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Income Tax Appellate Tribunal, DELHI
Before: SH. ANIL CHATURVEDI & SH. ANUBHAV SHARMA
The appeals have been filed by the Assessee and Revenue against order dated 05.07.2018 in appeal no. Del/CIT(A)-5/0167/2017-18 in assessment year 2015-16 passed by Commissioner of Income Tax (Appeals)-5, New Delhi (hereinafter referred to as the First Appellate Authority in short ‘Ld. F.A.A.’) in regard to the appeal before it arising out of assessment order dated 22.12.2017 u/s 143(3) of the Income Tax Act, 1961 passed by ACIT, Circle-13(2), New Delhi (hereinafter referred to as the Assessing Officer ‘AO’).
The facts in brief are that the return of income for A.Y. 2015-16 was furnished electronically by the assessee on 30.09.2015 by declaring loss of Rs. 2,58,31,000/- under normal provision and at book loss of Rs. 2,58,31,000/-. The case was selected for scrutiny under CASS and notice u/s 143(2) of the I.T.Act, dated 25.04.2016 was issued upon the assessee. The company was incorporated on 06.07.2010 and stated to be engaged in the infrastructure business providing consultancy services only as accounted for in books of accounts.
2.1 During the course of assessment proceedings assessee was asked to submit detailed note on applicability of Section 14A of the IT Act, 1961 in respect of company. However, after making submissions the assessee submitted that it hereby withdraw disallowances made u/s 14A earlier amounting to Rs. 6,40,890/-, as it had not earned dividend income and all the investments are in subsidiaries, for business and strategic. Accordingly request was made to Ld. AO to treat the disallowance u/s 14A at Nil following our above submissions.
2.2 Ld. AO observed that the assessee has made investments in equity shares. He relied the CBDT Circular No. 5/2014 dated 10.02.2014 conculded that the disallowance u/s 14A needs to be made in accordance with Rule 8D. He also observed that that substantial part of interest expense has been incurred for the purpose of earning income not includible in the total income, especially due to the complete absence of any justification or direct linkage of interest bearing funds not being used for the purpose of making investment and also considering the fact that had these investments not been made, the assessee company would not have raised additional interest bearing funds, the Ld. AO was not satisfied that the disallowance u/s 14A be made. Ld. AO also observed that it cannot be denied that a portion of Administrative and other expenses is also incurred for maintaining these investments in the form of man hours, use of common facilities like telephone, electricity, and other stationary etc. As such, the previsions of sub-section 2 of 14A were invoked for the purpose of determination of correct expenditure incurred in relation to the income not includible in the total income. The amount to be disallowed u/s 14A was worked out to be Rs,2,61,46,353/- (as per Rule 8D), and as the assessee has self disallowed u/s 14A amounting to Rs.6,40,890/- in its computation of income and hence the difference of Rs.2,55,05,465/- was disallowed u/s 14A and added to taxable income of the assessee.
2.3 The assessee vide letter dated 10-11-2017 had submitted additional claim with regard to expenditure on pro rata basis premium on redemption of convertible debentures amounting to Rs. 57,77,391/- for the period 01-02- 2015 to 31-03-2015.
2.4 Further, the assessee vide letter dated 14-12-2017 had also submitted that it has received losses amounting to Rs. 27,48,65,602/- of demerged undertaking (infrastructure business) as per the Demerged scheme approved by Allahabad High Court the same related to current as well as preceding years, which it has inadvertently not claimed earlier and submitted to allow the same during assessment proceeding.
In this regard, the Ld. AO observed that the assessee’s additional claims cannot be considered at this stage by relying on the Hon’ble Supreme Court judgment in Goetze (India) Ltd. Vs. Commissioner of Income Tax [2006 284 ITR 323 SC] as there is no provision under the Act to make amendment in the return without filing a revised return.
The Ld. CIT(A) has partly given relief to the assessee by restricting disallowance u/s 14A to Rs. 6,40,890/-. Ld. CIT(A) allowed the claim of assessee in regard to proportional premium on redemption of convertible debentures amount in Rs. 57,77,391/- while the claim of absorbed loss or depreciation of the demerged company to the extent relatable to the successor company was disallowed.
