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Judgment
PER BRAJESH KUMAR SINGH, AM,
This appeal by the assessee is directed against the order dated 24.09.2025 of Ld. Commissioner of Income Tax (Appeal)-30, New Delhi-110055 [hereinafter referred to as the ‘Ld. CIT(A)] arising out of the assessment order dated 23.03.2024 passed under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘the Act’) by the Assessing officer, ACIT, Central Circle-30, Delhi (hereinafter referred to as the ‘AO’) pertaining to Assessment Year (A.Y.) 2022-23.
The original return declaring total income of Rs. 15,43,52,93,060/- was filed by the assessee on 25.10.2022 vide acknowledgement number 747902631251022. The case was selected for complete scrutiny under CASS and notice u/s 143(2) of the Act was issued on 23.06.2023 and duly served upon the assessee. Subsequently, notice u/s 142(1) of the Act along with questionnaire was also issued on various dates.
The assessee is a co-operative society registered in India under the provisions of Multi State Co-Operative Societies Act, 2002, under the administrative control of the Department of Fertilizers, Ministry of Agriculture and Co-operative, Government of India. The principal business of the assessee is manufacture of fertilizers like urea and ammonia.
2.3. DISALLOWANCE U/S 14A OF THE I.T ACT
During assessment proceedings, the AO noted that the exempt income had been earned by the society during the year under consideration and no expenses had been disallowed relatable to earning of exempt income. The assessee vide reply dated 20.10.2023 on the issue of disallowance u/s 14A of the Act r.w.s. 8D of Income Tax Rule, 1962 submitted as below:
“Query No. 9 Please specify applicability of section 14A of I.T. Act, 1961 in your case. If yes, please submit computation for disallowances u/s 14A r.w. Rule 8D. During FY AY 2022-2023, Society did not receive any exempt income. Moreover, other than taxable income earned and offered for tax from the investments, the possible income from investment that could be earned by the assessee would be "Dividend Income only. Dividend income is also taxable in the hands of assessee in the relevant assessment year vide amendment made in section 10/34) by Finance Act, 2020. Therefore, there is no expenditure incurred by the assessee for earning any tax free income in the previous year. All the investments yield income that is offered for tax under PGBP.”
The AO did not accept the above explanation of the assessee and disallowed a sum of Rs. 8,50,90,660/- under Section 14A of the Act.
Aggrieved with the said order, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) dismissed the appeal of the assessee. The relevant extracts of the order of the Ld. CIT(A) are reproduced as under:
“ 9.2 However, after the amendment to Section 14A by the Finance Act, 2022, effective from AY 2022-23, disallowance under Section 14A read with Rule 8D is applicable even if no exempt income is earned in the current year. This Explanation clarifies, for the removal of doubts, that the provisions of Section 14A shall apply even in cases where no exempt income has accrued, arisen, or been received during the previous year. but expenditure has been incurred in relation to such income. The intent of this amendment, as outlined in the Memorandum to the Finance Bill. 2022, is to address situations where taxpayers hold investments capable of generating exempt income, but no such income is earned in a particular year. The amendment ensures that expenditure incurred on maintaining such investments is not deductible, preventing the erosion of the tax base. Though the appellant has demonstrated through submissions that no exempt income was generated in the current year, however, it cannot be ruled out entirely. It is also noteworthy that while dividends are generally taxable post-Finance Act, 2020, the presence of deductions like Section 80P effectively renders certain income non-taxable, warranting application of Section 14A.”
Aggrievd with the said order, the assessee is in appeal before us, on the following grounds of appeal:
“1.The Id. CIT(A) has erred in law and on facts in confirming disallowance of Rs. 8,50,90,660/- u/s 14A read with Rule 8D. There is no exempt income claimed by the assessee, hence there cannot be any disallowance u/s 14A.
2.The appellant contends that all the investments would yield taxable income only from equity shares/ preference shares. Therefore, the provisions of Section 14A would not apply.”
The Ld. AR relying upon the order dated 18th July, 2012 of the Hon’ble Delhi High Court in ITA no.- 444/2011 in the case of Commissioner of Income Tax vs. M/s Kribhco, submitted that the provision of section 14A of the Act will not be applicable in respect of income on which chapter-VI A deductions are claimed. The relevant extract of the said order is reproduced as under:
“ 6. By the order dated 1st September, 2011, the following two substantial questions of law were framed:
"A. Whether the ITAT was correct in law in holding that no disallowance can be made against income which is not specifically exempt under the Act?
