SEMIT PHARMACEUTICALS & CHEMICALS PVT. LTD.,MUMBAI vs. DCIT, CC- 34 , MUMBAI

All the appeals filed by the assessee are barred by limitation by 655 days. The assessee has moved petitions requesting the bench to condone the delay. It is stated in the affidavit that the business operations were closed in the financial year 2015-16 and accordingly the office premises at Wadala was vacated. Since the financial conditions of the assessee deteriorated and the assessee defaulted in payments to be made to the creditors, many creditors filed winding up petition in various Courts across the Country. It is stated

The Ld A.R reiterated the submissions made in the affidavit and prayed for condoning the delay. He also relied upon a decision dated 11.3.2019 rendered by the co-ordinate bench in the case of M/s Shree Vijaylaxmi Trading Corporation vs. ITO in ITA No.674 & 675/Mum/2018, wherein the delay of 247 days before Ld CIT(A) was condoned. Accordingly, he prayed that a reasonable view may be taken on this preliminary issue. The Ld D.R, on the contrary, submitted that the delay is substantial and accordingly opposed the prayer of the assessee.

We heard the parties on this preliminary issue. We noticed that the assessee was facing financial difficulties and hence it had closed down its business. Subsequently, the assessee was operating from the premises belonging to its sister concern and the said sister concern also went into problems. In the decision of the co-ordinate bench relied upon by the assessee (supra), the Tribunal has taken support of the decision rendered by Hon’ble Supreme Court in the case of Collector, Land Acquisition vs. Mst. Katiji & Ors (1987)(167 ITR 471)(SC), wherein it was held that when

The facts relating to the case are stated in brief. The revenue carried out search and seizure operations in the hands sister concern of the assessee named M/s Elder Pharmaceuticals Ltd on 06-03-2012. On the very same day, the proceedings u/s 153C of the Act was initiated in the hands of the assessee for the above said years. The assessing officer completed the assessments u/s 143(3) r.w.s 153C in all the years under consideration by making addition u/s 14A of the Act. The addition so computed u/s 14A of the Act was also added by him for the purpose of computing book profit u/s 115JB of the Act. The assessee got partial relief before Ld CIT(A) and hence the assessee has filed appeals for AY 2006-07, 2008-09, 2010-11 and 2011- 12 challenging the addition u/s 14A sustained by Ld CIT(A) both under normal provisions of the Act and also u/s 115JB of the Act. The revenue has filed appeal in AY 2013-14 challenging the relief granted by Ld CIT(A) in respect of addition made u/s 14A of the Act. Hence the issue contested in all these appeals relate to the addition made u/s 14A of the Act.

The submission of the assessee is that the addition made u/s 14A of the Act is not based on any incriminating material. Further, the assessments of AY 2006-07, 2008-09 and 2010-11 would fall under the category of “unabated assessments” and hence the AO could not have made the above said addition u/s 14A of the Act in the absence of any incriminating material forwarded to him by the AO of the searched person.

It is also submitted that it is well settled proposition that the addition u/s 14A of the Act should not exceed the exempt income and hence the addition should be directed to be restricted to the amount of exempt income in respect of other two years.

With regard to the adoption of the amount of disallowance computed u/s 14A of the Act for the purpose of computing book profit u/s 115JB of the Act, the Ld A.R submitted that the same is not permissible in view of the decision rendered by the Special bench of Tribunal, Delhi in the case of Vireet Investments P Ltd (165 ITD 27)(Delhi –SB).

We heard the parties and perused the record. There is no dispute with regard to the fact that the Assessments relating to AY 2006-07, 2008-09 and 2010-11 fall under the category of “unabated assessments”. There is also no dispute that the department did not unearth any incriminating material relating to the addition to be made u/s 14A of the Act. Hence the AO, in the absence of any incriminating material relating to the above said addition, could not have made any addition in unabated assessment years. In support of the above said proposition, we rely upon the decision rendered by Hon’ble Bombay High Court in the case of Continental Corporation (Nhava Sheva) Ltd (2015)(58 taxmann.com 78)(Bom) and Gurinder Singh Bawa (2017)(79 taxmann.com 398)(Bom), wherein the Hon’ble Bombay High Court held that the unabated assessments (finalized assessments) cannot be touched by resorting to the provisions of sec.153A of the Act unless some incriminating materials relating to the said assessments, which are contrary to and/or not disclosed during regular assessment proceedings, are found.

