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Income Tax Appellate Tribunal, SURAT BENCH, SURAT
Before: SHRI PAWAN SINGH, Honble & Dr ARJUN LAL SAINI, Honble
सुनवाईकीतारीख/ Date of hearing: 01.10.2020 उ�घोषणाक�तार�ख/Pronouncement on: 09.10.2020 आदेश /O R D E R
Per Pawan Singh, Judicial Member:
This appeal by the Assessee is directed against the order of Ld. Commissioner of Income Tax (Appeals)-2, Surat dated 09.11.2016, which in turn arise from assessment order under section 143(3) dated 15.01.2016 for the assessment year 2013-14. The assessee has raised following grounds of appeal: “1. The C.I.T.(Appeals) erred in law and on facts in confirming an addition of Rs.3,11,536/- made by Assessing Officer u/s.36(1)(va) of the I.T.Act, 1961.
2. The C.I.T.(Appeals) erred in law and on facts in confirming an addition of Rs.90,637/- made by Assessing Officer u/s.40(a)(ia) of the I.T.Act, 1961 being interest paid to NBFC Kotak Mahindra Pvt. Ltd. Sach Electro Mech Pvt. Ltd., Vs. ITO, Ward-2(1)(2), Surat A.Y. 2013-14
3. The CI.T.(Appeals) erred in law and on facts in confirming an addition of Rs.1,27,628/- being interest paid on late payment of TDS u/s.37 of the I.T. Act, 1961.
4. The C.I.T. (Appeals) erred in law and on facts in confirming an addition of Rs.61,883/- made by Assessing Officer u/s.14A.”
Brief facts of the case are that the assessee is engaged in the business of electrical installation and commissioning activities. The assessee filed its return of income for the assessment year under consideration on 03.10.2013 declaring total income at Rs.96,72,140/-. The case was selected for scrutiny. The assessing officer while passing the assessment order, made addition on under section 36(1)(va) of Rs. 3,11,536/-, disallowed Rs. 90,637/- being the payment of interest to the Kotak Mahindra Prime Ltd., disallowed Rs.1,27,628/- the interest paid on late payment of TDS under section 37 and disallowance of Rs.61,883/- under section 14A of the Act. On appeal before ld. CIT(A), the action of the A.O. was upheld.
Being aggrieved, the assessee filed appeal before this Tribunal. 4. We have heard the submissions of learned authorized representative (Ld. AR) of the assessee and the learned departmental representative (Ld. DR) for the revenue and perused the orders of the lower authorities. The ld.AR of the assessee submitted that the ground no.1 raised by the assessee is covered against the assessee in the decision of the Hon'ble Gujarat High Court in the case of Gujarat State Road Transport Corporation, dated 13.01.2014 in 366 ITR 170 (Gujarat), wherein it was held that section 43B of the Act is 2 Sach Electro Mech Pvt. Ltd., Vs. ITO, Ward-2(1)(2), Surat A.Y. 2013-14 not applicable for the delayed payments of employees contribution to PF as u/s.36(1)(va) r.w.s 2(24)(x) of the Act
On the other hand, the ld. Departmental Representative (DR) agreed with the submission of the ld.AR of the assessee. The Ld. DR for the revenue submits that the appeal may be dismissed.
We have considered the submissions of the Ld. Representative of the parties and perused the order of the lower authorities. The assessing officer (A.O.) while passing the assessment order noted that the assessee deposited employee contributions of Provident Fund and ESI after due date of deposit prescribed under the relevant statutory provisions of laws. The A.O. after issuing show cause notice to the assessee made addition of Rs. 3,39,286/- under section 36(1)(v) read with section 2(24)(x) of the Act. On appeal before learned Commissioner (Appeals) the action of A.O. was upheld. Before us the Ld. AR for the assessee fairly agreed that the issue is covered by the decision of Hon'ble Gujarat High Court in the case of CIT Vs Gujarat State Road Transport Corporation, reported (2014) 41 taxmann.com 100/(366 ITR 170) (Supra). Considering the submissions of the parties that the issue raised in present appeal is covered by the decisions of Hon'ble Jurisdictional High Court in CIT Vs GSRTC (supra) wherein it was held that sec. 43B of the Act is not applicable for the delayed payments of employees contribution to PF as under section 36(1)(va) r.w.s 2(24)(x) of the Act. In the light of Sach Electro Mech Pvt. Ltd., Vs. ITO, Ward-2(1)(2), Surat A.Y. 2013-14 above discussion and facts and circumstances and judicial decision Hon`ble High Court we upheld the addition made by the ld.AO, accordingly appeal of the assessee is dismissed. In the result, Ground No.1 of the appeal is dismissed. 7. Ground No.2 relates to interest paid to NBFC Kotak Mahindra Pvt. Ltd., and the ld. AR for the assessee submits that the recipient of the interest has paid tax on the interest, therefore this ground of appeal
may be restored to the file of the Assessing Officer (AO) for verification of facts, if the recipient has paid tax on the interest received by them than the AO be directed not to made the addition against the assessee.