B. Whether the ITAT was correct in distinguishing between deduction and exemption, which does not find any support in the language of Section 14A"
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32.Section 14A states that for the purpose of computing total income under Chapter IV, no deduction shall be allowed in respect of expenditure incurred in relation to the income which does not form part of the total income under this Act. It does not state that income which is entitled to deduction under Chapter VIA has to be excluded for the purpose of the said Section. The words "do not form part of the total income under this Act" is significant and important. As noticed above, before allowing deduction under Chapter VIA we have to compute the income and include the same in the total income. In this manner, the income which qualifies for deductions under Sections 80C to 80U has to be first included in the total income of the assessee. It, therefore, becomes part of the income, which is subjected to tax. Thereafter, deduction is to be allowed in accordance with and subject to the fulfillment of the conditions of the respective provisions. This is also subject to Section 80AB and 80A(1) and (2). Chapter VIA does not postulate or state that the incomes which qualify for the said deduction will be excluded and not form part of the total income. They form part of the total income but are allowed as a deduction and reduced.
33.It is clear from the aforesaid reasoning that the decisions in the case of Distributors (Baroda) Private Limited and Cambay Electric Supply Industrial Co. Ltd (supra) have proceeded on the specific language of the said Sections, whereas in the other decisions Stumpp Schuele and Somappa Private Limited and South Indian Bank (supra) and those of the High Courts mentioned above have gone on the general principle relating to deductions allowed and whether a deduction once allowed has the effect that the income on which deduction ceases to be part of the total income. It has been uniformly and consistently held that in the absence of express language to the contrary, deduction if allowed does not mean that the said income ceases to be part of the total income.
34.In view of the aforesaid position, we answer the questions of law mentioned above in affirmative, i.e., against the appellant-Revenue and in favour of the respondent-assessee. In the facts of the present case, there will be no order as to costs.”
(emphasis supplied by us)
On the other hand, the Ld. Sr. DR supported the orders of the authorities below.
We have heard both the parties and perused the material available on record. The above findings of the Ld. CIT(A) have been considered very carefully but not found to be acceptable. The Ld. CIT(A) held that disallowance u/s 14A of the Act r.w. Rule 8D of the IT Rules 1962 has to be made even if no exempt income is earned in the current year but in arriving at the findings, the Ld. CIT(A) did not appreciate the underlying principle that disallowance u/s 14A of the Act r.w. Rule 8D of the I.T. Rules, 1962 will be permissible only if the nature of such income would be exempt and not taxable. The fundamental condition for invoking Section 14A is that the expenditure sought to be disallowed must be incurred in relation to income which does not form part of the total income under the Act. In other words, the applicability of Section 14A is contingent upon the existence of exempt income. Pursuant to the amendment to Section 10(34) by the Finance Act, 2020, effective from AY 2021–22, dividend income is taxable in the hands of the recipient and hence dividend income is no longer exempt in the hands of the shareholder. Thus, in the present case, the assessee even though did not earn dividend income, yet even if it was earned, it would not have been in the nature of exempt income. Therefore, the very foundation for invoking Section 14A is absent in the present case. In view of the above discussion, the submission of the assessee that no disallowance can be made u/s 14A of the Act is acceptable.
Further, the view of the Ld. CIT(A) that while dividends are generally taxable post-Finance Act, 2020, the presence of deductions like Section 80P effectively renders certain income non-taxable, warranting application of Section 14A of the Act, is also not acceptable in view of the findings of the Hon’ble Delhi High Court in the case of Commissioner of Income Tax vs. M/s Kribhco (supra), which held that deduction if allowed does not mean that the said income ceases to be part of the total income as highlighted by us while reproducing that the above order of the Hon’ble Delhi High Court.
Therefore, in view of the above facts, the disallowance of Rs. 8,50,90,960/-made by the AO and confirmed by the Ld. CIT(A) is not sustainable and the same is deleted. Ground no. 1 and 2 of the appeal are allowed.
