Principal Commissioner Of Income Tax (Central) vs. M/S Keti Construction Ltd.

1 ITA No. 193 of 2023 IN THE HIGH COURT OF MADHYA PRADESH AT INDORE BEFORE HON'BLE SHRI JUSTICE SUSHRUT ARVIND DHARMADHIKARI & HON'BLE SHRI JUSTICE GAJENDRA SINGH ON THE 29th APRIL, 2024 INCOME TAX APPEAL No. 193 of 2023 BETWEEN:- PRINCIPAL COMMISSIONER OF INCOME TAX (CENTRAL) AAYKAR BHAWAN HOSHANGABAD ROAD BHOPAL (MADHYA PRADESH) .....APPELLANT (MS VEENA MANDLIK - ADVOCATE FOR THE APPELLANT) .

AND M/S KETI CONSTRUCTION LTD. VASTALYA CHAMBERS SAPNA SANGEETA 31/6 SNEH ANGAR MAIN ROAD INDORE (MADHYA PRADESH) .....RESPONDENT (NONE FOR THE RESPONDENT) ------------------------------------------------------------------------------------- Reserved on : 10.04.2024 Pronounced on : 29.04.2024 ------------------------------------------------------------------------------------ This appeal having been heard and reserved for order coming on for pronouncement this day, Hon'ble Shri Justice S.A. DHARMADHIKARI pronounced the following ORDER heard on I.A. No. 1673/2024, an application u/S 5 of the 2 ITA No. 193 of 2023 Limitation Act seeking condonation of delay. For the reasons stated in the application, the same is hereby allowed. Delay of 11 days in filing the appeal is condoned. I.A. Stands closed. Also heard on the question of admission. This appeal u/S 260A of the Income Tax Act, 1961[referred to as 'the Act' hereinafter] has been filed by the revenue against the order passed by the ITAT, Bench Indore in ITA No. 329/2022 affirming the the order passed by the CIT (Appeal) wherein, the addition of Rs. 1,68,64,954/- made by the Assessment Officer[referred to as 'AO' hereinafter] has been deleted for the assessment year 2013-14. 2. Before adverting to the legal issue involved in the present appeal, it would be apt to put up certain facts which are necessary for adjudication of the issue involved in this case. The assessee company being involved in the business of construction of road and building has filed its return of income tax for the assessment year 2013-14 and declared total income of Rs. 1,41,30,104/- on 01.10.2013. The scrutiny of the return in terms of Section 143 (3) of the income tax Act 1961 was made and completed on 07.03.2016 and assessing authority determined the total income of the assessee of Rs. 8,19,07,840/- . 3. After scrutiny, assessment proceedings were carried out wherein notice had been issued to the assessee and assessee was directed to submit the relevant documents in respect of operating expenses, cost of material consumed, employee benefits and other expenses debited in P & L account of the company. However, the assessee did not furnish the details of expenses and also failed to produce books of accounts for the Assessment year 2013-14. A search and seizure was conducted wherein it was noticed that assessee was inflating its expenses and suppressing its profit. In this case, after submitting the relevant document as sought by 3 ITA No. 193 of 2023 the assessing authority, AO proceeded further and passed an assessment order and made certain additions. 4. Being aggrieved with the order of the AO, assessee preferred an appeal before the CIT (A) and mainly contended before the appellate authority that disallowance of Rs, 3,79,85,854/- is contrary and without taking note of the documents submitted by the assessee. The appellate authority vide order dated 03.06.2022 allowed the appeal filed by the assessee and deleted the addition made by the AO of Rs. 3,79,85,854/- as also the other addition made by the AO. The appellate authority vide its order dated 03.06.2022 allowed the appeal filed by the assessee and deleted the addition made by the AO of Rs. 3,79,85,854/- as also the other addition made by the AO and made the following observation while allowing the appeal of the assessee and for sake of convenience: (i) The appellant during appellate proceedings by way of additional evidence has filed confirmation of the creditors and lenders and copy of these additional evidence was also forwarded to the AO for comments/verification. The AO in his remand report dated 01.02.2022 stated that more than sufficient opportunities were given to the assessee during assessment proceedings, therefore, the additional evidence submitted by the assessee during appellate proceedings cannot be admitted. It is further observed by the CIT (A) that AO remained silent on the merit of these evidence, the additional evidences furnished by the assessee goes to the root of the addition made by the AO, the same has already been admitted for the sake of natural justice. (ii) From the above, it has surfaced that the statutory 4 ITA No. 193 of 2023 liability has arisen from provisions of TDS, income tax, service tax, entry tax, VAT, professional tax, interest on these taxes for different assessment