The Madras High Court allowed an appeal against an ITAT order. The court held that Section 14A disallowance cannot be made if there is no exempt income earned and clarified principles regarding business income from SEZ/industrial park leasing.
Tax case appeal allowed; substantial questions of law answered in favour of the assessee; no costs.
This page shows the compact analysis of this judgement. The full analysis — procedural history, issue-by-issue holdings with ratio and obiter, advocates, and paragraph-level evidence for every claim — is being added to the record in batches and will appear here when this judgement has been through it.
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED : 10.08.2021
CORAM
The Honourable Mr.Justice T.S.SIVAGNANAM and
The Honourable Mr.Justice SATHI KUMAR SUKUMARA KURUP
T.C.A.No.219 of 2017
M/s.ETA Star Appliances Pvt. Ltd., 71, Sterling Road, Chennai-600 034. PAN: AABCE8102F
.. Appellant/Respondent
-vs-
Assistant Commissioner of Income Tax, Corporate Circle – 2(1), Chennai-600 034.
.. Respondent/Appellant
Appeal under Section 260A of the Income Tax Act, 1961 against the order dated 05.10.2016 made in I.T.A.No.470/Mds/2016 on the file of the Income Tax Appellate Tribunal 'A' Bench, Chennai for the assessment year 2012-13 and against the order of Commissioner of Income Tax, Chennai in ITA No.110/CIT/A5-6/201516 dated 23.12.2015 and against the order of Deputy Commissioner of Income Tax Corporate Circle 2(1), Chennai in AABCE 8102F/2012-13 dated 27.03.2015.
JUDGMENT
This appeal, by the appellant/assessee, filed under Section 260A of the Income Tax Act, 1961 is directed against the order dated 05.10.2016, made in I.T.A.No.470/Mds/2016 on the file of the Income Tax Appellate Tribunal 'A' Bench, Chennai for the assessment year 2012-13.
2.The appeal was admitted on 07.04.2017 on the following substantial questions of law:-
“(i) Whether on facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in holding that the claim of expenditure by the appellant is subject to disallowance under the provisions of Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962?
(ii) Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in holding that even if there is any income out of investments in shares, the same would be exempt under Section 10(33) of the Act and cannot be computed under the head “income from other sources?
(iii) Whether the provisions of Section 14A of Income Tax Act, 1961 read with Rule 8D of Income Tax Rules, 1962 would be attracted even if there is no expenditure incurred in connected with strategic investment made in the group concern out of own source of funds in the previous years not relevant to the assessment year in question? and
(iv) Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in not applying the amended provisions of Rule 8D of Income Tax Rules, 1962 substituting sub-rule (2) and omitting sub-rule (3) vide CBDR Notification No.43/2016 dated 02.06.2016 in computing the disallowance under Section 14A of Income Tax act, 1961?”
3.Heard Ms.S.Sriniranjani, learned counsel for the appellant/assessee and Mr.S.Rajesh, learned Standing Counsel for the respondent/Revenue.
4.It is not in dispute that the substantial questions of law, which have been framed for consideration, have been answered against the Revenue by a Division Bench of this Court in T.C.A.Nos.732 and 733 of 2018 dated 07.07.2020 to which, one of us (TSSJ) was a party. The operative portion of the judgment reads as follows:-
“4. We take up for consideration the substantial question of law no.2 referred above. The tribunal in paragraph No.8.1, held that the Assessing Officer is not justified in making excessive disallowance and that the CIT(A) rightly restricted the disallowance to the extent the dividend income declared by the assessee. In fact the tribunal records that the revenue could not controvert the findings rendered by the High Court of Delhi in the case of Joint Investments Private Limited Vs. CIT, reported in (2015) 372 ITR 0694 (Del).