Further, the AO disallowed a sum of Rs. 68,37,523/- claimed by the assessee towards the ‘Amortization of Lease Rent’. The break-up of the same was noted by the AO in the para no. 16 of the assessment order, which is reproduced as under:
“16.In this connection the assessee on this issued submitted his reply, the relevant portion of which is as below:
“During the year under consideration, the Society has made a claim for amortization of flump sum amount in respect of lease premium paid in respect of the following lands:
| Sr. No. | Particulars | Amount of amortization claimed (Rs.) |
| 1 | Land at Noida wherein office building (A 8-10, sector 1- Noida) of the Society at Noida is situated | 3,41,912/- |
| 2 | Land at Visakhapatnam for construction of Rural Godown leased from Port Trust | 39,23,146/- |
| 3. | Land at Tuticorin for construction of Godown leased from Port Trust and others | |
| 4. | Land at Shahjahanpur | 25,68,401/- |
| Total | 68,37,523/- |
The grounds of appeal filed by the assessee before us are reproduced as under:
“3.The Id. CIT (A) erred in law and on facts in confirming the disallowance of Rs. 68,37,523/- being amortization of lease payment. These are allowable business expenditure for determining the taxable income and should have been allowed.
4.The appellant contends that amortization of these expenses over the period of the lease is revenue expenditure and is in the nature of rent paid for the use of land. It is not in the nature of capital expenditure as the assessee does not get any legal title or any right over the land.”
At the outset, the Ld. Sr. AR submitted its claim of amortization of lease rent in respect of item nos. 1 and 4 in the above table was decided against the assessee by the Co-ordinate Bench of the Tribunal in assessee’s own case vide order dated 30.10.2023 in ITA No.- 1866/Del/2023 for A.Y. 2021-22, while item nos. 2 and 3 were restored to the file of the AO in the same order.
On the other hand, the Ld. Sr. DR supported the orders of the authorities below.
We have heard both the parties and perused the material available on record. On identical facts, the Co-ordinate Bench of the Tribunal has dismissed the appeal of the assessee in respect of the claim of the assessee for amortization of lease rent in respect of land at Noida and Shahjahanpur and has restored the similar claim of the assessee in respect of amortization of lease rent of land at Tuticorin and Visakhapatnam to the file of the AO. The relevant extract of the said order of the Tribunal is reproduced as under:
“3.During the year under consideration assessee has claimed an amount of Rs.67,71,508/- on account of amortization of Lease hold land in its Profit and Loss Accounts:
Sr. No. Particulars Amount of amortization claimed (Rs.) 1. Land at Noida wherein office building (A-8-10, sector-1 Noida) of the Society at Noida is situated 3,41,912/- 2. Land at Visakhapatnam for construction of Rural Godown leased from Port Trust 39,23,146/- 3. Land of Tuicorin for construction of Godown leased from Port Trust and others 4. Land at Shahjahanpur 25,06,450/- Total 67,71,508/- 4.It was treated as capital expenditure by the AO and he did not allow amortization. Further observation in the order of the AO are as under:
“23.The entire reply of the assessee has been considered which is more or less same as in the preceding year. The undersigned has also gone through the cases relied upon by the assessee, which are distinguishable from the facts of the instant case. The assessee in its computation has claimed the deduction of Rs.67,71,508/- as amortization of lease rent. In this regard, it is important to note that by merely changing the name of expenditure, the claim of the assessee does not become entitled u/s 37 whereas the allow ability of depreciation is to be considered u/s 32. It is obvious from the nature of these expenses that they provide the assessee enduring benefits spread over several decades. Making the part of the payment annually does rd change the nature of the expenditure. The assessee's claim is accordingly rejected u/s 37 of the income tax, Act 1961 which prohibits deduction of any capital expenditure.
24.It is pertinent to mention here that the Hon'ble Delhi High Court has dismissed the appeal of the assessee on this issue and the addition made by the AO has been upheld. Accordingly, the deduction on account of amortization of lease rent amounting to Rs.67,71,508/-is disallowed and added back in the income of assessee.”
5.Upon assessee’s appeal, Learned CIT(A) confirmed the same.
6.Against the above order, assessee appealed before us.