8. On the other hand, the ld. DR for the revenue submits that this issue may be restored to the file of the ld.AO for verification of facts and to pass the order, in case the recipient has not paid the tax on the interest, the disallowance be sustained.
9. Considering the submissions by both the parties and the fact the ld.AR of the assessee submitted that recipient has already paid tax on the interest received, therefore, we restore the issue to the file of the AO to verify the facts if the recipient had paid the tax on the interest paid by the assessee, no disallowance be made against the assessee. Therefore, the A.O. is directed to verify the facts and pass the order afresh in accordance with Law. The assessee is directed to provide all necessary information and documents to the AO, accordingly this ground no.2 is allowed for statistical purpose. 4 Sach Electro Mech Pvt. Ltd., Vs. ITO, Ward-2(1)(2), Surat A.Y. 2013-14 10. In the result, Ground No.2 of the assessee is allowed for statistical purposes.
11. Ground No. 3 relates to disallowance of interest paid on TDS. The Ld. AR for the assessee submits that the interest paid by the assessee is not a penalty and compensatory in nature and is allowable deduction under section 37 of the Act. In support of his submissions the Ld. AR for the assessee relied on the decision of Hon'ble Apex Court in Prakash Cotton Mills [(1993) 201 ITR 684 SC].
On the other hand the Ld. DR for the revenue supported the order of lower authorities.
We have considered the rival submissions of the parties and have gone through the orders of the lower authorities. The A.O. disallowed Rs. 127,621/- being interest debited to profit and loss account as interest on TDS by taking view that this amount is inadmissible under section 37 of the Act. The Ld. CIT(A) affirmed the action of AO by holding that interest paid on TDS is penal interest and was rightly disallowed by AO. The Hon’ble Apex Court in Prakash Cotton Mills Vs CIT (supra) held that whenever any statutory impost paid by an assessee by way of damages or penalty or interest is claimed as an allowable expenditure under section 37(1), the assessing authority is required to examine the scheme of the provisions of the relevant statute providing for the payment of such impost notwithstanding the nomenclature of the impost as 5 Sach Electro Mech Pvt. Ltd., Vs. ITO, Ward-2(1)(2), Surat A.Y. 2013-14 given by the statute, to find whether it is compensatory or penal in nature. The authority has to allow deduction under section 37(1) wherever such examination reveals the concerned impost to be purely compensatory in nature. Considering the fact that the assessee has paid interest of TDS, which is statutory impost, paid by the assessee and is compensatory in nature and thus is allowable deduction. Hence, we direct the AO to allow the interest paid by assessee on TDS. In the result, the ground No. 3 is allowed.
Ground No.4 relates to disallowance u/s.14A of the Act. The ld.AR of the assessee submits that during the financial year relevant to the assessment period under consideration, the assessee has not shown any exempt income, therefore there should not be any disallowance under section 14A of the Act.
On the other hand, the ld. DR relied upon the order of the Lower Authorities.
We have heard both the submissions and gone through the order of the lower authorities. The A.O.
17. The Hon'ble Delhi High Court in Cheminvest Ltd. v. CIT [[2015] reported viz; 378 ITR 33/234 Taxman 761/61 taxmann.com 118 (Delhi)], Hon'ble Delhi High Court has, on this issue, observed as follows:
15. Turning to the central question that arises for consideration, the Court finds that the complete answer is provided by the decision of this Court in CIT v. Holcim India (P.) Ltd. [2015] 57 taxmann.com 28. In that case a similar question arose, viz., whether the ITAT was justified in deleting the disallowance under Section 14A of the Act 6 Sach Electro Mech Pvt. Ltd., Vs. ITO, Ward-2(1)(2), Surat A.Y. 2013-14 when no dividend income had been earned by the Assessee in the relevant AY? The Court referred to the decision of this Court in Maxopp Investment Ltd's. case (supra) and to the decision of the Special Bench of the ITAT in this very case i.e. Cheminvest Ltd. v. ITO [2009] 121 ITD 318. The Court also referred to three decisions of different High Courts which have decided the issue against Revenue. The first was the decision in CIT v. Lakhani Marketing Inc . [2014] 226 Taxman 45/49 taxmann.com 257 of the High Court of Punjab and Haryana which in turn referred to two earlier decisions of the same Court in CIT v. Hero Cycles Ltd. [2010] 323 ITR 518/189 Taxman 50 and CIT v. Winsome Textile Industries Ltd . [2009] 319 ITR 204. The second was of the Gujarat High Court in CIT v. Corrtech Energy (P.) Ltd. [2014] 223 Taxman 130/45 taxmann.com 116 and the third of the Allahabad High Court in CIT v. Shivam Motors (P.) Ltd . [2015] 230 Taxman 63/55 taxmann.com 262. These three decisions reiterated the position that when an Assessee had not earned any taxable income in the relevant AY in question corresponding expenditure could not be worked out for disallowance."