years therefore, the same cannot be treated as unexplained liability and not only this, the increase in current and long term liabilities is due to amount received from Director and the relatives and concerned and assessee has filed copy of confirmation letter from the creditors/lenders. The confirmation letter clearly mention names, address, PAN details of the creditors/lenders and date of transaction and apart from this, no fresh long term borrowing has been taken by the appellant thus, the assessee has proved reasons for increase in liabilities with supportive documentary evidence. Hence, the CIT(A)directed to delete the addition made by the AO, in respect of Rs. 1,68,64,954/- (iii) The CIT(A) in paragraph no.3.3.2 has further observed that the AO while passing the said assessment order invoked the provisions of Section 14 (A) of the Act and has alluded to above, disallowed equivalent to a sum of Rs. 1,29,26,925/-, being 0.5% of the average investment and for this purpose recourse was taken to the provisions of Rule 8 (D) of the Income Tax Rules, 1962. The main object, on which the assessment order is based, is that no details have been furnished by the appellant and appellant has earned dividend income and therefore, the 0.5% of the average investment had been disallowed. (iv) It is observed by the CIT(A) that provisions of 5 ITA No. 193 of 2023 Section 14 (A) was inserted as a response to the judgment of Hon’ble Supreme Court in the case of Commissioner of Income Tax Vs. Maharashtra Sugar Mills Limited, (1971) 82 ITR 452 and in the case of Rajasthan State Warehousing Corporation Vs. Commissioner of Income Tax (2002) 242 ITR 450 in terms of which, expenditure incurred by the assessee carrying on a composite business giving rise to both taxable as well as non-taxable income was allowable in entirety with apportionment. It was thus that Section 14 (A) of the Act was inserted providing that no deduction shall be allowed in respect of expenditure incurred in relation to the earning of income exempt from taxation as observed by the Apex Court in the case of Commissioner of Income Tax Vs. Walfort Share and Stock Brokers (P) Limited (2010) 326 ITR 1, wherein it has been held that the mandate of Section 14 (A) of the Act is clear, it desires to curve the practice to claim deduction, expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. Thus, the provisions are clearly relatable to earning of actual income and notional or anticipated income. (v) The Appellate authority has correctly observed that assessing authority has grossly erred in making addition simply on the basis of guesswork, 6 ITA No. 193 of 2023 assumption and presumption. It is well settled that no addition can be made as a leap in the dark. The AO is not competent to make a guess work without evidence. The assessment of any particular year cannot be based on mere suspicion or bare assumption, but on the legitimate material from which a reasonable inference of any unexplained cash credit can be made. (vi) The CIT appeal has further relied the judgment of the Apex Court in the case of Dhakeswari Cotton Mills Vs. CIT (1954) 26 ITR 775

SC wherein the Apex Court has held that although strict Rule of Evidence Act do not apply to income tax proceeding but still assessment cannot be made on the basis of the imagination and guesswork and the view of the Apex Court has been further approved in the case of Umacharan Saha and brother Company Vs. CIT (37) ITR (SC) that suspicion, however, strong cannot take place of evidence. similar view has been taken by the Apex Court in the case of Dheeraj Lal Girdhari Lal Vs. CIT (1954) 26 ITR 736 (SC) and it is categorically observed by the CIT appeal that AO has discredited the documentary evidence submitted by the assessee in support of its claim during the assessment as well as in the remand proceeding. On the basis of the above referred discussion, the CIT appeal has rightly deleted the addition of Rs. 3,79,85,854/- made by the 7 ITA No. 193 of 2023 AO. 5. Against the order dated 03.06.2022 of CIT (A), appellant preferred an appeal before the ITAT and ITAT after considering the contentions of the appellant and ITAT before rejecting the appeal had observed that order of CIT(A) is well reasoned order and based on the document sought by the AO and adduced by the assessee and it is further observed by the ITAT that the CIT(A) has rightly drawn the conclusion that AO has passed the order in respect of addition of certain amount without appreciating the documents submitted by the assessee and before rejecting the appeal filed by the appellant, the ITAT has made certain observation. Para 7 and 11 of the order are relevant and the same are reproduced below: 7. The facts given by the Ld.CIT (A) is based on the record and particularly suo-moto disallowances made by AO under Section 40 –a (ia) of the Act as well as various precedence on this issue. The AO has not brought any facts or material before us to controvert the facts recorded by the Ld. CIT while deciding the issue. (Para -7 of the ITAT order). 