Accordingly, the revenue and assessee are both in appeal raising following grounds in the respective appeals :-
“ITA N0. 6632/Del./2018 of Assessee “1) (a) On the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in upholding the AO’s act of denying carry forward of brought forward losses of demerged undertaking of Rs, 27,48,65,602/- on the ground that the same was claimed through a letter during assessment proceedings and was not claimed in the return of income. On the facts and circumstances of the case and in law, the (b) lower authorities failed to appreciate that appellant was eligible to claim unabsorbed losses of demerged undertaking under the scheme of arrangement as sanctioned by the Hon’ble High Court of Allahabad. On the facts and circumstances of the case and in law, the Ld. (c) CIT(A) failed to appreciate that the provisions of section 139(3) are not impediment to the claim of appellant as original return was filed in time. On the facts and circumstances of the case and in law, the Ld. (d) CIT(A) erred in not entertaining the claim of brought forward losses specifically raised before him. On the facts and circumstances of the case and in iaw, the Ld. (e) CIT (A) has failed to appreciate that the purpose of assessment is correct determination of income and genuine claims of appellant cannot be denied on technical grounds. 2) (a) On the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in upholding Ao’s act of recomputing book loss when the provision of section 115JB are applicable to book profits and not to book loss. b) On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in upholding AO’s act of recomputing audited book loss when AO he has no power to do so. c) On the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in holding that sum of Rs. 6,40,890/- held by him to be disallowed u/s 14A while computing income under normal provisions of the act, would also be disallowed while computing book profit u/s 115JB. 3) (i) On the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in holding that a sum of Rs. 6,40,890/- would be disallowable u/s 14A since the same has been held suo motto disallowed by the appellant despite the fact that appellant had resiled from such disallowance. (ii) Without prejudice to the above and in alternative appellant prays that AO be directed not to make disallowance of Rs. 6,40,890/- u/s 14A made by appellant under erroneous understanding of legal position. 4) That the above grounds of appeal are mutually exclusive and without prejudice to each other 5) Appellant craves for grant of permission to add, alter, or withdraw any ground(s) of appeal at or any time before the hearing of appeal.” ITA N0. 6423/Del./2018 of Revenue
1. Whether the Ld. CIT(A) is justified on facts and law in restricting the disallowances under section 14A of the Act, from Rs. 2,55,05,465/- to Rs. 6,40,890/- by not considering a legal principle that allowability /disallowability of expenditure under the Act is not conditional upon the earning of the income as held by Hon’ble Supreme Court in the case of CITvs Rajendra Prasad Moody (1978) 115 ITR 519?
2. Whether CIT(A) is justified on facts and law in restricting the disallowance made under section 14A ignoring that the rule laid down by section 14A r.w. Rule 8D implies presumptive taxation and calculation of disallowance as per rule 8D is natural corollary to the disallowance made under section 14A of IT Act 1961.
3. CIT(A) has erred on facts by restricting the disallowance u/s 14A to the amount as suo moto disallowed by the assessee itself without verifying the basis of the said calculation and ignoring the calculation method as laid down in Rule 8D of IT Rules.
4. Whether CIT(A) is justified on facts and law in ignoring the CBDT circular no 5/2014 dated 10/12/14 which clearly dissociates disallowance made u/s 14A of IT Act and the exempted income earned during the year.
5. CIT (A) has erred on facts in reducing the income from 2,55,05,465 to 6,40,890 on account of disallowance under section 14A of IT Act 1961 which is to be included for calculation of book profit u/s 115J of IT Act, 1961.
6. CIT(A) has erred on facts & law in allowing claim of Rs. 57,77,391/- made by the assessee during assessment proceedings on account of proportional premium on redemption of convertible debentures without factual verification and corresponding fact examination.
7. CIT(A) has erred on facts & law in allowing claim of Rs. 57,77,391/- made by the assessee during assessment proceedings on account of proportional premium on redemption of convertible debentures, which is not in consonance with Hon’ble Apex Court’s order in the case of Goetze India Limited Vs CIT [2006,284 ITR 323 SC].
That the grounds of appeal
are without prejudice to each other.
9. That the appellant craves leave to add, alter, amend or forego any ground(s) of the appeal raised above at the time of hearing.”
Heard and perused the record.
Ld. DR submitted that there was no error in the assessment order and Ld. CIT(A) has failed to appreciate the reasoned order of ld. AO.
