Mudaliar and Sons Hotels Pvt. Ltd. Vs ACIT (ITAT Mumbai)

amendment to section 14A by the Finance Act, 2022 for making disallowance even no exempt income is earned, is held to  be  prospective  in nature

Income Tax Appellate Tribunal (ITAT) Mumbai has ruled that the amendment to Section 14A of the Income Tax Act, 1961, introduced by the Finance Act, 2022, which allows for disallowances even when no exempt income is earned, is prospective in nature. This decision came in the case of Mudaliar and Sons Hotels Pvt. Ltd. vs. ACIT, where the assessee challenged disallowances made by the Assessing Officer (AO) under Section 14A for the assessment year 2013-14, during which no exempt income was earned.

The AO had disallowed expenses under Section 37(1) and Section 14A, arguing that the assessee had incurred expenses to earn exempt dividend income, despite no such income being realized. The ITAT, however, relied on the precedent set by the Delhi High Court in Era Infrastructure (India) Ltd., which held that the 2022 amendment to Section 14A is applicable only prospectively. Therefore, for assessment years prior to the amendment, disallowances under Section 14A can only be made if the assessee has earned exempt income.

In this case, since Mudaliar and Sons Hotels Pvt. Ltd. did not earn any exempt income during the relevant assessment year, the ITAT concluded that the disallowance made by the AO under Section 14A could not be sustained. The tribunal also addressed the disallowance under Section 37(1), which pertained to expenses claimed as business expenses. The AO had disallowed these expenses, arguing that the assessee had not shown any business income. The ITAT decided to restore this issue to the AO for verification, specifically to determine if the expenses were related to a business that had already commenced.

The ITAT’s ruling clarifies that the retrospective application of the 2022 amendment to Section 14A is not valid, reinforcing the principle that disallowances under this section require the presence of actual exempt income for periods prior to the amendment.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal by the assessee is directed against order dated 01.06.2023 passed by the Ld. Commissioner of Income-tax (Appeals) – National Faceless Appeal Centre, Delhi [in short ‘the Ld. CIT(A)’] for assessment year 2013-14, raising following grounds:

1. The Commissioner of Income-tax (Appeals) at the National Faceless Appeal Centre (hereinafter referred to as ‘the CIT(A)’) erred in confirming the order passed under section 143(3) of the Act by the Assistant Commissioner of Income- tax,  Circle  1(2)(2),  Mumbai  (hereinafter  referred  to  as ‘Assessing officer’) ignoring the facts, statutory provisions and judicial pronouncements and therefore the impugned appellate order is, to this extent, erroneous and b d in law.

2. On the facts and in the circumstances of the case and in law, the CIT(A) has erred in confirming the disallowance made by the Assessing Officer under section 37(1) of the Act of Rs 50,05,240 on account of expenses incurred by the appellants in the ordinary course of business by treating that the appellants have not carried on any business.

2.1 On the facts and in the circumstances of the case and in law, the CIT(A) and the Assessing Officer have erred in not appreciating that during the relevant assessment year, the  appellants  are  engaged  in  the  business  of  inter- corporate loans & advances and investments; and derived income from interest and sale of investments.

2.2 On the facts and in the circumstances of the case and in law, the CIT(A) and the Assessing Officer have erred in ignoring the fact  that the appellants  have suo-moto disallowed  expenses of Rs 78,97,583 under certain heads on  a  conservative  basis  following  a  consistent  practice which has been accepted year on year by the Assessing Officer.

2.3 On the facts and in the circumstances of the case and in law, the C1T(A) and the Assessing Officer have erred in making a disallowance  of  mandatory and statutory expenses incurred by the appellants which are necessary and expedient for running and protecting the interest of the business of  he appellants.

2.4 On the facts and in the circumstances of the case and in law, the CIT(A) and the Assessing Officer have failed to appreciate that Tax Audit Report (‘TAR’) is applicable only where business is carried on by the In doing so, the CIT(A) and the Assessing Officer also failed  to appreciate that the appellants have complied with all the statutory requirements and none of the expenses claimed by the appellants have been disallowed in the TAR.

