Pr. Commissioner Of Income Tax , Kota v. Shri Prakash Gwalera , 28/311, Gumanpura, Kota

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 152/2018 Pr. Commissioner Of Income Tax , Kota. ----Appellant Versus Shri Prakash Gwalera , 28/311, Gumanpura, Kota. ----Respondent For Appellant(s) : Ms. Parinitoo Jain with Ms. Shiva GoyalFor Respondent(s): HON'BLE MR. JUSTICE KALPESH SATYENDRA JHAVERI HON'BLE MR. JUSTICE ASHOK KUMAR GAUR Judgment 31/07/2018 1.By way of this appeal, the appellant has assailed the judgment and order of the tribunal whereby tribunal has dismissed the appeal of the department. 2.Counsel for the appellant has framed following substantial question of law:- 1. Whether the Tribunal was legally justified indeleting the addition of Rs.3,75,183/- madeu/s.14A read with Rule 8D following the Board’sCircular 5/2014?deleting the addition of Rs.3,75,183/- madeu/s.14A read with Rule 8D following the Board’sCircular 5/2014? 2. Whether the Tribunal was legally justified innot considering the judgment of Hon’bleSupreme Court in the case of Godrej and BoyceLtd. where the purpose of Section 14A read withRule 8D has been interpreted?not considering the judgment of Hon’bleSupreme Court in the case of Godrej and BoyceLtd. where the purpose of Section 14A read withRule 8D has been interpreted? 3.Counsel for the appellant has taken us to the judgment of the Supreme Court in Godrej and Boyce Manufacturing Company Limited vs. Dy. Commissioner of Income Tax and Ors. AIR 2017 SC 2675 wherein it has been held as under:- 24. The object behind the introduction of Section14A of the Act by the Finance Act of 2001 is clearand unambiguous. The legislature intended tocheck the claim of allowance of expenditureincurred towards earning exempted income in asituation where an Assessee has both exemptedand non-exempted income or includible or non-includible income. While there can be no scintillaof doubt that if the income in question is taxableand, therefore, includible in the total income, thededuction of expenses incurred in relation tosuch an income must be allowed, such deductionwould not be permissible merely on the groundthat the tax on the dividend received by theAssessee has been paid by the dividend payingcompany and not by the recipient Assessee,when Under Section 10(33) of the Act suchincome by way of dividend is not a part of thetotal income of the recipient Assessee. A plainreading of Section 14A would go to show that theincome must not be includible in the total incomeof the Assessee. Once the said condition issatisfied, the expenditure incurred in earning thesaid income cannot be allowed to be deducted.The Section does not contemplate a situationwhere even though the income is taxable in thehands of the dividend paying company the sameto be treated as not includible in the total incomeof the recipient Assessee, yet, the expenditureincurred to earn that income must be allowed onthe basis that no tax on such income has beenpaid by the Assessee. Such a meaning, ifascribed to Section 14A, would be plainly beyondwhat the language of Section 14A can beunderstood to reasonably convey. 4.She also taken us to the CBDT circular dt. 11.2.2014 the relevant para of which reads as under:- 3. The matter has been examined in the Board. Itis pertinent to mention that section 14A of theAct was introduced by the Finance Act, 2001 withretrospective effect from 01.04.1962. Thepurpose for introduction of section 14A withretrospective effect since inception of the Act wasclarified vide Circular No. 14 of 2001 as under: “Certain incomes are not includible whilecomputing the total income, as these are exemptunder various provisions of the Act. There havebeen cases where deductions have been claimedin respect of such exempt income. This in effectmeans that the tax incentive given by way ofexemptions to certain categories of income is 4.She also taken us to the CBDT circular dt. 11.2.2014 the relevant para of which reads as under:- 3. The matter has been examined in the Board. Itis pertinent to mention that section 14A of theAct was introduced by the Finance Act, 2001 withretrospective effect from 01.04.1962. Thepurpose for introduction of section 14A withretrospective effect since inception of the Act wasclarified vide Circular No. 14 of 2001 as under: “Certain incomes are not includible whilecomputing the total income, as these are exemptunder various provisions of the Act. There havebeen cases where deductions have been claimedin respect of such exempt income. This in effectmeans that the tax incentive given by way ofexemptions to certain categories of income is being used to reduce also the tax payable on thenon-exempt income by debiting the expensesincurred to earn the exempt income againsttaxable income. This is against the basicprinciples of taxation whereby only the netincome, i.e., gross income minus theexpenditure, is taxed. On the same analogy, theexemption is also in respect of the net income.Expenses incurred can be allowed only to theextent they are relatable to the earning oftaxable income”. Thus, legislative intent is to allow only thatexpenditure which is relatable to earning ofincome and it therefore follows that the expenseswhich are relatable to earning of exempt incomehave to be considered for disallowance,irrespective’of the fact whether any such incomehas been earned during the financial-year or not. 4. The above position is further clarified by theusage of term ‘includible’ in the Heading tosection 14A of the Act and also the Heading toRule 8D of I.T.Rules, 1962 which indicates that itis not necessary that exempt income shouldnecessarily be included in a particular year’sincome, for disallowance to be triggered. Also,section 14A of the Act does not use theword “income of the year” but “income under theAct”. This also indicates that for invokingdisallowance under section 14A, it is not materialthat assessee should have earned such exemptincome during the financial year underconsideration. 