11. Though, the AO has mentioned that the assessee has not submitted any reply or submission during the assessment proceeding for verification, however, the AO has not mentioned any notice or show cause notice where the relevant details and additional evidence for the sale of confirmation of the creditors and lenders which were forwarded to the AO for the comment and verification. The AO in the remand report has objected to the admission of the additional evidence but did not conduct any inquiry on the additional evidence filed by the 8 ITA No. 193 of 2023 assessee. (Para 11 of the order of the ITAT). 6. Being aggrieved by the dismissal of appeal, appellant has filed the present appeal before this Court on the following substantial questions of law. “(i) Whether on the facts and on the circumstances of the case the ITAT was justified in law in upholding the order of CIT(A) deleting the addition of Rs.3,79,85,854/- on account of disallowance out of operating expenses, cost of material consumed, employee benefits and other expenses debited in P&L account of the company, without appreciating that: a) The assessee failed to produce any details, documents and evidences to substantiate these expenses before the Assessing Officer during the assessment proceeding? b) The CIT(A) has grossly erred in admitting 'additional evidences' in contravention of the provisions of Rule 46A of the Income Tax Rules, 1962, more so since the assessee has neither claimed and / or proved, nor the order of CIT(A) has noted, that any of the requisite condition(s) specified in Rule 46A(1) for admission of additional evidence have been met? c) Without prejudice to the above, even the so-called 'additional evidences, filed before the appellate authorities, fail to establish the genuineness of such expenses since these were merely self-serving breakup of expenses and no relevant ledger accounts, no copies of bills and vouchers, no banks statements reflecting the payments in respect of such expenses, etc. were submitted even before the 9 ITA No. 193 of 2023 appellate authorities? d) Without prejudice to the above, the finding of CIT(A) that 49.6% of the expenses have been disallowed suo moto holds no value since the assessee has completely failed to prove the genuineness of the expenses? (ii) Whether on the facts and on the circumstances of the case the ITAT was justified in law in upholding the deletion of addition of Rs.1,68,64,954/- on account of difference of current year and previous year of other long term liabilities, current liabilities and statutory liabilities shown in books of account without appreciating that: a) The assessee failed to furnish the details of current and statutory liabilities and other long term liabilities before the Assessing Officer during the assessment proceedings? b) The CIT(A) has grossly erred in admitting 'additional evidences' in contravention of the provisions of Rule 46A of the Income Tax Rules, 1962, more so since the assessee has neither claimed and/or proved, nor the order of CIT(A) has noted, that any of the requisite condition(s) specified in Rule 46A(1) for admission of additional evidence have been met? (iii) Whether on the facts and on the circumstances of the case, the ITAT was justified in law in upholding the order of CIT(A) deleting the addition of Rs.1,29,26,925/- disallowance by holding that no such disallowance was required in view of the fact that the assessee has not disclosed any exempt income during the year, ignoring: a) The provisions of Circular No. 05 of 2014 dated 11.02.2014 issued by the CBDT as well as amendment to 10 ITA No. 193 of 2023 Section 14A inserted by the Finance Act, 2022 inserting explanation which is clarificatory in nature and hence has retrospective operation? b) That the appeal of revenue is pending before Hon'ble Supreme Court of India in the lead case of Adani Wilmart Ltd. [2021] 133 taxmann.com 444 (SC) on disallowance of expenses U/s 14A of the Act r.w.r.8D of the Income Tax Rule, 1962 wherein the issue involved in appeal is same viz. disallowance in cases where no exempt income has been claimed by the assessee during the year under consideration? (iv) Whether on the facts and on the circumstances of the case, the ITAT was justified in law in upholding the order of the CIT(A) without deciding the admissibility of additional evidences by the CIT(A) even though the assessee has failed to explain the reasons for non-furnishing of these details during the course of assessment proceedings and CIT(A) has ignored the provisions of Rule 46A of the Income Tax Rules, 1962? (v) Whether on the facts and circumstances of the case and in law, the findings given by ITAT in upholding the order of CIT(A) which deleted the entire additions, suffers from perversity as it failed to allude to relevant facts, misread the evidence and its probative value and the legal position, which itself gives rise to question of law in view of ratio of decisions in several cases including in the case of Sudarshan Silk and Sarees 300 ITR 205 (SC)?” 