2.5 Without prejudice  to  the  above,  on  the  facts  and circumstances  of  the  case  and  in  law,  CIT(A)  and  the Assessing  Officer  failed  to  appreciate  the  setled  legal position an binding judicial pronouncements  wherein  it has been categorically held  that statutory expenses  are allowable even when no business is carried assessee. on by an assessee.

3. On the facts and in the circumstances of the case and in law, the CIT(A) has erred in confirming the addition made by the Assessing Officer under section 14A of the Act read with Rule 8D(2)(ii) of the Income Tax Rules, Rules) of Rs 43,07,817 on account of expenses i the appellants in earning exempt income. 1982 the appellants in earning exempt income.

3.1 On the facts and in the circumstances of the case and in law, the CIT(A) and the Assessing Officer have erred in not appreciating that during the relevant assessment year, the appellants have not derived any exempt income.

3.2 Without prejudice to the above, once the Assessing Officer has 1,20,02,204 himself accepted that interest expense of Rs is directly relatable to interest income earned by the appellants, the CIT(A) and the Assessing Officer have grossly erred on the facts and in the circumstances of the case and in law, in holding that such interest expense has been incurred to earn notional exempt income conjectures and surmises.

4. On the facts and in the circumstances of the case and in law, the CIT (A) and the Assessing Officer have grossly erred in disallowing sum of Rs 43,07,817 under section 14A of  the  Act r.w.  Rule  8D  of  Rules resulting in  double  disallowance  since total remaining expenses of Rs 50,05,240 have already been  disallowed under section 37(1) of the Act.

2. At the outset, the counsel for the assessee submitted that initially the assessee filed appeal on 06.07.2023 which was within the limitation period, but in view of defects of non-verification of appeal by the Managing Director pointed out by the Registry, which was not removed by the assessee, the appeal was dismissed as non- maintainable  by  the  Bench  with  liberty  to  file  a  fresh  appeal. Subsequently, the assessee rectified the above defects and filed afresh appeal in prescribed form No. 36 duly verified by the Director of the company as there was no managing director in the Company. The Ld. counsel referred to the affidavit filed by the Director of the company explaining the delay of 204 days in filing the appeal. The Ld. counsel submitted that there is no malafide intention on the part of the assessee for the aforesaid delay and no benefit would accrue the assessee on account of not filing the fresh appeal within the due date.

2.4 We have heard rival submission of the parties on the issue of condonation    of    the    delay    in    filing    the    appeal. In view of  the sufficient cause explained by the assessee by way we feel it appropriate to condone the delay in filing admit the same for adjudication.

3. Briefly stated, facts of the case are that the assessee filed its return of income for the year under consideration on 30.11.2013 declaring total income at Rs. Nil. The return of income filed by the assessee was selected for scrutiny and statutory notices under the Income-tax Act, 1961 (in short ‘the Act’) were issued and complied with. In the scrutiny proceedings, the Assessing Officer noticed that the assessee company was engaged in the inter-corporate loans and advances and earned income only from interest. The Assessing Officer noticed following expenses amounting to Rs.2,49,05,027/- claimed by the assessee :

4. Further, the Assessing  Officer noticed  that  the assessee treated the entire interest income of Rs.1,63,68,105/- as income under the head “income from other sources” and claimed interest expenses (finance cost) of Rs.1,20,02,204/- as deduction u/s 57 of the Act. Out of the assessee disallowed and other expenses remaining expenses of Rs.1,29,02,823/-, the the expenses of depreciation of Rs.7,64,179/- of Rs.71,33,404/-, leaving balance expenses of Rs.50,05,240/- under the  head ‘profit and gains of business or profession’. The Assessing Officer however of the view that no income under the head ‘profit and gains of business or profession was offered by the assessee and therefore remaining expenses of Rs.50,05,240/- were also not in the nature of allowable expenses.

