No disallowance u/s 14A r.w. Rule 8D where no exempt income earned, despite investments capable thereof; 2022 Explanation to section 14A not retrospective.

ORDER

PER MANJUNATHA G., A.M :

The captioned appeals filed by the Revenue are directed against orders of the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre [in short “NFAC”], Delhi, all dated 25.06.2024, pertaining to the assessment years 2016-17, 2017-18 and 2018-19. Since the issues involved in all these appeals are identical, these appeals are clubbed, heard together and a common order is being passed for the sake of convenience as under. Facts are extracted from the appeal of the Revenue in ITA.No.828/Hyd/2024 for the assessment year 2016-17, being lead appeal.

2. The brief facts of the case are that the assessee company filed its return of income for the A.Y.2016-17 on 17.10.2016, admitting loss at Rs.1,19,39,478/- under normal provisions of Income Tax Act, 1961 (“the Act”) and book profit of Rs.Nil. The case was selected for scrutiny and during the course of assessment proceedings, the A.O. noticed that, the assessee company had shown investment of Rs.897.97 crores towards investment in unquoted equity shares of its subsidiaries as against Rs.834.34 crores in the last financial year. The dividend income from these investments is exempt. Therefore, the A.O. called upon the assessee to furnish the details of expenditure incurred in relation to the above investment and show cause as to why the provisions of section 14A r.w.Rule 8D of Income Tax Rules, 1962 shall not be invoked to disallow the expenditure. In response, the assessee company stated that all the investments made by the assessee company are long term strategic investments in the group companies only and no expenses had been incurred for maintaining the portfolio of the investment or for holding the same. The purpose of investment is not for earning dividend income, but having control and business purpose. The A.O., after considering the submissions of the assessee and also taking note of provisions of section 14A, observed that the expenditure incurred in relation to income, which does not form part of the total income shall not be allowed. Further, the provisions of section 14A also apply to the case, 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 as per section 14A(3) of the Act. The CBDT vide its Circular No.5 of 2014 dated 11.02.2014 clarified that the Rule 8D read with section 14A of the Act also provides for disallowance of expenditure, even where taxpayer in a particular year has not earned any exempt income. Therefore, held that the appellant has failed to file any evidence to prove that no expenditure has been incurred in relation to exempt income and thus, by taking net interest expenditure of Rs.3,84,42,000/-, has made disallowance u/s 14A r.w.r.8D of Rs,3,84,42,000/- and added back to the total income. The A.O. had also made similar adjustments to book profit computed u/s 115JB of the Act.

3. Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the Ld.CIT(A), the assessee submitted that the assessee has not earned any exempt income for the year under consideration and in the absence of any exempt income, the question of disallowance of expenses relatable to exempt income u/s 14A does not arise. In this regard, he relied upon the decision of ITAT Hyderabad in appellant‟s own case for the A.Y.2013-14 and 2014-15 in ITA No.1931 & 1932/Hyd/2017. The Ld.CIT(A), after considering the submissions of the assessee and also taking note