THE PRINCIPAL COMMISSIONER OF INCOME TAX, VADODARA 1 vs. GUJARAT INDUSTRIES POWER COMPANY LTD.

This appeal is preferred under section 260A of the Income Tax Act, 1961 [for short ‘the Act, 1961’] by the revenue feeling aggrieved by the order dated 28.02.2022 passed by the Income Tax Appellate Tribunal, “D” Bench, Ahmedabad [for short ‘the Tribunal’] in C.O. No. 117/Ahd/2009 for A.Y. 2006-07. 2. The Tribunal passed a common order dated 28.02.2022 for A.Ys. 2003-04, 2006-07, 2007-08 and 2008-09 in case of the assessee-Gujarat Industries Power Company Limited in appeals and cross-objections filed before it. So far as present appeal is concerned, the following substantial questions of law are proposed: “(a) Whether on the facts and in the circumstances of the case and in law, the Hon’ble ITAT is justified in deleting the addition of Rs. 6,53,607/- being 10% of the exempt income of Rs. 65,36,070/- made by the Assessing Officer as per the provisions of Section 14A of the I.T.Act, ignoring the fact that the assessee has failed to prove that no expenditure has been incurred to earn the exempt income disclosed during the year under consideration? (b) Whether on the facts and in the circumstances of the case and in law, the Hon’ble ITAT is justified in deleting the addition of Rs. 3,13,108/- made on account of disallowance of claim of depreciation on Managing Director’s residence, without appreciating the fact that as per the Income Tax Rules the buildings which are used mainly for residential purpose except hotels and boarding houses are eligible for depreciation @ 5% whereas the assessee has claimed depreciation @ 10% on the Managing Director’s residence?”

The issue pertains to disallowance under section 14A of the Act, 1961. The assessee disclosed the tax free income of Rs. 65,36,070/- for assessment year 2006-07 comprising of dividend income and interest on tax free bond. However, there was no administrative expenses incurred since the tax free income was essentially passive income requiring no effort on the part of the assessee. The assessee also did not make an investment during the year in the assets yielding the tax free income. However, the Assessing Officer made ad-hoc disallowance of 10% on the exempt income under section 14A of the Act, 1961 amounting to Rs. 6,53,607/-.

The assessee being aggrieved by the additions made by the Assessing Officer preferred appeal before the CIT (Appeals). The CIT(Appeals), however, dismissed the appeal directing the Assessing Officer to adopt Rule 8D of the Income Tax Rules, 1962 [for short ‘the Rules, 1962’].

The Revenue therefore preferred appeal before the Tribunal being I.T.A. No. 1534/Ahd/2009 challenging the direction of the CIT (Appeals) to adopt Rule 8D of the Rules, 1962. The assessee

The Tribunal allowed the cross-objection filed by the assessee by deleting the addition under section 14A of the Act,1961 as per the decision of the Hon’ble Supreme Court in case of Tax reported in [2018] 91 Taxman.com 154 (SC) wherein it is held that Rule 8D is prospective in nature and could not have been made applicable in respect of the assessment year prior to 2007 as the said rule was inserted w.e.f. March 24, 2008 vide Income Tax (Fifth Amendment) Rules, 2008. 7. The Tribunal has also relied upon the decision of this Court in case of Commissioner of Income Tax-4 vs. Sintex Industries Ltd reported in [2017] 82 taxman.com 171 (Gujarat) wherein also it is held by this Court that the expenditure incurred in relation to income not includible in total income i.e. administrative expenses and where the assessee already had its own surplus funds against which minor investment was made, there was no question of making any disallowance of expenditure in respect of interest and administrative expenses under section 14A of the Act, 1961. 8. The Tribunal also referred to the decision in case of Principal Commissioner of Income Tax vs. India Gelatine & Chemicals Ltd reported in [2015] 376 ITR 553 (Guj) wherein it is observed that when the assessee had sufficient interest- free funds out of which concerned investment had been made, disallowance under section 14A is not justified. Accordingly, the Tribunal considering the facts of the case arrived at a finding that the direction given by the CIT (Appeals) to apply Rule 8D is not proper and there being the surplus funds invested by the assessee, no interest and administrative expenses can be disallowed under section 14A of the Act, 1961. The Tribunal accordingly deleted the addition made by the Assessing Officer under section 14A of the Act, 1961. 9. In view of the decisions of this Court in case of Sintex Industries Ltd (supra) and India Gelatine & Chemicals Ltd (supra) there is no illegal infirmity in the impugned order passed by the Tribunal while deleting the dis-allowance under section 14A of the Act, 1961. We are therefore of the opinion that no question of law much less any substantial question of law proposed or otherwise arises from the impugned order of the Tribunal. The Appeal accordingly stands dismissed. (N.V.ANJARIA, J) (BHARGAV D. KARIA, J) JYOTI V. JANI