PIL INDUSTRIES,MUMBAI vs. DCIT RG 8(2), MUMBAI

Briefly stated facts necessary for consideration and adjudication of the issues at hand are : the assessee company is into the business of manufacturing of readymade garments and trading of fabrics. During the years under consideration i.e. A.Y. 2010-11 and 2011-12 the assessee company filed return of income declaring total income at (-)Rs.65,80,229/- and (-)Rs.17,23,93,975/- for A.Y. 2010-11 & 2011-12 respectively, which was processed under section 143(1) of the Income Tax Act, 1961 (for short ‘the Act’). Subsequently, both the years were subjected to scrutiny. Notices under section 143(2) and 142(1) along with questionnaire were served upon the assessee company and in response to which the assessee company had filed submissions and details called for. Assessing Officer (AO) noticed from the audited financials of the & ors. 6 M/s. PIL Industries Ltd. (Formerly, Pantaloon Industries Ltd.) assessee company that it has earned dividend on shares amounting to Rs.1,36,26,121/- & Rs.93,87,160/- under the head “other income” for A.Y. 2010-11 & 2011-12 respectively which were claimed exempt under section 10 of the Act in its computation of income, without making any disallowance under section 14A of the Act. Declining the contentions raised by the assessee company the AO proceeded to make disallowance of an amount of Rs.20,18,46,419/- (-) Rs.6,06,853/- = Rs.20,12,39,566/- and Rs.14,63,97,149/- (-) Rs.99,64,159/- suo-moto disallowed = Rs.13,64,32,990/- for A.Y. 2010-11 and A.Y. 2011-12 respectively under section 14A read with rule 8D of the Act. The AO also made a disallowance of Rs.2161 + Rs.12 on account of delayed payment of employees’ contribution of Provident Fund (PF) and labour welfare fund respectively under section 36(1)(va) read with section 2(24)(x) of the Act. The AO thereby framed the assessment under section 143(3) of the Act.

The assessee carried the matter before the Ld. CIT(A) by way of filing appeals who has partly allowed the same by restricting the disallowance to the tune of Rs64857678/- and Rs.58636230/- for A.Y. 2010-11 & 2011-12 respectively. Feeling aggrieved with the impugned orders passed by the Ld. CIT(A) the Revenue as well as the assessee have come up before the Tribunal by way filing the present appeals as well as cross objections.

We have heard the Ld. Authorised Representatives of the parties to the appeal, perused the orders passed by the Ld. Lower Revenue Authorities and documents available on record in the light & ors. 7 M/s. PIL Industries Ltd. (Formerly, Pantaloon Industries Ltd.) of the facts and circumstances of the case and law applicable thereto.

Undisputedly, the assessee company has earned dividend income on shares to the tune of Rs.93,87,160/- and made suo-moto disallowance of Rs.6,06,853/- under rule 8D(2)(iii) on account of expenses relating to the exempt income. It is also not in dispute that the AO made disallowance by invoking rule 8D(2)(i), rule 8D(2)(ii) & rule 8D(2)(iii) to the tune of Rs.20,12,39,566/-. It is also not in dispute that during the assessment proceedings the assessee company has furnished a detailed working of suo-moto disallowance of Rs.6,06,853/- along with audited financials, which have been extracted by the AO in para 5.2 of the assessment order.

However, the AO without recording any valid satisfaction as required under section 14A(2) proceeded to reject the suo-moto disallowance by the assessee and further made the disallowance under section 14A in a mechanical manner as per notification No.45/2008 dated 24.03.2008.

Hon’ble Bombay High Court in case of PCIT vs. Bombay Stock Exchange Limited in of 2017 (Bombay HC) while deciding the identical issue held that non-acceptance of disallowance computed by the assessee has to be in accordance with provisions contained under section 14A(2) which is not a valid satisfaction by returning following findings: & ors. 8 M/s. PIL Industries Ltd. (Formerly, Pantaloon Industries Ltd.) “11. Non-satisfaction with the disallowance offered by the assessee has to be arrived at on the basis of the accounts submitted by the assessee. In this case, the Assessing Officer had not carried out the aforesaid exercise but rejected the disallowance claimed by the assessee only on the ground that it was not in accordance with Rule 8D of the Rules. The application of Rule 8D of the Rules would only arise once the Assessing Officer is not satisfied on an objective criteria in the context of its accounts, that suo motu disallowance claimed by the assessee is not proper. 12. In fact, the Supreme Court in the case of Maxopp Investment Ltd. v. CIT [2018] 91 taxmann.com 154/254 Taxman 325/402 ITR 640 while upholding the view of the Delhi High Court has held that the Assessing Officer needs to record his non-satisfaction having regard to the sou motu disallowances claimed by the assessee in the context of its accounts. It is only thereafter, the occasion to apply rule 8D of the Rules for apportionment of expenses can arise. 13. In the present facts, the Tribunal has correctly come to the conclusion that non-satisfaction as recorded by the Assessing Officer for rejecting the sou motu disallowances claimed by the assessee is not done as required under section 14A(2) of the Act. On facts, the view taken by the Tribunal is a possible view and calls for no interference.”

