The Apex Court In [1]Maxopp Investment Ltd v. D. B. Realty Pvt. Ltd

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO. 344 OF 2018 Pr. Commissioner of Income Tax, Central-1, Mumbai….. AppellantVs.D.B. Realty Pvt. Ltd. ….. Respondent ….. Respondent Mr. Akhileshwar Sharma a/w Ms. Shilpa Goel, for Appellant.None for the Respondent. CORAM:K.R.SHRIRAM, J &FIRDOSH P. POONIWALLA, J.DATED :JUNE 28, 2023 P.C. 1.The Principal Commissioner of Income Tax, Central-1, Mumbai(‘PCIT’) has filed this appeal aggrieved by an order dated 20/02/2017passed by the Income Tax Appellate Tribunal (‘ITAT’) dismissing theappeal of the Revenue. Respondent is the assessee and this relates to theAssessment Year 2010-11. 2.Respondent was engaged in the business of construction,development and real estate. Respondent filed its return of income on30/09/2010 declaring loss of Rs. 86,50,349/-. Assessment order underSection 143(3) of the Income Tax Act, 1961 (‘the Act’) came to be passedon 28/03/2013 and the income came to be assessed at Rs.3,86,29,793/- after making disallowances of Rs. 4,05,42,608/- under Section 14A of theAct and of Rs. 67,37,534/- under Section 36(i)(iii) of the Act. Theassessed income thereafter was set off against carried forward business lossmaking the total income of respondent as nil. 3.Aggrieved by the said assessment order, respondent preferred anappeal to the Commissioner of Income Tax (Appeal)-36, Mumbai [CIT(A)].CIT(A) partly allowed the appeal of respondent and relied upon a decisiongiven by his predecessor in respondent’s own case in Assessment Year2009-10 and restricted disallowance at 5% of aggregate of expenditure,i.e., restricted to Rs.19,99,230/-. Aggrieved by this order, Revenuepreferred an appeal to ITAT. ITAT dismissed the appeal filed by Revenueby observing that the Assessing Officer (‘AO’) had computed disallowanceunder Rule 8D(2)(iii) at 0.5% of average value of investment. ITAT alsoobserved that CIT(A) noted that respondent had major portion ofinvestments only in subsidiary companies, associates concerns andpartnership firms in which respondent was a partner. The CIT(A) has takena view that the investments made by company are in the form of strategicinvestments and directed the AO to compute the disallowance at 5% of thefixed/semi variable expenditure incurred by respondent and there wasnothing wrong in the view expressed by CIT(A). 4.Respondent though served, as is evident from affidavit of service of Mr. Vijay Kumbhar affirmed on 26/11/2021, has not entered appearance. 5.Following substantial questions of law are proposed: (a) Whether on the facts and in the circumstances of thecase and in law the Hon’ble ITAT was justified in confirmingthe computation of disallowance of expenditure u/s. 14Aadopted by the CIT(A) without appreciating that thedisallowance u/s. 14A was required to be determinedaccording to Rule 8D of Income Tax Rules 1962 as had beendone by the Assessing Officer ?” (b) Whether on the facts and in the circumstances of thecase and in law disallowance of expenditure was required tobe made u/s. 14A in relation to the share income from thefirm received by the assessee as such share income isexempted under 10(2A) of the Act and whether suchdisallowance was required to be determined in accordancewith Rule 8D of the Income Tax Rules 1962?” (c) “Whether on the facts and in the circumstances of thecase and in law the Hon’ble ITAT was justified in notupholding the computation of the disallowance u/s. 14Amade by the assessing officer when the assessing officer hassimply accepted the computation made by the assessee?” (b) Whether on the facts and in the circumstances of thecase and in law disallowance of expenditure was required tobe made u/s. 14A in relation to the share income from thefirm received by the assessee as such share income isexempted under 10(2A) of the Act and whether suchdisallowance was required to be determined in accordancewith Rule 8D of the Income Tax Rules 1962?” (c) “Whether on the facts and in the circumstances of thecase and in law the Hon’ble ITAT was justified in notupholding the computation of the disallowance u/s. 14Amade by the assessing officer when the assessing officer hassimply accepted the computation made by the assessee?” (d) Without prejudice to the above, whether on the facts andin the circumstances of the case and in law the Hon’ble ITATwas justified in not itself correcting the computation of thedisallowance u/s. 14A of the Act read with rule 8D made bythe Assessing Officer or setting aside the assessment to thefile of the Assessing Officer to rework the disallowance u/s.14A read with Rule 8D if it had any reservation about thecomputation of disallowance u/s. 14A. (e) Whether on the facts and in the circumstances of the caseand in law, the order of the Hon’ble ITAT confirming theorder of the CIT(A) is not perverse when it specificallydisapproved the method of computation of disallowance u/s.14A adopted by the CIT(A)? 6.The Apex Court in [1]Maxopp Investment Ltd. Vs. Commissioner ofIncome Tax relied upon by Mr. Sharma has held that as per Section 14Ainserted by Finance (Amendment) Act, 2001, if expenditure is incurred onearning the dividend income, that much of the expenditure which isattributable to the dividend income has to be disallowed and cannot betreated as business expenditure. The Apex Court held that as per Section14A(1) of the Act, deduction of that expenditure is not to be allowed whichhas been incurred by assessee “in relation to income which does not formpart of the total income under this Act”. Axiomatically, it is thatexpenditure alone which has been incurred in relation to the income whichis includible in total income that has to be disallowed. If an expenditureincurred has no causal connection with the exempted income, then such anexpenditure would obviously be treated as not related to the income that isexempted from tax, and such expenditure would be allowed as businessexpenditure. To put it differently, such expenditure would then beconsidered as incurred in respect of other income which is to be treated aspart of the total income. Rule 8D provides for method for determiningamount of expenditure in relation to income not includible in total income. 7.In view of the judgment of the Apex Court in Maxopp InvestmentLtd.(supra), we hereby quash and set aside the order impugned passed 1(2018) 402 ITR 640 (SC) by ITAT and direct the AO to give effect to this order passed by us. TheAO shall strictly follow the law and formula laid down in MaxoppInvestment Ltd. (supra). Before passing any order, the AO shall givereasonable opportunity to assessee to show cause. 8.Appeal disposed. 9.We clarify that we have not made any observations on thecomputation part.computation part. (FIRDOSH P. POONIWALLA, J) (K.R.SHRIRAM, J)