PR COMMISSIONER OF INCOME TAX JAIPUR-II vs. M/S SPC INFRASTRUCTURE PVT LTD

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ITA/69/2017HC RajasthanRJHC02095268201720 February 20189 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that the issues were required to be answered in favour of the assessee and against the Department, based on the view taken by different High Courts as relied upon by the respondent (assessee). Specifically, regarding Section 14A, the court noted that disallowance is only permissible in relation to income that does not form part of the total income. If no exempt income was earned during the year, no disallowance under Section 14A can be made. The court also acknowledged that once account books are rejected, the AO cannot rely on entries within those books for making additions, and additions must be based on evidence and not surmises. The court found merit in the contentions raised by the assessee. Consequently, the appeal filed by the Revenue was dismissed.

What were the facts?

The assessee, M/s. SPC Infrastructure Pvt. Ltd., Jaipur, was subjected to scrutiny assessment under Section 143(3) for Assessment Year 2015. The Assessing Officer (AO) rejected the assessee's books of accounts and estimated net profit at 11.05%, leading to an addition of Rs. 3,22,94,264/-. The AO also made a disallowance of Rs. 7,84,190/- under Section 14A, an addition of Rs. 29,63,480/- under Section 40A(3), and additions of Rs. 80,00,000/- under Section 69B along with Rs. 1,39,000/- interest. The assessee appealed to the Commissioner of Income Tax (Appeals) and then to the Income Tax Appellate Tribunal (ITAT). The ITAT partly allowed the assessee's appeal. The Principal Commissioner of Income Tax, Jaipur-II, has filed the present appeal before the High Court challenging the ITAT's order.

What were the issues?

1. Whether, in law, the ITAT was correct in deleting the disallowance of Rs. 7,84,190/- made by the AO under Section 14A, without considering Department's Circular No. 5/2014 dated 11.02.2014? The Revenue argued that the ITAT erred in deleting the disallowance, especially in light of the AO's observation that the assessee had not disallowed any expenses related to exempt income and the Supreme Court's decision in Rajendra Prasad Modi. The Assessee contended that Section 14A disallowance is only applicable if there is exempt income, citing decisions like CIT vs. Shivam Motors (P) Ltd. and Redington (India) Ltd. vs. Additional CIT, which held that in the absence of tax-free income, corresponding expenditure cannot be disallowed. 2. Whether, in law, the ITAT was correct in deleting the additions made under Sections 69B and 69C based on documents found during a survey? The Revenue argued that the ITAT committed an error in allowing the assessee's appeal regarding these additions. The Assessee relied on CIT, Patiala vs. Dulla Ram, Labour Contractor, which stated that once account books are rejected in their entirety, the AO cannot rely on entries within those books for additions, and CIT vs. Hindustan Equipment (P) Ltd., which held that when a net profit rate is applied, there is no scope for further disallowance of expenditure. 3. Whether, in law, the ITAT was justified in deleting additions made under Section 40A by the AO based on documents found and impounded during a survey? The Revenue contended that the ITAT's view needed reversal and that expenses under Section 14A and Section 69B required serious consideration. The Assessee relied on CIT vs. Kulwant Rai, which held that additions based on surmises and guesswork, without the assessee being a party to an agreement found in possession, are not sustainable, referencing Dhakeswari Cotton Mills Ltd. v. Commissioner of Income Tax.

Which sections of the Income-tax Act were involved?

Section 14A,Section 69B,Section 69C,Section 40A(3),Section 143(3),Section 10(33),Section 57(iii),Section 68

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances
HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 69 / 2017 Pr. Commissioner of Income Tax, Jaipur-II, Jaipur. ----Appellant Versus M/s. SPC Infrastructure Pvt. Ltd., C-74, Ambabari, Jaipur. ----Respondent _____________________________________________________ For Appellant(s) : Mr. Prateek Kedawat & Mr. Prabhansh Sharma for Mr. R. B. Mathur For Respondent(s) : Mr. Sanjay Jhanwar with Ms. Archana _____________________________________________________ HON'BLE MR. JUSTICE K.S.JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS

JUDGMENT 20/02/2018

1.

By way of this appeal, the appellant has challenged the judgment and order of the Tribunal whereby the Tribunal has partly allowed the appeal of the assessee.

2.

This court while admitting the appeal on 18.07.2017 framed the following question of law:- “(I) Whether in the facts and circumstances of the case and in law, the ITAT was right in deleting the disallowance made by the Assessing Officer u/s. 14A of Rs. 7,84,190/- without considering Department’s Circular No. 5/2014 dated 11.02.2014. (ii) Whether in the facts and circumstances of the case and in law, in deleting the additions made u/s. 69B and 69C respectively on the basis of documents found during the course of survey. (iii) Whether in the facts and circumstances of the case the ITAT was justified in law and has not acted perversely in deleting additions made u/s. 40A by the Assessing Officer on the basis of documents found and impounded during the course of survey.?”