7. Learned counsel for the appellant contended that the ITAT erred in confirming the order of CIT(A) in deleting the addition of Rs. 11 ITA No. 193 of 2023 3,79,85,854/- for disallowance out of operating expenses, cost of material consumed , employee benefits and other expenses debited in P & L account of the company. The ITAT further erred in ignoring the fact that the assessee failed to produce any details, documents and evidences to substantiate the expenses before the AO. It has further erred in not appreciating that the CIT(A) erred in admitting 'additional evidences' in contravention of Rule 46A as any of the requisite condition(s) specified in Rule 46A(1) for admission of additional evidence have been met. It is further submitted that ITAT ignoring the CBDT Circular No. 05 of 2014 dated 11.02.2014 and amendment to Section 14 of the Act inserted by the Finance Act, 2022. The ITAT erred in confirming the order of CIT. Hence, the appeal of appellant may be allowed considering the proposed substantial questions of law involved in the appeal and set aside the order of the ITAT. 8. On the other hand, learned counsel for the respondent submitted that the order of CIT(A) as well as the ITAT affirming the same have been passed after considering the facts and circumstances of the case. Hence, the present appeal is liable to be dismissed. 9. Heard, learned counsel for the parties and perused the record. 10. The appellant has filed present appeal and framed as many as five substantial questions of law. During the course of argument, the main emphasis has been laid on question no.3 by submitting that the order of CIT(A) and also the order of the ITAT is contrary to Circular No.5/2014 dated 11.02.2014 issued by the CBDT as also the issue pending in the case of Pr. Commissioner of Income Tax 1 Vs

Adani Wilmar Ltd (2021) 133 reported in Texman.com 444 (SC). 11. From the perusal of the order of the assessing authority, it appears that the assessing authority did not consider the documents submitted by the assessee during the course of the assessment proceeding and this fact 12 ITA No. 193 of 2023 came to light from the observation made by the appellate authority that despite availability of documents, additions were made by the assessing authority. 12. During the course of the arguments, appellant emphasized on question no.3 and submitted that deleting the addition of Rs. 1,29,26,925/- is contrary to circular no.5 of 2015 issued by the CBDT on 11.02.2014 as also in light of the pending decision of the Hon’ble Apex Court in the case of Adani Wilmart Limited (2021) 133 Texman.com 444, Now this court would consider this question analogously along with the other substantial question of law framed by the appellant. 13. The answer to question no.3 which has been strongly raised by the appellant during the course of arguments pin pointing that the amendment brought in Section 14 (A) of the Act inserted by the Finance Act, 2022, inserting explanation which is clarificatory in nature hence have retrospective effect. 14. To answer this question, it would be relevant to refer the amendment made by the Parliament in Section 14 (A) vide Finance Act, 2022 whereby, a non-obstante Clause has been inserted in the opening portion of Section 14 (A) of the Act and also the following explanation has been inserted at the end of Section. “Explanation – For the removal of doubts, it is hereby clarified that notwithstanding anything to the contrary contained in this Act, the provisions of the Section shall apply and shall be deemed to have always applied in a case where income, not forming part of the total income under this Act, has knot accrued or arisen or has not been received during the previous year relevant to assessment year and the expenditure had been incurred during 13 ITA No. 193 of 2023 the such previous year in relation to such income not forming part of the total income”. 