7.We have heard the rival submissions and perused the material on record. Learned Counsel for the assessee fairly conceded that land at Noida and land at Shahjahanpur are duly covered by the order of Delhi High Court as above. Hence, amortization of these lands is to be disallowed. Thus in case of above two lands, we uphold the order of Learned CIT(A).
8.As regards land at Visakhapatnam and at Tuiticorin is considered, the Learned Counsel for the assessee has submitted that on the same matter earlier ITAT has remanded the matter to the file of AO.
9.Upon careful consideration, we note that ITAT in its order for A.Y. 2016- 17 in ITA No.581/Del/2022 has considered the identical issue and has held as under:
“6.We have carefully perused the orders of the authorities below. We find force in the contention of the ld. counsel for the assessee. An identical issue came up for hearing before this Tribunal in Assessment Year 2012- 13 in ITA No. 5711/DEL/2017. This Tribunal has considered the issue at Para 6 of its order and, thereafter, held as under:”
“7.Insofar as the amortisable portion of the lease taken from the Noida Authority is concerned, Ld. AR fairly admitted that this issue is covered against the assessee by the order of the Hon’ble Delhi High Court in ITA No.205/2010 dated 12.07.2012 pertaining to the assessment year 2004-05, and though the assessee is in appeal before the Hon’ble Supreme Court on that issue, as the things stand today the assessee is bound by the order of the Hon’ble Delhi High Court.
8.Assessee is, therefore, confining the challenge in respect of the land at Visakhapatnam into Tuticorin, which issue is quite different from the issue relating to the Noida land. On this aspect it is the submission of the Ld. AR that in assessee’s own case for the assessment year 2008-09 in ITA numbers.2304 and 2321/Del./2012, a Coordinate Bench of this Tribunal considered the same and after careful consideration thereof it was observed that the nature of lease, the location of the land, the terms and conditions of lease etc, for example, it is located in the Porto premises, the entry and exit of which is with Port Security, land used only for storage during transit etc., that the assessee has in its long time lease with Visakhapatnam Port trust is different from the terms and conditions of lease from Noida Authority; that the principle on the issue whether the rent in question is to be allowed as Revenue expenditure or not, is laid down by the Hon’ble High Court in assessee’s own case for earlier assessment years and this depends on the facts of each case; that the issue was to be examined in the interest of Justice; that no prejudice would be caused to the Revenue in examining the matter once again; and therefore, the issue was set aside to the file of the learned Assessing Officer for considering the arguments of the assessee de novo in accordance with law.
9.Ld. AR, in all fairness, submits that the same course as adopted for the assessment year 2008-09 may also be followed for this assessment year in restoring the issue to the file of the learned Assessing Officer for considering the facts and circumstances relevant for this particular assessment year and to take a call de novo. Ld. DR reports no objection for sending it back to the learned Assessing Officer. Recording the same, we allow this ground for statistical purpose, by restoring the issue to the file of the learned Assessing Officer to take a view de novo for this particular assessment year after hearing the assessee de novo in accordance with law.”
7.Finding parity on facts, respectfully following the findings of the coordinate bench, amortization portion of the lease taken from Noida authority is decided against the assessee and the challenge in respect of land at Vishakapatnam and Tuticorn is restored to the file of the Assessing Officer to be decided as per directions given in Assessment Year 2012-13 [supra].
10.We find that the facts are similar, hence, following the aforesaid ITAT order in assessee’s own case, we restore the issue of land amortization at Visakhapatnam and Tuiticorin to the file of Assessing Officer to decide as per the directions as given above.
11.In the result, this appeal of assessee is allowed for statistical purposes.” (emphasis supplied by us)
Following the above order on similar facts, we uphold the order of the Ld. CIT(A) in respect of disallowance of amortization of lease rent in respect of land in respect of land at Noida and Shahjahanpur and set aside the order of the Ld. CIT(A) in respect of the claim of the assessee in respect of amortization of lease rent in respect of land at Visakhapatnam and Tuticorin and restore it to the file of the AO to decide as per the directions given in the order of the Tribunal for A.Y. 2016-17 in ITA No.- 581/Del/2022. Ground no. 3 and 4 of the appeal are partly allowed.
In the result, the appeal of the assessee is partly allowed.