(2 of 9) [ITA-69/2017]

3.

The brief facts of the case are that the assessee was picked up for scrutiny assessment and the assessment under Section 143(3) of the IT Act, 1961 (hereinafter referred to as the Act) was framed vide order dated 27.03.2015. While framing the assessment, the AO rejected the books of accounts and estimated the net profit @ 11.05% thereby made an addition of Rs. 3,22,94,264/-. The AO also made disallowance by invoking provisions of Section 14A of Rs. 7,84,190/-. The AO made furhter disallowance and made addition of Rs. 29,63,480/- by invoking provisions of Section 40A(3) of the Act. Further, the AO made addition of Rs. 80,00,000/- by invoking provisions of Section 69B and Rs. 1,39,000/- interest accurred thereon.

4.

Counsel for the appellant has taken us to the order of the assessing officer wherein it has been observed as under:- “ From the investment of share only income which came arise is derivatives which is exempt from tax, therefore, investment will result in exempt income and accordingly provisions of Section 14A read with rule 8B are applicable in which it is clearly clarified that if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. Since the assessee has not disallowed any expenses, I am satisfied that the expenditure relating to exempt income/investment is required to be disallowed as per Rule 8D. Then even if, there is no exempt income from investment during the year, as per the decision of Hon’ble Supreme Court in the case of Rajendra Prasad Modi, there is no necessity of earning income during the year under attributing expenses relatable to such exempt income.”

5.

[ITA-69/2017] Tax, 2009(319) ITR 416: wherein it has been held as under:- “3. Smt Anuradha, learned Counsel for the appellant relied upon the decision reported in MANU/SC/0211/1978 : [1978]115ITR519(SC) (Commissioner of Income Tax v. Rajendra Prasad Mody) wherein, it is held that interest paid on money borrowed for investment in shares is deductible under Section 57(iii) of Income Tax Act, which requires that the expenditure must be laid out or expended wholly and exclusively for making or earning income. She also relied upon another decision in the case of The Commissioner of Income Tax-20 v. Smt. Sushila Devi Khadaria reported in 2009 TIOL 171 HC MUM-IT and submits that the orders passed by the assessing authority and the Tribunal are erroneous and contrary to the aforementioned decisions. Therefore, she submits that substantial question (i) and (ii) framed in the appeal memorandum arise for consideration of this Court and requested to set aside the order passed by the Tribunal. The substantial questions of law framed in the appeal are extracted as hereunder: (i) Whether or not the Tribunal was right in not allowing the interest incurred by the assessee as expenditure in computing income of the assessee? (ii) Whether or not the Tribunal was right in reversing the findings of the CIT(A), which was based on a Supreme Court's decision by relying on the decision of other Tribunals? (iii) Whether or not the Tribunal was justified in not affording an opportunity of hearing to the assessee before deciding the issue on hand by placing reliance on judgments, which were not cited by either side? (iv) Whether or not the Tribunal was right in relying on the decisions inapplicable to the facts on hand by distinguishing the decision of the Hon'ble Supreme Court, which is squarely applicable?

7.

The first appellate authority reversed the order of assessing authority by applying the decision in Rajendra Prasad Mody's case, referred to supra, which was rendered prior to introduction of Section 14A of the Act and which has no application to the fact situation. The Tribunal has rightly set aside the order of first appellate authority. It cannot be disputed that dividend

(4 of 9) [ITA-69/2017] income is exempted under Section 10(33) of the Act from the tax liability and the same cannot be computed for income under the head 'other sources'. Exempted income is not allowable for deduction in view of Section 14A of the Act In view of these two provisions, the claim of the assessee is wholly untenable and the decisions relied upon by the learned Counsel on behalf of the appellant are not applicable to the fact situation. “

6.

He further contended that the view taken by the Tribunal is required to be reversed and expenses which are done under Section 14-A of the Income Tax Act and 69-B are required to be viewed very seriously. He also contended that the Tribunal has seriously committed an error in allowing the appeal of the assessee.

7.

On the other hand, counsel for the respondent on question No.1 relied on the following decisions of different High Courts: (i) (Allahabad), it has been held as under:- “10. As regards the second question, s. 14A of the Act provides that for the purposes of computing the total income under the chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Hence, what s. 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of fact is that the assessee had not earned any tax-free income. Hence, in the absence of any tax-free income, the corresponding expenditure could not be worked out for disallowance. The view of the CIT(A). which has been affirmed by the Tribunal, hence does not give rise to any substantial question of law. Hence, the deletion of the disallowance of Rs. 2,03,752 made by the AO was in order.”

(5 of 9) [ITA-69/2017] (ii) 633 (Madras), it has been held as under:- “15. The exemption extended to dividend (MANU/SC/0493/1997 : 225 ITR 802)). The language of s. 14A (1) should be read in that context and such that it advances the scheme of the Act rather than distort it.” (iii) been held as under:- “22. In the impugned order, the ITAT has referred to the decision in Maxopp Investment Ltd. (supra) and remanded the matter to the AO for reconsideration of the issue afresh. The issue in Maxopp Investment Ltd. (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.