Hon’ble Supreme Court has also held in Maxopp Investment Ltd. vs. CIT 301 CTR 489 that only after recording satisfaction under section 14A(2) the provisions contained under rule 8D of the Rules for apportionment of expenses can be applied by returning following findings: “41. Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO.”

At the same time the Ld. CIT(A) also made disallowance under section 14A mechanically by making disallowance of Rs.4,05,390/- being 20% of the common administrative expenses of & ors. 9 M/s. PIL Industries Ltd. (Formerly, Pantaloon Industries Ltd.) Rs.20,26,953/- incurred by the assessee, which is again not in accordance with rule 8D(2).

In the given circumstances and following the decision rendered by Hon’ble Bombay High Court in case of Bombay Stock Exchange Ltd. (supra), decision rendered by Hon’ble Supreme Court in case of Maxopp Investment Ltd. (supra), disallowance made by the AO and further sustained by the Ld. CIT(A) is not sustainable in the eyes of law as the suo-moto disallowance made by the assessee has not been unsettled by the AO by recording dissatisfaction that audited working given by the assessee company is not correct in accordance with section 14A(2) of the Act. So the disallowance sustained by the Ld. CIT(A) is not sustainable in the eyes of law, hence ordered to be deleted and the AO is directed to accept the suo-moto disallowance of expenditure made by the assessee under section 14A read with rule 8D of the IT rules.

Consequently, ground No.1 of Revenue’s Appeal bearing is hereby dismissed and ground No.1 of assessee’s appeal bearing ITA No.1825/M/2015 is hereby allowed.

There is a delay of 42 days in filing the cross objection by the assessee which it sought to condone by moving an application supported with affidavit on the ground that one Mr. Virender Kumar who was handling taxation matters of the assessee company was frequently travelling due to some personal reasons and he & ors. 10 M/s. PIL Industries Ltd. (Formerly, Pantaloon Industries Ltd.) could not put up the paper in time and that delay in filing cross objection is nether intentional nor deliberate.

Keeping in view the law laid down by the Hon’ble Supreme Court in case of Land Acquisition Collector vs. MST Katiji & Others 167 ITR 471 (SC) wherein the Hon’ble Supreme Court has held that, “it is on contention of delay that when substantial justice and technical considerations are pitted against each other, the case of substantial justice deserves to be preferred, for the other side cannot claim to have a vested right in injustice being done because of a non deliberate delay”, we are of the considered view that in order to decide the issue once for all on merits and to stop the multiplicity of the proceedings non filing of the objections by the tax expert of the assessee company in time due to his travelling for personal reasons is a sufficient cause to condone the delay. Hence, the delay in filing the cross objection of 42 days is hereby condoned.

Undisputedly, the assessee company has earned exempt income to the tune of Rs.1,36,26,121/- during the year under consideration and made suo-moto disallowance of Rs.99,64,159/-. It is also not in dispute that during the year under consideration the assessee company has not made any fresh investment as is evident from the findings given by the Ld. CIT(A) in para 1.3.2 of the impugned order.

In the backdrop of the aforesaid undisputed facts when we examine the assessment order passed by the AO as discussed in the preceding para qua appeal pertaining to A.Y. 2010-11 the AO has mechanically invoked the provisions contained under section 14A & ors. 11 M/s. PIL Industries Ltd. (Formerly, Pantaloon Industries Ltd.) read with rule 8D of the Act without recording valid satisfaction. In view of what has been discussed above, we are of the considered view that law discussed in preceding para in case of Bombay Stock Exchange Ltd. (supra), Maxopp Investment Ltd. (supra) working of disallowance made by the assessee duly shown in its audited financials cannot be disturbed without recording valid satisfaction as required under section 14A(2) of the Act.

However, the Ld. CIT(A) directed the AO to re-compute the disallowance under section 14A read with rule 8D by taking into consideration the actual indirect expenses, which is again not in accordance with section 14A read with rule 8D of the Act. Because the assessee has come up with complete working as to earning the exempt income as well as to making suo-moto disallowance which has not been discussed by the AO by recording valid dissatisfaction.

However, during the course of argument the Ld. A.R. for the assessee contended that in such circumstances disallowance under section 14A read with rule 8D(2) cannot be more than exempt income and the assessee would be satisfied if disallowance is made equivalent to the amount of dividend earned by the assessee i.e. Rs.1,36,26,121/-. This proposition meted out by the Ld. A.R. for the assessee has not been disputed by the Ld. D.R. as it is settled principle of law that the disallowance in any case cannot be more than exempt dividend income. So the AO is directed to disallow an amount of Rs.1,36,26,121/- under section 14A which is equivalent to the exempt income earned by the assessee during the year under consideration. Consequently, ground No.1 raised by the Revenue

The AO disallowed an amount of Rs.2,173/- (Rs.2,161/- + Rs.12 on account of employees’ contribution of PF and labour welfare fund respectively) on the ground that the same has not been deposited prior to the due date prescribed under the Act. However, the Ld. CIT(A) deleted the addition on the ground that since the same has been deposited will before filing the return of income same cannot be disallowed.

