M/S VIJAY SOLVEX LTD vs. INCOME TAX APPELLATE TRIBUNAL and ORS

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ITA/90/2016HC RajasthanRJHC02055897201604 August 20174 pages
AI SummaryAllowed

What did the High Court hold?

The High Court held that the issue is covered by the decision of the Supreme Court in Godrej & Boyce Manufacturing Company Ltd. vs. Deputy Commissioner of Income Tax (2017) 81 taxmann.com 111 (SC). The Supreme Court held that for attracting Section 14A(1), proof of expenditure incurred in earning dividend income is required. Earlier to the introduction of Sub-sections (2) and (3) of Section 14A, the Assessing Officer had to determine this in his best judgment. In the cited case, the Revenue failed to establish any nexus between the expenditure disallowed and the earning of dividend income. The Court noted that Rule 8D prescribes a formula for determination of expenditure where the Assessing Officer is not satisfied with the assessee's claim. However, the law requires the Assessing Officer to be satisfied that it is not possible to generate satisfaction with regard to the correctness of the claim. In the absence of reasons for the Assessing Officer to depart from a settled position or establish a nexus between expenditure and dividend income, and given the availability of surplus funds, the disallowance was not justified. The High Court answered the issue in favour of the assessee. The appeal stands allowed.

What were the facts?

The appellant, M/s Vijay Solvex Ltd., through its Managing Director, Mr. Vijay Data, has filed an appeal against the judgment and order of the Income Tax Appellate Tribunal (ITAT), Jaipur Bench. The ITAT had partly allowed the appeal of the assessee. The appeal before the High Court was admitted on September 6, 2016, with a substantial question of law framed regarding the ITAT's justification in upholding a disallowance under Section 14A by applying Rule 8D on a lump sum basis, despite the assessee having reserves and surplus far exceeding its investments in shares during the relevant assessment year.

What were the issues?

1. Whether, in the facts and circumstances of the case, the ITAT was justified in upholding the disallowance under Section 14A by applying Rule 8D on a lump sum basis without any rhyme and reason, when undisputedly the appellant-assessee had reserves and surplus far in excess of the investment made in shares during the relevant assessment year? (Question of law/mixed law and fact, concerning Section 14A of the Income Tax Act, 1961). Assessee's Contention: The assessee argued that the disallowance under Section 14A by applying Rule 8D on a lump sum basis was unjustified, especially when its reserves and surplus significantly exceeded its investments in shares. The assessee relied on the principle that expenditure must have a nexus with the income sought to be disallowed. Revenue's Contention: The judgment does not record specific contentions made by the revenue for this appeal. However, the underlying issue pertains to the disallowance of expenditure under Section 14A.

Which sections of the Income-tax Act were involved?

Section 14A

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. 90 / 2016 M/s Vijay Solvex Ltd. having its registered office at Bhagwati Sadan, S.D. Marg, Alwar (Rajasthan) through its Managing Director, Mr. Vijay Data. ----Appellant Versus 1. The Income Tax Appellate Tribunal, Jaipur Bench, Rajasthan Chamber Bhawan, M.I. Road, Jaipur. 2. The Assistant Commissioner of Income Tax, Circle-2, Alwar. ----Respondent _____________________________________________________ For Appellant(s) : Mr. Anil Mehta with Mr. Sameer Sharma For Respondent(s) : Mr. Sanjay Jhanwar with Ms. Archana Mr. Amol Vyas _____________________________________________________ HON'BLE MR. JUSTICE K.S.JHAVERI HON'BLE MR. JUSTICE INDERJEET SINGH

Judgment 04/08/2017

1.

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

2.

This court while admitting the appeal on 6.9.2016 framed following substantial question of law:- “Whether in the facts and circumstances of the case, the ITAT was justified in upholding disallowance under Section 14A by applying the rule 8D on lump sum basis without any rhyme and reason when undisputedly the appellant-

(2 of 4) [ITA-90/2016]

assessee has reserve and surplus far in excess of the investment made in the shares during the relevant assessment year?”

3.

The issue is covered by the decision of Supreme Court in Godrej & Boyce Manufacturing Company Ltd. vs. Deputy Commissioner of Income Tax (2017) 81 taxmann.com 111 (SC) wherein it has been held as under:- “36. Section 14A as originally enacted by the Finance Act of 2001 with effect from 1.4.1962 is in the same form and language as currently appearing in Sub-section (1) of Section 14A of the Act. Sections 14A (2) and (3) of the Act were introduced by the Finance Act of 2006 with effect from 1.4.2007. The finding of the Bombay High Court in the impugned order that Sub- sections (2) and (3) of Section 14A is retrospective has been challenged by the Revenue in another appeal which is presently pending before this Court. The said question, therefore, need not and cannot be gone into. Nevertheless, irrespective of the aforesaid question, what cannot be denied is that the requirement for attracting the provisions of Section 14A(1) of the Act is proof of the fact that the expenditure

sought

to be disallowed/deducted had actually been incurred in earning the dividend income. Insofar as the Appellant-Assessee is concerned, the issues stand concluded in its favour in respect of the Assessment Years 1998-1999, 1999-2000 and 2001- 2002. Earlier to the introduction of Sub- sections (2) and (3) of Section 14A of the Act, such a determination was required to be made by the Assessing Officer in his best judgment. In all the aforesaid assessment years referred to above it was held that the Revenue had failed to establish any nexus between the expenditure disallowed and the earning of the dividend income in question. In the appeals arising out of the assessments made for some of the assessment years

(3 of 4) [ITA-90/2016]

the aforesaid question was specifically looked into from the standpoint of the requirements of the provisions of Sub- sections (2) and (3) of Section 14A of the Act which had by then been brought into force. It is on such consideration that findings have been recorded that the expenditure in question bore no relation to the earning of the dividend income and hence the Assessee was entitled to the benefit of full exemption claimed on account of dividend income.

37.

We do not see how in the aforesaid fact situation a different view could have been taken for the Assessment Year 2002-2003. Sub-sections (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules merely

prescribe

a formula

for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the Assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the Assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the Assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier

prevailing,

would

become applicable.

38.

In the present case, we do not find any mention of the reasons which had prevailed upon the Assessing Officer, while dealing with the Assessment Year 2002- 2003, to hold that the claims of the Assessee that no expenditure was incurred to earn the dividend income cannot be accepted and why the orders of the Tribunal for the earlier Assessment Years were not acceptable to the Assessing Officer, particularly, in the absence of any new fact or change of circumstances.

(4 of 4) [ITA-90/2016]

Neither any basis has been disclosed establishing a reasonable nexus between the expenditure disallowed and the dividend income received. That any part of the borrowings of the Assessee had been diverted to earn tax free income despite the availability of surplus or interest free funds available (Rs. 270.51 crores as on 1.4.2001 and Rs. 280.64 crores as on 31.3.2002) remains unproved by any material whatsoever. While it is true that the principle of res judicata would not apply to assessment proceedings under the Act, the need for consistency and certainty and existence of strong and compelling reasons for a departure from a settled position has to be spelt out which conspicuously is absent in the present case. In this regard we may remind ourselves of what has been observed by this Court in Radhasoami Satsang v. Commissioner of Income Tax (1992) 193 ITR (SC) 321 [At Page 329]. We are aware of the fact that strictly speaking res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.”

4.

In that view of the matter, the issue is answered in favour of the assessee and against the department.

The appeal stands allowed. (INDERJEET SINGH)J. (K.S.JHAVERI)J. Brijesh 104.

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