6. Thus, in light of above, Central Board of DirectTaxes, in exercise of its powers under section 119of the Act hereby clarifies that Rule 8D read withsection 14A of the Act provides for disallowanceof the expenditure even where taxpayer in aparticular year has not earned any exemptincome. 5.She has also relied on the observations made by the AO which reads as under:- 2.2 The submission of the assessee has beenconsidered and found not acceptable. The CentralBoard of Direct Taxes vide Circular No.05/2014clarified the issue and its relevant portion is asunder:- “Thus, the legislative intent is to allow only thatexpenditure which is relatable to earning ofincome and it therefore follows that the expenseswhich are relatable to earning of exe3mpt incomehave to be considered for disallowance, irrespective of the fact that whether any suchincome has been earned during the financial yearor not.” 2.3 The relevant provisions of section 14A are asunder:- “14A. (1) For the purposes of computing the totalincome under this Chapter, no deduction shall beallowed in respect of expenditure incurred by theassessee in relation to income which does notform part of the total income under this Act.(2) The Assessing Officer shall determine theamount of expenditure incurred in relation tosuch income which does not form part of thetotal income under this Act in accordance withsuch method as may be prescribed, if theAssessing Officer, having regard to the accountsof the assessee, is not satisfied with thecorrectness of the claim of the assessee inrespect of such expenditure in relation to incomewhich does not form part of the total incomeunder this Act. 2.3 The relevant provisions of section 14A are asunder:- “14A. (1) For the purposes of computing the totalincome under this Chapter, no deduction shall beallowed in respect of expenditure incurred by theassessee in relation to income which does notform part of the total income under this Act.(2) The Assessing Officer shall determine theamount of expenditure incurred in relation tosuch income which does not form part of thetotal income under this Act in accordance withsuch method as may be prescribed, if theAssessing Officer, having regard to the accountsof the assessee, is not satisfied with thecorrectness of the claim of the assessee inrespect of such expenditure in relation to incomewhich does not form part of the total incomeunder this Act. (3) The provisions of sub-section (2) shall alsoapply in relation to a case where an assesseeclaims that no expediture has been incurred byhim in relation to income which does not formpart of the total income under this Act” 2.4 In view of the provisions of section 14A ofthe Income-Tax Act, 1961 and in the light ofBoard’s Circular No.5/2014 and having regard tothe books of account of the assessee, I am notsatisfied with the correctness of the claim ofassessee in respect of such expenditure and theassessee’s explanation in relation to income,which does not form part of the total incomeunder this Act. The Ld. AR of the assessee hasrelied on the decision of Hon’ble P&H High Courtin the case of CIT V Winsome Textile IndustriesLtd. (2009) 319 ITR 204 is squarely not coveredas the assessee has used its borrowed fund forsuch investments. Therefore, the disallowanceunder section 14A of the Income-Tax Act, 1961 iscalculated as prescribed under rule 8D of theIncome-Tax Rules, 1962 is as under and added tothe total income of the assessee:- and Boyce (supra) observing as under:- 33. While answering the said question this Courtconsidered the object of insertion of Section 14Ain the Income Tax Act by Finance Act, 2001,details of which have already been noticed.Noticing the objects and reasons behindintroduction of Section 14A of the Act this Courtheld that: Expenses allowed can only be in respect ofearningoftaxableincome. In paragraph 17, this Court went on to observethat: Therefore, one needs to read the words"expenditure incurred" in Section 14A in thecontext of the scheme of the Act and, if so read,it is clear that it disallows certain expenditureincurred to earn exempt income from beingdeducted from other income which is includible inthe "total income" for the purpose ofchargeabilitytotax. The views expressed in Walfort Share and StockBrokers P. Ltd. (supra), in our considered opinion,yet again militate against the plea urged onbehalfoftheAssessee. 34. For the aforesaid reasons, the first questionformulated in the appeal has to be answeredagainst the Appellant-Assessee by holding thatSection 14A of the Act would apply to dividendincome on which tax is payable Under Section115-O of the Act. 7.Moreso, this court has already decided the issue in favour of the assessee. 8.Hence, no substantial question of law arises. 9.The appeal stands dismissed. (ASHOK KUMAR GAUR),J (K.S. JHAVERI),J Bmg/3