DCIT vs Electricals and Electronics India Limited

“1.

whether on the facts and circumstances of the case the Id cit appeal is correct in deleting the addition of rs 343665947 u/s 56 2 viia of the income tax 1961 despite the fact that the fair market value should indeed be taxable as income from other sources when the aggregate differences between fmv and consideration exceed rs 50000 2. whether on the facts and circumstances of the case the Id cit appeal is correct in deleting the addition of rs 343665947 us 56 2 viia of the Income Tax 1961 by ignoring the fact that the section 56 2 viia empower to make addition if there is investment in shares below the fmv and the default in filling details accurately 3. whether Id cit appeal is correct on facts and in law in allowing the appeal of the assessee by deleting the addition of rs 3286237 made on account of disallowance us 14A of the Income Tax act 1961 despite the fact that the expenses which are relatable to earning of exempt income have to be considered for disallowance irrespective of the fact whether any such income has been earned during the financial-ycar OR not as per provisions of us 14A rwr 8D 4. whether ld cit appeal is correct on facts and in law, in allowing the appeal of the assessee by deleting the addition of rs 3286237 made on account of disallowance us 14A of the income tax act 1961 ignoring the ratio of judgement of honourable supreme court in the case of cit vs rajendra prasad moody and ratio of judgement in the case of maxopp investment Itd 5. the appellant craves leave to add amend any all the grounds of appeal before OR during the course of hearing of appeal.”

“Sub: Written submission onbehalf of the Revenue on Ground No. III and IV [Disallowance u/s 14A)-reg. Issue: The Ld. CITIA) has wrongly deleted the disallowance u/s 14A of the IT Act, ignoring the ratio of the judgments of the Hon'ble Supreme Court in the cases of CIT us. Rajendra Prasad Moody and Maxopp Investment Ltd. vs. CIT.

1.

Facts of the case: It is an admitted fact that the assessee did not earn any exempt income during FY 2016-17. However, the assessee held investments capable of yielding tax-free income, and did not establish that these were made out of its own non-interest-bearing funds. The AO recorded his satisfaction and computed the disallowance under Rule 8D. The Ld. CIT(A) deleted the disallowance solely because no exempt income was earned, which is contrary to the ratio of Moody and Maxopp discussed above. Even though the assessee did not earn exempt income during the year, such investments, not shown to be made from own funds, keep interest-bearing funds blocked, and the interest cost arises every year. Whether dividend is declared is decided by the investee company, not the assessee. Allowing this cost in a nil-dividend year, while later dividends stay exempt, would give the very double benefit that s. 14A seeks to prevent.

2.

Matching principle: Tax is levied on net income. Where income is taxable, the expenditure relatable to it is allowed; where income is exempt, the expenditure relatable to it must be excluded, so that the assessee does not get a double benefit. The Memorandum to the Finance Bill, 2001 (quoted with earning of taxable income. The test is the nexus between the expenditure and the investment capable approval in Maxopp) records that expenses can be allowed only to the extent they are relatable to the of yielding exempt income, and not the receipt of such income in a particular year. Hence, even where exempt income for the year is nil, the relatable expenditure has to be disallowed.

2.

CIT vs. Rajendra Prasad Moody (1978) 115 ITR 519 (SC): The Hon'ble Supreme Court held that it is the purpose of the expenditure that is relevant; the law does not require that the purpose be fulfilled or that any income be actually earned. It further held that a proper expenditure must be debited irrespective of whether income is received or not, and whether the income is X, Y or nil. Applying the same logic, expenditure incurred in relation to investments yielding exempt income retains that character even in a year in which no such income is received.

3.

Maxopp Investment Ltd. vs. CIT (2018) 402 ITR 640 (SC): The object of s. 14A is to prevent double benefit (para 3). The purpose or motive of the investment is irrelevant, and the principle of apportionment of expenses is engrained in s. 14A (para 34). The Hon'ble Court agreed with the Hon'ble Delhi High Court that s. 14A applies regardless of the intention behind the investment (paras 9 & 35). The AO is to record satisfaction and examine the nature of funds used (para 41), which has been done in this case.

4.

Rule 8D (as amended w.e.f. 02.05.2016, applicable to AY 2017-18): The Rule applies to investments "income from which does not or shall not form part of total income". The words "shall not" look to the future and show that the capacity of the investment to yield exempt income, and not its actual receipt during the year, is the test.

5.