The   assessee  explaned  that  those    expenses    were   incurred  for maintaining property and for running day-to-day activity of the company, hence same should be allowed as business expenses. The Assessing Officer noticed      that assessee had not claimed  depreciation on property and therefore no asset was used for the purpose of    business. In view  of the discussion  made in the impugned  order,  the  Assessing  Officer  held  that  expenditure  of Rs.50,05,240/- was not incurred wholly and exclusively for the purpose of the business and therefore, he disallowed the same. The Assessing Officer further noticed that investment of Rs.14,47,89,975/- was made by the assessee towards assets for earning exempted dividend income, but no disallowance was made by the assessee and therefore, invoking Rule 8D of the Income-tax Rules, 1962 read with section 14A of the Act, The Assessing Officer made disallowance of Rs.46,69,792/-.

5. On further appeal, the  CIT(A)  upheld  both  the disallowances made by the Assessing Officer.

6. Before us, the counsel for the assessee filed a Paper Book containing pages 1 to 104.

7. The ground 1 of the appeal is general in nature and same is not required to  be  adjudicated  upon  specifically, accordingly same is dismissed as infructuous. The ground No. 2 to 2.5 of the appeal relate to disallowance of Rs.50,05,240/- invoking section 37(1) of the Act.

7.1 We have heard rival submissions of the parties and perused the relevant material on record. The detail of Rs.50,05,240/- is available on page 7 of the Ld. reference said details is reproduced as under:

7.2 On perusal of the above, we find that expenses of Rs.3,09,704/- pertains to rate and taxes (DMC) and expenses of Rs.8,03,853/- pertains to electricity and water expenses. The Ld. counsel before us submitted that those expenses are related to the property which was to be used for the purpose of lease. We find that the assessee has not demonstrated whether it was engaged in the business of lease of the property and whether said business was commenced during the year under consideration or not. Unless business     of    leasing    is    commenced,     no    expenses against said business could be allowed in the year under consideration. Before us,the    Ld.  counsel  for  the  assessee    submitted  that no such disallowance has been made in the preceding assessment years or in the    succeeding years,  therefore following the  rule of the consistency, no disallowance should be made in the year under consideration. Before us, the Ld. counsel has not demonstrated that the business of the  leasing was commenced in the year under  consideration, therefore, said expenses related to property are not allowable in the year under consideration. However, as far as the other expenses out of expenses of Rs.50,05,240/- are concerned, if those expenses pertain to the maintaining of corporate structure of the assessee after commencement of business activity, same are allowable to the assessee despite no business activity was carried out in the year under consideration. In view of the facts and circumstances of the case, we feel it appropriate to restore this issue    back    to   the    file    of   the    Assessing    Officer  for  verification whether the expenses of employee cost and other expenses were incurred in relation to business which had already commenced and allow the claim of expenses accordingly. The ground Nos. 2 to 2.5 of the appeal of the assessee are accordingly allowed for statistical purposes.

8. The ground 3 and 4 of the appeal relate to disallowance u/s 14A of the Act r.w.r. 8D of the Rules.

8.1 We have heard rival submissions of the parties on the issue in dispute and perused the relevant material on record. On perusal of the  records,  we  find  that  no  exempt  income  was earned  by  the assessee in the year under consideration. We also note that Hon’ble Delhi High Court in the case of Era Infrastructure (India) Ltd. 141 taxmann.com 289 (Delhi) held that amendment to section 14A by the Finance Act, 2022 for making disallowance even no exempt income is earned, is held to  be  prospective  in nature  and not applicable over the instant assessment year, therefore, being no exempted income in the year under consideration, the disallowance  made by the Assessing Officer cannot be sustained. The ground Nos. 3 and 4 of the appeal of the assessee are accordingly allowed.

9.  In the result, the appeal of the assessee is paartly allowed for statistical purposes.