23.

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

(6 of 9) [ITA-69/2017] 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.” (iv) In Principal CIT vs. IL & FS Energy Development Company Ltd. (2017) 84 Taxmann.com 186 (Delhi), it has been held as under:- “22. It was suggested by Mr. Hossain that, in the context of section 57(iii), the Supreme Court

in CIT

v.

Rajendra

Prasad Moody MANU/SC/0211/1978 : [1978] 115 ITR 519 (SC) explained that deduction is allowable even where income was not actually earned in the assessment year in question. This aspect of the matter was dealt with by this court in Cheminvest Ltd. (supra) where it reversed the decision of the Special Bench of the Income-tax Appellate Tribunal by observing as under ( ITR) : "Since the Special Bench has relied upon the decision of the Supreme Court in Rajendra Prasad Moody (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 ( ITR) : 'What section 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 section 57(iii) and that purpose must be making or earning of income. Section 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that (7 of 9) [ITA-69/2017] the expenditure shall be deductible only if any income is made or earned. There is in fact nothing in the language of section 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 section 57(iii) irresistibly leads to the conclusion that to bring a case within 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 (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 (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."

23.

The decisions of the Income-tax Appellate Tribunal in Asst. CIT v. Ratan Housing Development Ltd. (supra) and Relaxo Footwears Ltd. v. Addl. CIT (supra), to the extent that they are inconsistent with what has been held hereinbefore do not merit acceptance. Further, the mere fact that in the audit report for the assessment year in question, the auditors may have suggested that there should be a disallowance cannot be determinative of the legal position. That would not preclude the assessee from taking a stand that no disallowance under section 14A of the Act was called for in the assessment year in question because no exempt income was earned.”

8.

Regarding question No.2 he relied on the following decisions: (i) Taxmann.com 349 (P & H), it has been held as under:- “10. An Assessing Officer may, while considering a return of income, inspect the account books

(8 of 9) [ITA-69/2017] and, if satisfied, that account books do not reflect the true income of an assessee, reject the same. Account books once rejected, are ruled out of consideration and cannot be pressed into service whether by the assessee or the revenue. Thus, when account books are rejected, it would follow, as a necessary corrolary, that entries in the account books whether suspicious or not cannot be relied by the revenue or the assessee. To hold otherwise, would, in essence, render account books valid for certain purposes and invalid for others, a course impermissible in law. The Assessing Officer rejected the account books in their entirety and thereafter proceeded to assess income by applying a flat rate of profit of 10%. After applying a flat rate of profit of 10%, the Assessing Officer added Rs.1,98,298/- to the income of the assessee on the basis of certain ‘entries’ deemed to be suspicious. The Commissioner of Income Tax (Appeals) as well as the Tribunal have rightly held that as books of account were rejected in their entirety the Assessing Officer could not rely upon any entry in the books of account for making an addition of Rs.1,98,298/-. A bare reading of Section 68 of the Act would reveal that it would not apply to a situation where account books have not (sic) been rejected.” (ii) taxmann.com 295 (Madhya Pradesh), it has been held as under:- “9. Having regard to the law laid down in the case of Purshottamlal Tamrakar (supra) and the fact that in the present case also net profit rate was applied we are of the view that when net profit rate was applied by the Assessing Officer there was no scope for further disallowance of any expenditure.” 9. as under:- “13. It is an admitted fact that the present assessed had not signed the agreement in question and since the assessed had not signed

(9 of 9) [ITA-69/2017] the agreement, no liability can be attributed qua that agreement towards the assessed since he is not party to the agreement till he had signed the same. The mere fact that this agreement was found in the possession of the assessed does not lead us anywhere. We find no hesitation in holding that this addition of Rs. 17,00,892/- made by Assessing Officer is based on surmises and guess work and on this point case of Dhakeswari Cotton Mills Ltd v. Commissioner

of Income Tax MANU/SC/0073/1954 : (1954) 26 ITR 775, may be referred to, in which held: In making

an assessment

under Section 23(3) of the Indian Income tax Act, the Income Tax Officer is not fettered by technical rules of evidence and pleadings, and he is entitled to act on material which may not be accepted as evidence in a court of law, but the Income Tax Officer is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all. There must be something more than bare suspicion to support the assessment under Section 23(3). The rule of law on this subject has been fairly and rightly stated by the Lahore High Court in the case of Seth Gurmukh Singh v. Commissioner of Income Tax, Punjab MANU/LA/0007/1944.”

10.

We have heard the learned counsel for the parties.

11.

Taking into consideration the view taken by different High Courts as relied by counsel for the respondent, the issues are required to be answered in favour of assessee and against the Department.

12.

The appeal stands dismissed. (VIJAY KUMAR VYAS)J. (K.S.JHAVERI)J. B.M.G/Gourav/45

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