Cheminvest Ltd. vs. CIT (2015) 378 ITR 33 (Del) is distinguishable: (1) Cheminvest distinguished Moody only because s. 57 (iii) uses "for the purpose of making or earning such income" whereas s. 14A uses "in relation to". But "in relation to" is the wider expression. In Maxopp, the Hon'ble Delhi High Court read it as "in connection with" or "pertaining to", in an expansive sense (relying on Doypack Systems), and the Hon'ble Supreme Court agreed with that view (paras 9, 16 & 35). If the narrower words of s. 57 (iii) do not require actual earning of income, the wider words of s. 14A cannot require it either. (ii) Cheminvest (2015) was rendered before Maxopp (2018), in which the Hon'ble Supreme Court laid down that apportionment is inherent in s. 14A and motive is irrelevant; the test is therefore nexus, not receipt. (iii) Rule 8D's reference to income that "shall not" form part of total income is inconsistent with a requirement of actual receipt in the year.

6.

Prayer: In view of the above, it is prayed that the order of the Ld. CIT(A) on this ground may be set aside and the disallowance made by the AO u/s 14A be restored.”

“1.

At the outset, it is most humbly submitted that the Revenue's submissions solely deals with the issue of disallowance u/s 14A and proceeds contrary to the binding judgments of the Hon'ble jurisdictional Delhi High Court. It is an admitted position that the assessee earned no exempt income during the impugned year. The issue is therefore squarely covered in favour of the assessee by Cheminvest Ltd. v. CIT (2015) 378 ITR 33 (Delhi HC), wherein the Hon'ble Delhi High Court has held that Section 14A does not apply where no exempt income is received or receivable during the relevant previous year.

2.

The Revenue's attempt to distinguish Cheminvest by relying upon CIT v. Rajendra Prasad Moody and Maxopp Investment Ltd. v. CIT is misconceived. Cheminvest itself considered Rajendra Prasad Moody and distinguished it in the context of Section 14A. More importantly, the proposition laid down in Cheminvest continues to be binding and has subsequently been expressly followed by the Hon'ble Delhi High Court.

3.

The matter stands put beyond doubt by PCIT v. Era Infrastructure (India) Ltd. (2022) 448 ITR 674 (Delhi HC). The Hon'ble Delhi High Court, while considering the question whether Section 14A can operate where no exempt income is earned, dismissed the Revenue's appeal as being covered by Cheminvest and IL & FS Energy Development Co. Ltd. The Hon'ble Court further held that the amendment to Section 14A by the Finance Act, 2022, which specifically seeks to bring within Section 14A cases where exempt income has not accrued, arisen or been received, is prospective and applicable from AY 2022-23 onwards.

4.

Consequently, it is submitted that for AY 2017-18, the subsequent statutory amendment cannot assist the Revenue. The Revenue cannot achieve for AY 2017-18, through an interpretation of Rule 8D or the words "shall not", what the amended Section 14A itself achieves only prospectively.

5.

The reliance upon Maxopp Investment Ltd. v. CIT is equally misplaced. Maxopp deals with the nexus/apportionment of expenditure and the irrelevance of the dominant purpose of making an investment. It does not overrule the jurisdictional High Court's proposition in Cheminvest that, in the absence of exempt income in the relevant year, Section 14A is not attracted. Significantly, even after Maxopp, the Delhi High Court in Era Infrastructure continued to apply Cheminvest. Thus, the contention that Cheminvest ceased to govern after Maxopp cannot be sustained.

6.

The Revenue's argument based upon the amended Rule 8D and the expression "income from which does not or shall not form part of total income" also cannot override the substantive provision contained in Section 14A as judicially interpreted. A rule framed under the Act cannot enlarge the substantive scope of Section 14A for an assessment year to which the Finance Act, 2022 amendment does not apply.

7.

Accordingly, since no exempt income was earned or receivable during AY 2017-18, no disallowance under Section 14A read with Rule 8D could be made. The deletion of the disallowance by the Ld. CIT(A) is therefore supported by the binding judgments of the Hon'ble Delhi High Court in Cheminvest and Era Infrastructure, and the Revenue's Ground Nos. 3 and 4 deserve to be dismissed.

8.

Further, it is submitted that with regards to Grounds Nos. 1 and 2. Revenue fairly conceded that the issue is covered in favor of assessee. That a bare perusal of learned CIT (A) order at pages 7 to 9 makes it amply clear that while giving relief to the assessee appellant reliance was placed on assessee's own case for preceding AY 2015-16 and 2016-17, wherein, under identical circumstances the additions made by learned AO u/s 56(2)(viia) were deleted by learned CIT (A) since, the assessee company is a listed company and the aforesaid provisions are only applicable to private companies and not to listed companies. That further, even Hon'ble ITAT Delhi in assessee's own case for AY 2015-16 has upheld the deletion of addition so made by learned CIT (A) (kindly see pages 39 to 44 of the paper book). As such, it is most humbly submitted that the ground nos. 1 and 2 so raised by Revenue be dismissed, being covered by order of Hon'ble ITAT in assessee's own case for AY 2015-16.

9.

It is thus, prayed that the appeal so filed by Revenue be dismissed in view of the aforesaid submissions.”