16. In Holcim India (P.) Ltd's. case (supra), the Court further explained as under: "15. Income exempt under Section 10 in a particular assessment year, may not have been exempt earlier and can become taxable in future years. Further, whether income earned in a subsequent year would or would not be taxable, may depend upon the nature of transaction entered into in the subsequent assessment year. For example, long term capital gain on sale of shares is presently not taxable where security transaction tax has been paid, but a private sale of shares in an off market transaction attracts capital gains tax. It is an undisputed position that respondent assessee is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to management. Possibility of sale of shares by private placement etc. cannot be ruled out and is not an improbability. Dividend may or may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend. When declared, it is subjected to dividend distribution tax."
On facts, it was noticed in Holcim India (P.) Ltd's. case (supra) that the Revenue had accepted the genuineness of the expenditure incurred by the Assessee in that case and that expenditure had been incurred to protect investment made.
Sach Electro Mech Pvt. Ltd., Vs. ITO, Ward-2(1)(2), Surat A.Y. 2013-14 18. In the present case, the factual position that has not been disputed is that the investment by the Assessee in the shares of Max India Ltd. is in the form of a strategic investment. Since the business of the Assessee is of holding investments, the interest expenditure must be held to have been incurred for holding and maintaining such investment. The interest expenditure incurred by the Assessee is in relation to such investments which gives rise to income which does not form part of total income.
19. In light of the clear exposition of the law in Holcim India (P.) Ltd's. case (supra) and in view of the admitted factual position in this case that the Assessee has made strategic investment in shares of Max India Ltd.; that no exempted income was earned by the Assessee in the relevant AY and since the genuineness of the expenditure incurred by the Assessee is not in doubt, the question framed is required to be answered in favour of the Assessee and against the Revenue.
Since the Special Bench has relied upon the decision of the Supreme Court in Rajendra Prasad Moody's case (supra), it is considered necessary to discuss the true purport of the said decision. It is noticed to begin with that the issue before the Supreme Court in the said case was whether the expenditure under Section 57(iii) of the Act could be allowed as a deduction against dividend income assessable under the head "income from other sources". Under Section 57(iii) of the Act deduction is allowed in respect of any expenditure laid out or expended wholly or exclusively for the purpose of making or earning such income. The Supreme Court explained that the expression "incurred for making or earning such income', did not mean that any income should in fact have been earned as a condition precedent for claiming the expenditure. The Court explained: "What s. 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of s. 57(iii) and that purpose must be making or earning of income. s. 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There is in fact nothing in the language of s. 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the language of s. 57(iii) irresistibly leads to the conclusion that to bring a case within 8 Sach Electro Mech Pvt. Ltd., Vs. ITO, Ward-2(1)(2), Surat A.Y. 2013-14 the section, it is not necessary that any income should in fact have been earned as a result of the expenditure."
There is merit in the contention of Mr. Vohra that the decision of the Supreme Court in Rajendra Prasad Moody's case (supra) was rendered in the context of allowability of deduction under Section 57(iii) of the Act, where the expression used is 'for the purpose of making or earning such income'. Section 14A of the Act on the other hand contains the expression 'in relation to income which does not form part of the total income.' The decision in Rajendra Prasad Moody's case (supra) cannot be used in the reverse to contend that even if no income has been received, the expenditure incurred can be disallowed under Section 14A of the Act.
In the impugned order, the ITAT has referred to the decision in Maxopp Investment Ltd's. case (supra) and remanded the matter to the AO for reconsideration of the issue afresh. The issue in Maxopp Investment Ltd's. case (supra) was whether the expenditure (including interest on borrowed funds) in respect of investment in shares of operating companies for acquiring and retaining a controlling interest therein was disallowable under Section 14A of the Act. In the said case admittedly there was dividend earned on such investment. In other words, it was not a case, as the present, where no exempt income was earned in the year in question. Consequently, the said decision was not relevant and did not apply in the context of the issue projected in the present case.
In the context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression 'does not form part of the total income' in Section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year.
In view of the above discussions, and considering the fact the A.O. has not identified any exempt income earned by the assessee during the year, thus the A.O. was not justified in making disallowance under section 14A.
In the result ground No. 4 of the appeal is allowed. 9 Sach Electro Mech Pvt. Ltd., Vs. ITO, Ward-2(1)(2), Surat A.Y. 2013-14 20. In the result appeal of the assessee is partly allowed.
Order pronounced on 09-10-2020 as per Rule 34 of Income Tax (Appellate Tribunal Rules -1963).