The provisions of sec.153A of the Act provide for issuing of notice u/s 153A of the Act for six assessment years immediately preceeding the year of search and thereafter, the AO shall assess or reassess the total income for the above said six years. This section further provides that all pending

The above said view expressed by the Special bench has since been upheld by Hon’ble Bombay High Court in the case of Continental Warehousing Corporation (Nhava Sheva) Ltd (supra). The relevant observations made by Hon’ble Bombay High Court in the above said case are extracted below:-

Before proceeding further, we may now examine the provision contained in sub-section (2) of section 153, which has been dealt with by Ld. Counsel. It provides that if any assessment made under sub-section (1) is annulled in appeal etc., then the abated assessment revives. However, if such annulment is further nullified, the assessment again abates. The case of the Ld. Counsel is that this provision further shows that completed assessments stand on a different footing from the pending assessments because appeals etc. proceedings continue to remain in force in case of completed assessments and their fate depends upon subsequent orders in appeal. On consideration of the provision and the submissions, we find that this provision also makes it clear that the abatement of pending proceedings is not of such permanent nature that they cease to exist for all times to come. The interpretation of the Ld. Counsel, though not specifically stated, would be that on annulment of the assessment

The provision contained in section 132 (1) empowers the officer to issue a warrant of search of the premises of a person where any one or more of conditions mentioned therein is or are satisfied, i.e. - a) summons or notice has been issued to produce books of account or other documents but such books of account or documents have not been produced, b) summons or notice has been or might be issued, he will not produce the books of account or other documents mentioned therein, or c) he is in possession of any money or bullion etc. which represents wholly or partly the income or property which has not been and which would not be disclosed for the purpose of assessment, called as undisclosed income or property. We find that the provision in section 132 (1) does not use the word "incriminating document". Clauses (a) and (b) of section 132(1) employ the words "books of account or other documents". For harmonious interpretation of this provision with provision contained in section 153A, all the three conditions on satisfaction of which a warrant of search can be issued will have to be taken into account.

Having held so, an assessment or reassessment u/s 153A arises only when a search has been initiated and conducted. Therefore, such an assessment has a vital link with the initiation and conduct of the search. We have mentioned that a search can be authorised on satisfaction of one of the three conditions enumerated earlier. Therefore, while interpreting the provision contained in section 153A, all these conditions will have to be taken into account. With this, we proceed to literally interpret to provision in 153A as it exists and read it alongside the provision contained in section 132(1).

The provision comes into operation if a search or requisition is initiated after 31.5.2003. On satisfaction of this condition, the AO is under obligation to issue notice to the person requiring him to furnish the return of income of six years immediately preceding the year of search. The word used is "shall" and, thus, there is no option but to issue such a notice. Thereafter he has to assess or reassess total income of these six years. In this respect also, the word used is "shall" and, therefore, the AO has no option but to assess or reassess the total income of these six years. The pending proceedings shall abate. This means that out of six years, if any assessment or reassessment is pending on the date of initiation of the search, it shall abate. In other words pending proceedings will not be proceeded with thereafter. The assessment has now to be made u/s 153A (1)(b) and the first proviso. It also means that only one assessment will be made under the aforesaid provisions as the two proceedings i.e. assessment or reassessment proceedings and proceedings under this provision merge into one. If assessment made under sub-section (1) is annulled in appeal or other legal proceedings, then the abated assessment or reassessment shall revive. This means that the assessment or

The question now is - what is the scope of assessment or reassessment of total income u/s 153A (1)(b) and the first proviso ? We are of the view that for answering this question, guidance will have to be sought from section 132(1). If any books of account or other documents relevant to the assessment had not been produced in the course of original assessment and found in the course of search in our humble opinion such books of account or other documents have to be taken into account while making assessment or reassessment of total income under the aforesaid provision. Similar position will obtain in a case where undisclosed income or undisclosed property has been found as a consequence of search. In other words, harmonious interpretation will produce the following results :-

It may be mentioned here that Ld. Counsel for All Cargo Global Logistics Ltd. was questioned about the scope of pending assessments as it was his contention that all six assessments are to be made, if necessary, on the basis of undisclosed income discovered in the course of search. He was specifically questioned about the jurisdiction of the AO to make original assessment along with assessment u/s 153A, merging into one. However he took an evasive view submitting that this question need not be decided in his case although the question of jurisdiction u/s 153A was vehemently pressed on account of which ground No.1 in the appeal for assessment year 2004-05 was admitted as additional ground. He also wanted the additional ground to be retained in case of any future contingency."