On the other hand, in reagard to ground no 2 and 3 Ld. AR submitted that when assessee had withdrawn suo moto disallowance the same could not have been considered by Ld. CIT(A) and as there was no exempt income earned no disallowance to u/s 14A could have been made.
7.1 In regard to remaining grounds, it was submitted that Ld. CIT(A) and Ld. AO both fallen in error in not considering the fact that the judgment of Hon’ble Supreme Court in the case of Goetze India Limited (supra) was in regard to any fresh claim. However, the assessee was only making a claim on the basis of demerged scheme approved by Hon’ble Allahabad High Court as per the Scheme of arrangement and it was not a claim independently out of operations of the assessee. It was also submitted the Ld. CIT(A) has failed to appreciate that provisions of Section 139(3) of the Act have no bearing to the present facts and circumstances as the original return under section 139(1) was filed in time. It was also submitted that there cannot be re computation of book loss by disallowing the disallowances u/s 14A while computing book profit u/s 115 JB of the Act.
8. The grounds raised in the respective appeals are determined with ground no. 2 and 3 of ITA No. 6632.Del.2018 are taken up together for discussion along with ground no. 1 to 5 in , as they are inter-connected and to avoid contradictory findings. In regard to these grounds it can be observed that in the assessment orders, itself, Ld. AO mentions the fact that during the assessment proceedings the suo moto disallowance of Rs. 6,40,890/- was withdrawn by the assessee submitting that there was no exempt income. The Ld. CIT(A) proceeded on this fact that there was no exempt income in the current year under reference however, Ld. CIT(A) erred in making the disallowances restriction to the suo moto amount ignoring that the same was withdrawn during the assessment proceedings by the assessee company. There can be no estoppel against law and when the settled proposition of law is that if there is no exempt income then there will be no disallowance u/s 14A. Ld. CIT(A) had relied the case law cited by the appellant in that regard. Thus, the suo moto disallowance could not have been made basis for restricting the relief once it stood withdrawn. Consequently, grounds deserve to be allowed in favour of the assessee.
Ground no. 6, 7 of appeal no. 6423/Del/2018 and grounds no. 1 of appeal no. 6632/Del/2018 are taken up together for discussion as they have common questions of facts and law involved and to avoid contradictory findings in regard to these issues it can be observed that the Ld. AO primarily influenced by the judgment of Hon’ble Supreme Court of India in Goetze India Limited case did not consider the claims. However, interestingly Ld. CIT(A) allowed the claim of assessee in regard to proportional premium on redemption of convertible debentures with following relevant findings :-
“4.4 Ground no. 3 is related to a claim of proportional premium on redemption of convertible debentures amounting to Rs. 57,77,391/-. The basic fact of this issue are that the predecessor company of the appellant had claimed a premium of Rs.
16,67,45,620/- in their ITR on a lump sum basis. Thereafter, it was decided that in view of a new accounting standards which was more appropriate to make a proportionate claim for this premium and spread it over the number of years in which such claim is made. It was submitted that in March 2007 the holding company was advised that the premium should be claimed on a pro rata basis during the tenure of debentures. This was based on the Supreme Court decision in the case of Madras Industrial investment Corporation ltd. 225 ITR 802. Further, the new ICDS notified on 29.09.2016 also stated that discount/ premium is a part of borrowing cost and should be amortised during the tenure of the borrowing. As a result of these facts the appellant due to the decision of the holding company was eligible to claim the proportionate amount of debentures premium which pertained to 01.02.2015 to 31.03.2015. The AO has not allowed this premium on the ground that it was not claimed in the original return. The appellant has also submitted that the original claim of the entire lump sum amount was in the hands of the predecessor company. After debiting the new accounting standards additional income was offered in the hands of the predecessor company and the claim was reduced substantially in the first year. It is clear that this premium has resulted to be debited in the present year due to circumstances which have developed after the appellant filing his return. Moreover, the premium constitutes only the amortization of an expenditure which was originally claimed as a lump sum amount in one year. Keeping all these facts in view the said deduction of Rs. 57,77,391/- corresponding to the premium related to the year under reference is liable to the appellant. The ground of appeal is allowed.”