However, now this issue has been settled by the Hon’ble Supreme Court in case of Checkmate Services P. Ltd. vs. CIT order dated 12.10.2022 wherein it is held that the assessee is not entitled for deduction on account of delayed payment of PF and ESI of employees’ contribution deposited after the due date prescribed under the Act by returning following findings: “51. The analysis of the various judgments cited on behalf of the assessee i.e., Commissioner of Income-Tax v. Aimil Ltd.; Commissioner of Income-Tax and another v. Sabari Enterprises; Commissioner of Income Tax v. Pamwi Tissues Ltd.; Commissioner of Income-Tax, Udaipur v. Udaipur Dugdh Utpadak Sahakari Sandh Ltd. and Nipso Polyfabriks (supra) would reveal that in all these cases, the High Courts principally relied upon omission of second proviso to Section 43B (b). No doubt, many of these decisions also dealt with Section 36(va) with its explanation. However, the primary consideration in all the judgments, cited by the assessee, was that they adopted the approach indicated in the ruling in Alom Extrusions. As noticed previously, Alom Extrutions did not consider the fact of the introduction of Section 2(24)(x) or in fact the other provisions of the Act. 52. When Parliament introduced Section 43B, what was on the statute book, was only employer’s contribution (Section 34(1)(iv)). At that point in time, there was no question of employee’s contribution being considered as part of the employer’s earning. On the & ors. 13 M/s. PIL Industries Ltd. (Formerly, Pantaloon Industries Ltd.) application of the original principles of law it could have been treated only as receipts not amounting to income. When Parliament introduced the amendments in 1988-89, inserting Section 36(1)(va) and simultaneously inserting the second proviso of Section 43B, its intention was not to treat the disparate nature of the amounts, similarly. As discussed previously, the memorandum introducing the Finance Bill clearly stated that the provisions –especially second proviso to Section 43B - was introduced to ensure timely payments were made by the employer to the concerned fund (EPF, ESI, etc.) and avoid the mischief of employers retaining amounts for long periods. That Parliament intended to retain the separate character of these two amounts, is evident from the use of different language. Section 2(24)(x) too, deems amount received from the employees (whether the amount is received from the employee or by way of deduction authorized by the statute) as income - it is the character of the amount that is important, i.e., not income earned. Thus, amounts retained by the employer from out of the employee’s income by way of deduction etc. were treated as income in the hands of the employer. The significance of this provision is that on the one hand it brought into the fold of “income” amounts that were receipts or deductions from employees income; at the time, payment within the prescribed time – by way of contribution of the employees’ share to their credit with the relevant fund is to be treated as deduction (Section 36(1)(va)). The other important feature is that this distinction between the employers’ contribution (Section 36(1)(iv)) and employees’ contribution required to be deposited by the employer (Section 36(1)(va)) was maintained - and continues to be maintained. On the other hand, Section 43B covers all deductions that are permissible as expenditures, or out-goings forming part of the assessees’ liability. These include liabilities such as tax liability, cess duties etc. or interest liability having regard to the terms of the contract. Thus, timely payment of these alone entitle an assessee to the benefit of deduction from the total income. The essential objective of Section 43B is to ensure that if assessees are following the mercantile method of accounting, nevertheless, the deduction of such liabilities, based only on book entries, would not be given. To pass muster, actual payments were a necessary pre-condition for allowing the expenditure.

This proposition of law has not been controverted by the Ld. A.R. for the assessee also. Consequently ground Nos.2 & 3 of Revenue’s appeal bearing for A.Y. 2011-12 are hereby allowed. & ors. 15 M/s. PIL Industries Ltd. (Formerly, Pantaloon Industries Ltd.)

The Ld. CIT(A) confirmed the adjustment of Rs.20,18,46,419/- and Rs.2,65,160/- made by the AO on account of disallowance under section 14A and on account of provision of doubtful debts respectively which is under challenge before the Tribunal.

By now it is settled principle of law as per order passed by the Special Bench of the Tribunal in case of Vireet Investment cited as 165 ITD 27 that disallowance if any made by the AO under section 14A read with rule 8D while computing the book profit under section 115JB of the Act is not sustainable in the eyes of law, hence ordered to be deleted. So ground No.3 raised by the assessee is hereby allowed.

In view of what has been discussed above, appeal filed by the Revenue bearing for A.Y. 2010-11 is hereby dismissed and appeal filed by the assessee bearing ITA No.1825/M/2015 for A.Y. 2010-11 is partly allowed and cross objections filed by the assessee are also partly allowed and appeal filed by the Revenue bearing ITA No.2566/M/2015 is partly allowed. Order pronounced in the open court on 23.01.2023.