The view expressed by Hon’ble jurisdictional Bombay High Court in the case of Continental Warehousing Corporation (Nhava Sheva) Ltd (supra) was reiterated by the Hon’ble Bombay High Court in yet another case of Gurinder Singh Bawa (2017)(70 taxmann.com 398) as under:-

Mr. Kotangale, the learned Counsel for the revenue very fairly states that the decision of the Special Bench of the Tribunal in Al-Cargo Global Logistics Ltd. was a subject matter of challenge before this Court as a part of the group of appeals disposed of as CIT v. Continental Warehousing Corporation (Nhava Sheva) Ltd. [2015] 374 ITR 645/58 taxmann.com 78/232 Taxman 270 (Bom.) upholding the view of the Special Bench of the Tribunal in Al- Cargo Global Logistics Ltd. Consequently, once an assessment has attained finality for a particular year i.e. it is not pending then the same cannot be subject to tax in proceedings under Section 153A of the Act. This of course would not apply if incriminating materials are gathered in the course of search or during proceedings under Section 153A of the Act which are contrary to and/or not disclosed during regular assessment proceedings.

In view of the above, on issue of jurisdiction itself the issue stands concluded against the revenue by the decision of this Court in Continental Warehousing Corpn. (Nhava Sheva) Ltd. (supra). In the appeal before us, the revenue has made no grievance with regard to the impugned order of the Tribunal holding that in law the proceedings under Section 153A of the Act are without jurisdiction. This in view of the fact that no assessments were pending, so as to abate nor any incriminating evidence was found. The grievance of the revenue is only with regard to finding in the impugned order on the merits of the individual claim regarding gifts and deemed dividend. However once it is not disputed by the revenue that the decision of this Court in Continental Warehousing Corporation (Nhava Sheva) Ltd. (supra) would apply to the present facts and also that there are no assessments pending on the time of the initiation of proceedings under Section 153A of the Act. The occasion to consider the issues raised on merits in the proposed questions becomes academic. 8. In the above view, the questions as framed in the present facts being academic in nature, do not give rise to any substantial question of law. Thus not be entertained.”

The co-ordinate bench has followed the above said binding decisions of jurisdictional High Court in the cases of Smt Anjali Pandit vs. ACIT (ITA

We may also gainfully refer to the decision rendered by Hon’ble Delhi High Court in the case of Kabul Chawla, wherein identical view was expressed. The Hon’ble Delhi High Court has summarized the legal position with regard to the provisions of sec.153A as under:-

On a conspectus of Section 153A(1) of the Act, read with the provisos thereto, and in the light of the law explained in the aforementioned decisions, the legal position that emerges is as under:

We shall now take the appeal filed by the assessee for AY 2011-12 and 2013-14. In these two years, the assessee earned exempt income of Rs.63,33,372/- and Rs.69,75,048/- respectively. The assessee suo motu disallowed a sum of Rs.63,33,372/- and Rs.4,61,74,060/- respectively. The AO computed disallowance at Rs.1,24,76,868/- and Rs.6,59,67,391/- respectively and accordingly added the difference amount. While computing book profit u/s 115JB of the Act, the AO added the above said amount of

The Ld CIT(A) granted any relief to the assessee in AY 2011-12. However, the Ld CIT(A) deleted the disallowance enhanced by the AO in AY 2013-14.