10. However, the claim of unabsorbed losses or depreciation of the demerged company was disallowed with following relevant findings :-
“4.6 The appellant ahs stated that in view of the aforesaid provisions it is entitled to claim brought forward losses amounting to Rs. 27,48,65,602/- (to the extent they are relatable to the assessee company). It is, however, seen that this amount of loss was not claimed due to the error of the return preparer. During assessment proceedings, the appellant therefore filed revised claim of brought forward losses. The arguments of the appellant have been examined it is seen that the allowability for claim of brought forward loss is closely linked to the return filed u/s 139. The section139(3) provides for any assessee to file a loss return. There is, however, a strict stipulation in this provision that a return is required to be filed us/ 139(3) in case the appellant has to carry forward any loss incurred in the relevant assessment year. In the appellant's case it is not disputed that the loss was not claimed in the original return. It may be due to an error or over sought but the factual position relating to the claim of loss is not disputed that is to say that a claim of loss was not filed. This implies that a loss return as required u/s 139(3) was not filed. The subsequent claim / deduction may be permitted by the Appellate authorities but the scope of these deductions is not so large was as to over right the Act itself. Once the Act is very clear with reference to the claim of loss by filing a return u/s 139(3) and no return has been filed to claim the loss, such loss cannot be allowed at a later stage. The case laws quoted by the appellant are related to the claims of deduction and are not related to issues which are covered by direct provisions of the Income Tax Act. This ground of appeal is, therefore, dismissed.”
11. The bench is of considered opinion that Ld. CIT(A) has fallen in error in approbating and reprobating qua two issues while exercising his co- terminus powers. As appellate authority, he rightly went beyond the judgment of Hon’ble Supreme Court of India in Goetze India Limited case while allowing claim of proportional premium on redemption of convertible debentures while taking note of the Hon’ble Supreme Court judgement in Madras Industrial Investment Corporation Case but restraining to exercise, in case of claim with regard to unabsorbed losses or depreciation of the demerged company by taking rescue to provisions of section 139(3) of the Act, though both were not part of the original return and claim were rested during assessment by a letter only and not revised return.
Relevant here is to reproduce the operative part of the judgement dated 03.08.2015 at para 3(k) being part of part B of the scheme of merger in company petition no. 29/2015 and others of, Hon’ble Allahabad High Court, available at page no. 65 to 124 of the PB, as follows :
k. Upon the Scheme coming into effect on the Effective Date and with effect from the Appointed Date 1, all taxes of any nature, duties, cess or any other like payment or deductions made by the Demerged Company for payment to any statutory authorities such as income tax, service tax, value added tax etc. or any tax deduction or collection at source (including, inter alia, under Sections 40, 40A and 43B of the IT Act), service tax input credit receivables, in relation to the Demerged Undertaking] and relating to the period from the Appointed Date ] and up to the Effective Date shall be deemed to have been on account of or on behalf of or paid by the Resulting Company] and such deductions shall be eligible for deduction by the Resulting Company upon fulfillment of the conditions prescribed IT Act in relation thereto. Further, upon the Scheme coming into effect on the Effective Date and with effect from the Appointed Date I, all business losses and unabsorbed depreciation of the Demerged Company- relating to the Demerged Undertaking ] shall be treated as business loss and unabsorbed depreciation of the Resulting Company ] and shall be available to the Resulting Company ] to carry forward and set off against tax on future taxable income m accordance with the provisions of Section 72A of the IT Act
Ld. CIT(A) has fallen in error in observing that the assessee was required to file return u/s 139(3) to claim the loss of demerged company while failing to appreciate that the original return being return of loss was already filed by the assessee company. The claim of unabsorbed losses of depreciation of demerged company was not a claim arising out of operations of the assessee company but only consequential to the Hon’ble company court judgement. So the business losses and unabsorbed depreciation of the demerged company became statutory claim in the hands of assessee company. Thus Ld. AO could have taken note of the same even if original return of assessee was not revised. In any case, the limitations laid by Hon’ble Supreme Court of India in Goetze India Limited case were not applicable to Ld. CIT(A) but he failed to take note of it. Thus, the grounds in hand deserve to be allowed.
As a consequence of above discussion, the appeal of the assessee is 14. allowed while that of revenue is dismissed. Ld. AO shall allow the claim of unabsorbed losses or depreciation of the demerged company in present AY.
Order pronounced in the open court on 16th January, 2023.