COMMISSIONER OF INCOME TAX II LUDHIANA vs. M/S AARTI STEELS LTD

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA-483-2015 (O&M) Date of decision:- 28.11.2016 The Pr. Commissioner of Income Tax-2, Ludhiana ...Appellant Versus M/s Aarti Steels Ltd. ...Respondent CORAM: HON'BLE MR. JUSTICE S.J. VAZIFDAR, CHIEF JUSTICE HON’BLE MR. JUSTICE DEEPAK SIBAL Present:- Mr. Zora Singh Klar, Advocate, for the appellant. Mr. Alok Mittal, Advocate, for the respondent. * * * * S.J. VAZIFDAR, C.J. (ORAL) This is an appeal against the order of the Income Tax Appellate Tribunal confirming the order of the CIT (Appeals) in respect of the assessment year 2007-2008. 2. The appeal is admitted on the following substantial questions of law:- “(i) Whether on the facts and in the circumstances of the case and in law the Hon’ble ITAT is correct in upholding the order of CIT (Appeals)- 2, Ludhiana in deleting disallowance u/s 14A of the I.T. Act? (ii) Whether on the facts and in the circumstances of the case and in law (a) The Hon’ble ITAT is correct in granting relief to the assessee on the basis of its own order in the case of M/s Nahar Capital & Financial Services, Ludhiana vide in ITA No. 1353/CHD/2012 and ITA No. 1120/Chd/2011 without appreciating that in the case of M/s Nahar Capital Amodh Sharma 2016.12.01 14:59 I attest to the accuracy and authenticity of this document chandigarh

ITA-483-2015 (O&M) 2 & Financial Services, Ludhiana, the AO had made an addition under clause (f) of explanation 1 below section 115JB whereas in the case of assessee the assessing officer has not disturbed book profits. (b) In view of the above Hon’ble ITAT has erred in not appreciating the fact that the decision in the case of M/s Nahar Capital and Financial Services, Ludhiana is not applicable in this case. (iii) Whether on the facts and in the circumstances of the case and in law the ld. ITAT is correct in upholding the order of the ld. CIT (Appeal) without appreciating the implication of sub section (1A), (2A), (3A)(4) and (5) of Section 115JAA r.w. Section 115JB of the I.T. Act, 1961?” 3. Neither the CIT (Appeals), nor the Tribunal have adopted the correct approach to the matter. They have not adverted to the main issue that arises. 4. The assessee filed its return of income for the assessment year 2007-2008 showing an income of about ` 28.87 crores under Section 115JB of the Income Tax Act, 1961 (in short the Act). The Assessing Officer noted that the assessee had earned income from dividend of about ` 82,165/- and had shown an investment in shares and mutual funds of about ` 17.07 crores. Ultimately, the Assessing Officer computed the disallowance under Section 14A of the Act at about ` 1.03 crores. For the purpose of this appeal, we are not concerned with whether the disallowance was rightly computed or not. The Assessing Officer ultimately assessed the regular income at ` 1.03 crores. However, the book profit of ` 28.87 crores was assessed for tax purposes under Section 115JB. The respondent/assessee challenged the same before the CIT (Appeals). It is important to note that the assessee had itself challenged the computation of disallowance Amodh Sharma 2016.12.01 14:59 I attest to the accuracy and authenticity of this document chandigarh

ITA-483-2015 (O&M) 3 under Section 14A on various grounds. The CIT (Appeals), inter alia, held as under:- “3. Grounds No. 1 to 3:- These grounds are against disallowance of Rs. 1,03,46,099/- u/s 14A read with rule 8D. 3.3 I have carefully considered the appellant’s submissions. The facts which need to be noted are that the appellant filed its return of income on 29.10.2007 declaring loss of Rs. 9,75,28,257/- and book profits u/s 115JB at Rs. 28,87,00,981/-. The assessment u/s 143(3) was made on an income of Rs. 1,03,46,099/- and since the tax payable u/s 115JB exceeded the tax on regular income hence book profits of Rs. 28,87,00,981/- were assessed to tax. The issue which needs to be considered is whether provisions of section 14A are applicable for determining book profits under section 115JB of the Act. This issue is squarely covered by the decision of the Hon’ble ITAT, Chandigarh in the case of M/s Nahar Capital and Financial Services, Ludhiana for A/Y 2008-09. In this order dated 27.07.2012 in ITA No. 1120/CHD/2011, the Hon’ble ITAT held as under:- “The issue arising in the present appeal is identical to the issue before the Chandigarh Bench of the Tribunal in DCIT Vs. Ind-Swift Ltd. (Supra) and following the same we direct the Assessing Officer to adopt the book profits as per the Profit & loss Account and to not make addition on account of disallowance worked out under section 14A of the Act, as such disallowance is computed under the normal provision of the Act, which are not applicable for determining book profits under section 115JB of the Act.” This view has been again followed by the Hon’ble ITAT in order dated 16.04.2013 in the case of M/s Nahar Amodh Sharma 2016.12.01 14:59 I attest to the accuracy and authenticity of this document chandigarh

