)] by the High Court of Gujarat, in our view, correctly, to mean as income \"arising or accruing in India\". The amendment to the section by way of an Explanation in 1983 effected a change in the scope of that judicial definition so as to include with effect from 1979, \"income payable for service rendered in India\". 19. When the Explanation seeks to give an artificial meaning to \"earned in India\" and brings about a change effectively in the existing law and in addition is stated to come into force with effect from a future date, there is no principle of interpretation which would justify reading the Explanation as operating retrospectively.\" (emphasis supplied) 8. Consequently, this Court is of the view 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. 9. Though the judgment of this Court has been challenged and is pending adjudication before the Supreme Court, yet there is no stay of the said judgment till date. Consequently, in view of the judgments passed by the Supreme Court in Kunhayammed and Others vs. State of Kerala and Another, (2000) 6 SCC 359 and Shree Chamundi Mopeds Ltd. Vs. Church of South India Trust Association CSI Cinod Secretariat, Madras (1992) 3 SCC 1, the present appeal is dismissed being covered by the judgment passed by the learned predecessor Division Bench in PCIT vs. IL & FS Energy Development Company Ltd (supra) and Cheminvest Limited vs. Commissioner of Income Tax-VI, (2015) 378 ITR 33. 10. Accordingly, the appeal and application are dismissed. However, it is clarified that the order passed in the present appeal shall abide by the final decision of the Supreme Court in the SLP filed in the case of PCIT vs. IL & FS Energy Development Company Ltd (supra).” 8. Ld. Counsel for the assessee has also brought to our notice that the SLP (Civil Appeal No.002292/2019) preferred by the Revenue has been dismissed. Therefore, the judgment of the Printed from counselvise.com ITA No.206/LKW/2022 Page 9 of 10 Hon’ble Delhi High Court rendered in the case of PCIT vs IL & FS Energy Development Company Ltd (2017) 84 taxmann.com 186 (Del) has now attained finality. 9. Ld. Counsel for the assessee has also placed reliance and the assessee’s own case pertaining to the A.Y. 2013-14 in ITA. No.786/LKW/2017 and the judgment of the Hon’ble Jurisdictional High Court in the case of UP Electronics Corpn. Ltd (2017) 88 taxmann.com 696 (Alld). Therefore, in the light of the above binding precedents, we are of the considered view that the Ld. CIT(A) grossly erred in not considering the precedents on the issue and without adverting to the same had sustained the disallowance which is not justified. Therefore, respectfully following the Hon’ble Delhi High Court in the case of PCIT (Central) vs Era Infrastructure (India) Ltd (supra), the AO is hereby directed to delete the impugned disallowance. 10. In the result, the appeal of the assessee is allowed. Order pronounced in the open Court on 29/07/2025. Sd/- [ननखखल चौिरी] Sd/- [क ुल भारत] [NIKHIL CHOUDHARY] [KUL BHARAT] लेखा सदस्य/ACCOUNTANT MEMBER उपाध्यक्ष/VICE PRESIDENT ददनांक/DATED: 29/07/2025 Vijay Pal Singh, (Sr. PS) Printed from counselvise.com ITA No.206/LKW/2022 Page 10 of 10 Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. DR 5. Guard File By order // True Copy// Assistant Registrar Printed from counselvise.com "