“The following principles would emerge from s. 14A : (a) the mandate of s. 14A is to prevent claims for deduction of expenditure in relation to income which does not form part of the total income of the assessee; (b) sec. 14A(1) is enacted to ensure that only expenses incurred in respect of earning taxable income are allowed; (c) the principle of apportionment of expenses is widened by s. 14A to include even the apportionment of expenditure between taxable and non-taxable income of an indivisible business; (d) the basic principle of taxation is to tax net income. This principle applies even for the purposes of s. 14A and expenses towards nontaxable income must be excluded; (e) once a proximate cause for disallowance is established —which is the relationship of the expenditure with income which does not form part of the total income—a disallowance has to be effected. All expenditure incurred in relation to income which does not form part of the total income under the provisions of
the Act has to be disallowed under s. 14A. Income which does not formpart of the total income is broadly adverted to as exempt income as an abbreviated appellation. Under sub-s. (2), the AO is required to determine the amount of expenditure incurred by an assessee in relation to such income which does not form part of the total income under the Act in accordance with such method as may be prescribed. The method, having regard to the meaning of the expression 'prescribed' in s. 2(33), must be prescribed by rules made under the Act. What merits emphasis is that the jurisdiction of the AO to determine the expenditure incurred in relation to such income which does not form part of the total income, in accordance with the prescribed method, arises if the AO is not satisfied with the correctness of the claim of the assessee in respect of the expenditure which the assessee claims to have incurred in relation to income which does not form part of the total income. Moreover, the satisfaction of the AO has to be arrived at, having regard to the accounts of the assessee. Hence, sub-s. (2) does not ipso facto enable the AO to apply the method prescribed by the rules straightaway without considering whether the claim made by the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income is correct. The AO must, in the first instance, determine whether the claim of the assessee in that regard is correct and the determination must be made having regard to the accounts of the assessee. The satisfaction of the AO must be arrived at on an objective basis. It is only when the AO is not satisfied with the claim of the assessee, that the legislature directs him to follow the method that may be prescribed. Sub-s. (3) of s. 14A provides for the application of sub-s. (2) also to a situation where the assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under the Act.”
assessee's case and therefore, rightly dismissed the appeal filed by the revenue. Thus, we find that the Substantial Question of Law No.2 has to be answered against the revenue and in favour of the assessee.
"11. In considering whether the income arising on the leasing of the property was business of the assessee, one has to get into the nature of the business of the assessee, to find out the receipts are assessable under the head of income from house property or as business income and if receipts does not fall in any of those classified heads, would fall consideration under the residuary head of income as income from other sources."
case of CIT Vs. Chennai Properties and Investments Limited, reported in (2005) 274 ITR 117, it was pointed out that income derived from letting out of the property with all amenities and facilities would be income from business and cannot be assessed either as income from house property or as income from other sources. The said decision of the Hon'ble Division Bench was appealed against by the revenue before the Hon'ble Supreme Court in SLP No.11638 of 2013 and we are informed that the appeal was dismissed on 27.01.2020 on the ground of Low Tax Effect.
the circular issued by CBDT, substantial question of law No.1, has to be answered against the revenue and in favour of the assessee. The Tax Case Appeals are dismissed and the Substantial Questions of Law are answered against the revenue. No Costs.”
6.Thus, following the aforementioned decisions, this tax case appeal is allowed and the substantial questions of law are answered in favour of the assessee. No costs.
Sd/-
Assistant Registrar(CS-IX)
// True Copy//
Sub Assistant Registrar
abr
To
T.C.A.No.219 of 2017
SJ(CO) SU(03/09/2021)
3 issues framed by the court
Whether the claim of expenditure by the appellant is subject to disallowance under Section 14A read with Rule 8D?
Whether income out of investments in shares is exempt under Section 10(33) and cannot be computed under income from other sources?
Whether Section 14A is attracted even if there is no expenditure incurred connected with strategic investment made out of own source of funds in previous years?
Colour shows how this judgement treated each authority
Joint Investments Private Limited Vs. CITRelied on¶24
Joint Investments Private Limited Vs. CIT
Commissioner of Income Tax VI Vs. Taikisha Engineering India LimitedExplained¶25
Commissioner of Income Tax VI Vs. Taikisha Engineering India Limited
Godrej & Boyce Manufacturing Company Limited Vs. Deputy Commissioner of Income TaxExplained¶26
Godrej & Boyce Manufacturing Company Limited, Mumbai Vs. Deputy Commissioner of Income Tax
CIT Vs. Elnet Technologies LimitedRelied on¶35
CIT Vs. Elnet Technologies Limited
CIT Vs. Chennai Properties and Investments LimitedRelied on¶38
CIT Vs. Chennai Properties and Investments Limited
CIT vs. Chettinad Logistice (P.) Ltd.Affirmed¶43
CIT vs. Chettinad Logistice (P.) Ltd.
Redington (India) Ltd. vs. Additional Commissioner of Income-taxRelied on¶43
Redington (India) Ltd. vs. Additional Commissioner of Income-tax
CIT Vs. Elnet Technologies LimitedReferred¶732
CIT Vs. Elnet Technologies Limited
4 provisions across 2 enactments
M/s.ETA Star Appliances Pvt. Ltd.
Assistant Commissioner of Income Tax
T.S.Sivagnanam
Sathi Kumar Sukumara Kurup
As recorded by the court registry
Judgements on the same questions, provisions and authorities, from every court