15. From the perusal of the aforesaid, it is clear that though the affect of this amendment is such that the disallowance under Section 14 (A) of the Act shall be attracted, even if the exempt income is not earned during the year ,but the amendment is itself applicable prospectively from assessment year 01.04.2022 and not applicable to assessment year 2013- 14, which is the subject matter in the present appeal. To further elaborate amendment in Section 14 (A) of the Act, the following paras of memorandum to finance bill, 2022 are worthy of reference: (4) in order to make the intention of Legislation clear and to make it free from any misinterpretation, it is proposed to insert an explanation to Section 14 (A) of the Act to clarify that notwithstanding anything to the contrary contained in this Act, the provision of the Section shall apply and shall be deemed to have always applied in a case where exempt income has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such exempt income. It is clarified that this amendment will take effect from 01st April 2022. (i) It is also proposed to amend Sub Section 1 of the said Section, so as to include a non-abstante clause in respect of other provisions of the Income-tax Act and provide that no deduction shall be allowed in relation to exempt income, notwithstanding anything to the contrary contained in this Act. 14 ITA No. 193 of 2023 (ii) This amendment will take effect from 1st April, 2022 and will accordingly apply in relation to the assessment year 2022-23 and subsequent assessment years.” 16. From the above discussion, it is clear that the contention of appellant in respect of question no.3 (a) is not relevant in this case as the assessment is for the year 2013-14, therefore, the amendment proposed in Section 14 (A) of the Act as discussed hereinabove would not be applicable in the present case and the submission of the appellant in respect of Section 14 (A) of the Act is not relevant in light of the amendment, therefore, the contention of the appellant to this effect that order of CIT appeal as well as an order of ITAT may be quashed is hereby rejected. 17. Now so far as question no. 3 (d) is concerned, the submissions of the appellant is considered in light of Adani Wilmart Ltd (supra) pending before the Apex Court. 18. To consider this issue, the judgment rendered by the Delhi Court in the case of Chivenwest Vs. CIT (supra) is worthy of reference, where it has been categorically held that Section 14 (A) of the Act will not apply, if no exempt income is received or receivable during the relevant previous year by the assessee and this finding is just and proper and further contention of the appellant in respect of the pendency of the case in the Apex Court i.e. PCIT vs. Adani Wilmart Ltd, against the order of the Gujarat High Court (2021) 133 Texman.com 443 (Guj.) and in the PCIT Vs. Karnataka State Financial Corporation against the judgment of the Karnataka High Court are concerned, in the cases of the High Court, relief has been granted to the assessee by holding that no disallowance of the expenditure under Section 11 (A) of the Act can be made more than exact annual income earned by the assessee and it is the 15 ITA No. 193 of 2023 view of this Court that until and unless the issue travelled uptil Apex Court modifying or setting aside judgment of the High Court. 19. So far as other questions are concerned, since the same are based upon fact finding and we have already discussed the order of the CIT(A) and ITAT and find that the order of the CIT (A) is well reasoned order and disallowance made by the AO is contrary to the settled norms and in this case we approve the findings that according to the demand of the AO, assessee submitted all the relevant documents but before disallowing, no findings have been recorded by the AO and the order of the CIT (A) has been upheld by the ITAT and the addition made by the AO in the case of assessee for an amount of Rs. 3,79,85,854/-, R.s 1,68,64,954/- and an amount of Rs. 1,29,26,925/- has rightly been deleted. 20. In view of the above, this Court is of the considered opinion that to maintain the parity in light of the view taken by the different High Courts, we are inclined to hold that deletion has rightly been made by the CIT (A) which was further affirmed by the ITAT and, therefore, no interference is warranted in the facts and circumstances of the case. 21. Under such circumstances, we are of the view that the order passed by the CIT(A) dated 03.06.2022 is a well reasoned order which is affirmed by the order 30.05.2023 passed by the ITAT and, therefore, no interference is warranted in both the orders. No question of law much less substantial question of law arises to entertain the present appeal. 22. Consequently, the appeal filed by the appellant fails and is hereby dismissed. (S.A. Dharmadhikari) (Gajendra Singh)

Judge Judge sh/- SEHAR HASEE N Digitally signed by SEHAR HASEEN DN: c=IN, o=HIGH COURT OF MADHYA PRADESH BENCH INDORE, ou=BENCH AT INDORE, 2.5.4.20=900ec6fc757798eaeb3df7a3 2860bd3298415a4d1c2d91436213f2 568c8f27da, postalCode=452001, st=Madhya Pradesh, serialNumber=E7DBBA955B262C04B 8413251CE7FB6F0B7DBA610C57F15 59C08BF6C6F5DD40D4, cn=SEHAR HASEEN Date: 2024.04.29 16:16:13 +05'30'