ITA-483-2015 (O&M) 4 Capital and Financial Services, Ludhiana for AY 2009-10 in ITA No. 1353/Chd/2012. Respectfully following the decisions of the Hon’ble ITAT, the disallowance made u/s 14A read with Rule 8D for computing book profit u/s 115JB of the Income Tax Act is deleted. This ground of appeal is accordingly allowed.” 5. As we mentioned earlier, for tax purposes, the income under Section 115JB was taken into consideration without making any disallowance in respect thereof under Section 14A. Admittedly, for the purpose of Section 115JB, the book profits assessed by the assessee were accepted and the assessee was brought to tax accordingly. The CIT (Appeals), therefore, wrongly observed that the issue which required consideration is whether the provisions of Section 14A are applicable for determining the book profits under Section 115JB. In view of what we have just said this issue does not arise. The last but one sentence in paragraph 3.3 quoted above would cause difficulties in future. The CIT (Appeals) observed that the disallowance under Section 14A read with Rule 8D for computing book profit under Section 115JB was deleted. While it is possible to restrict this observation for the purpose of Section 115JB alone, it is also possible that in future the same confusion may arise on account of the assessee contending that the disallowance under Section 14A was set aside. 6. More important, it was necessary for the CIT (Appeals) to compute the disallowance under Section 14A for the purpose of future assessment years. Under Section 115JAA of the Act, it was necessary to compute the correct disallowance under Section 14A, as the assessee is entitled to the credit stipulated therein. It was necessary, therefore, for the CIT (Appeals) to compute the disallowance, if any, under Section 14A. Amodh Sharma 2016.12.01 14:59 I attest to the accuracy and authenticity of this document chandigarh

ITA-483-2015 (O&M) 5 7. The Tribunal fell into the same error. Paragraph 6 of the order of the Tribunal impugned in this appeal reads as under:- “6. On consideration of the rival submissions, it is admitted fact that assessee filed return of income showing income under section 115JB of Rs. 28,87,00,981/-. The Assessing Officer, considering the issue of disallowance under section 14A and made addition of Rs.1.03 Cr to the ‘nil’ income declared in the return. Since the returned income declared under section 115JB exceeds the tax on regular income, therefore, Assessing Officer accepted the book profit of Rs. 28,87,00,981/- and assessed the same income for the purpose of tax. Literally, when higher income is assessed by the Assessing Officer, the addition of Rs. 1.03 Cr should not have been considered as addition made to the returned income. The issue was wholly academic interest in nature. The ld. CIT(Appeals) followed the order of the Tribunal in the case of M/s Nahar Capital & Financial Services for the purpose of deleting the addition. However, it remains a fact that since higher income is assessed by the Assessing Officer under section 115JB of the Act at Rs. 28.87 Cr for the purpose of tax, therefore, the assessee as well as revenue should not have any grievance on the addition made of Rs. 1.03 Cr. which is as per assessment order and since the tax payable under section 115JB of the Act exceeds the tax on regular income, therefore, Assessing Officer correctly accepted the book profit of Rs. 28.87 Cr and correctly assessed the same income for the purpose of tax. The departmental appeal, thus has no merit and is accordingly dismissed.” 8. The Tribunal has gone a step further in observing that the issue of disallowance under Section 14A was academic. It is not. As we mentioned earlier, it is necessary that the Amodh Sharma 2016.12.01 14:59 I attest to the accuracy and authenticity of this document chandigarh

ITA-483-2015 (O&M) 6 disallowance under Section 14A is also computed for it may have an effect in the future years on account of the benefit accorded to an assessee under Section 115JAA. 9. In these circumstances, the impugned order and judgement is set aside. The matter is remanded to the Tribunal for determining all the issues raised by the assessee especially the issue of disallowance under Section 14A. Needless to clarify that all the contentions of the parties including as to the applicability of Rule 8D are kept open. 10. Mr. Mittal without prejudice to his other contentions submitted that the matter ought to be remanded to the CIT (Appeals) as even the CIT (Appeals) had not determined the relevant issues raised by the assessee. It would be open to the assessee to raise this contention before the Tribunal. It would be for the Tribunal to decide whether to remand the matter to the CIT (Appeals) or to decide it itself as the Tribunal is also a fact finding authority. 11. The other appeals, namely, ITAs-65, 66, 442-2015, 149, 157, 294, 128, 82, 225, 340, 259, 260, 261, 272, 275, 301, 302 & 327-2016 which were tagged with this appeal raise different issues also including as to whether Rule 8D is retrospective or not. Those appeals which were tagged earlier, are, therefore, segregated and not decided by this order. (S.J. VAZIFDAR) CHIEF JUSTICE (DEEPAK SIBAL) JUDGE 28.11.2016 Amodh Whether speaking/reasoned Yes/No Whether reportable Yes/No Amodh Sharma 2016.12.01 14:59 I attest to the accuracy and authenticity of this document chandigarh