The common contention of the assessee in both the years is that the law on the disallowance u/s 14A of the Act is now well settled, i.e., the disallowance cannot exceed the amount of exempt income. In this regard, he placed reliance on the decision rendered by the co-ordinate bench in the case of M/s Elder Projects Ltd vs. DCIT (ITA No.815/Mum/2017 dated 14.11.2018), wherein the co-ordinate bench has held that the amount of disallowance cannot exceed exempt income. In this regard, the co-ordinate bench has followed the decision rendered by Hon’ble Punjab & Haryana High Court in the case of PCIT vs. M/s Empire Package P Ltd (ITA No.415 of 2015 dated 12.01.2016) and the decision rendered by Hon’ble Delhi High Court in the case of Joint Investment P Ltd (ITA No.117/15 dated 25.2.2015).

However, in AY 2013-14, the assessee himself has computed disallowance at Rs.4,61,74,060/- voluntarily, while the exempt income earned by the assessee was only Rs.69,75,048/- in that year.

In this context, it is important to refer to the judgment of the Hon’ble Madras High Court in the case of M/s.Marg Limited v. CIT in Tax Case Appeal Nos.41 to 43 & 220 of 2017 (judgment dated 30.09.2020). The Hon’ble Madras High Court followed the judgment of the Hon’ble Karnataka High Court in the case of Pargathi Krishna Gramin Bank v. JCIT[(2018) 95 taxman.com 41 (Kar.)]. In the case considered by the Hon’ble Madras High Court, the assessee therein had made voluntarily disallowance u/s 14A of the I.T.Act more than the dividend income earned and the Tribunal

We cannot approve even the larger disallowance proposed by the Assessee himself in the computation of disallowance under Rule 8D made by him. These facts are akin to the case of Pragati Krishna Gramin Bank (2018) 95 taxmann.com 41 (Kar.) decided by Karnataka High Court. The legal position, as interpreted above by various judgments and again reiterated by us in this judgment, remains that the disallowance of expenditure incurred to earn exempted income cannot exceed exempted income itself and neither the Assessee nor the Revenue are entitled to take a deviated view of the matter. Because as already noted by us, the negative figure of disallowance cannot amount to hypothetical taxable income in the hands of the Assessee. The disallowance of expenditure incurred to earn exempted income has to be a smaller part of such income and should have a reasonable proportion to the exempted income earned by the Assessee in that year, which can be computed as per Rule 8D only after recording the satisfaction by the Assessing Authority that the apportionment of such disallowable expenditure under Section 14A made by the Assessee or his claim that no expenditure was incurred is validly rejected by the Assessing Authority by recording reasonable and cogent reasons conveyed to Assessee and after giving opportunity of hearing to the Assessee in this regard.

We, therefore, dispose of the present appeal by answering question of law in favour of the Assessee and against the Revenue and by holding that the disallowance under Rule 8D of the IT Rules read with Section 14A of the Act can never exceed the exempted income earned by the Assesee during the particular assessment year and further, without recording the satisfaction by the Assessing Authority that the apportionment of such disallowable expenditure made by the Assessee with respect to the exempted income is not acceptable for reasons to be assigned the

Therefore, the AO is directed to restrict the disallowance u/s 14A of the Act to the amount of exempt income in both AY 2011-12 and 2013-14.

We notice that the AO also adopted the very same amount of disallowed u/s 14A of the Act for making addition under clause (f) of Explanation 1 to sec. 115JB of the Act for computing ‘Book Profit’ u/s 115JB of the Act and it was also confirmed by Ld CIT(A). It is well settled proposition that the disallowance computed u/s 14A is for the purpose of computing total income under normal provisions of the Act. The ‘Book Profit” is computed u/s 115JB of the Act on the basis of the Profit and Loss account computed under the provisions of the Companies Act, after making adjustments provided for in Explanation 1 to sec.115JB of the Act. Clause (f) of the said Explanation 1 states that the expenses incurred for earning exempt income should be added to the Net Profit. Hence the addition to be made under clause (f) is required to be computed on the basis of Profit and Loss account prepared under the Companies Act and accordingly, the Special bench in the case of Vireet Investments P Ltd (supra) held that the disallowance computed under Rule 8D r.w.s 14A of the Act cannot be imported in sec.115JB of the Act. Accordingly, we direct the AO to compute the addition to be made under clause (f) to Explanation 1 to sec.115JB of the Act on the basis of Profit and Loss account considered for the purposes of sec.115JB of the Act in both the years.

In the result, all the appeals filed by the assessee are allowed. The appeal of the revenue is dismissed.