M/S. JINDAL BRUGS PRIVATE LIMITED ,MUMBAI vs. PRINCIPAL COMMISSIONER OF INCOME TAX -3, MUMBAI
Before: SHRI NARENDER KUMAR CHOUDHRY & SHRI PRABHASH SHANKARAssessment Year: 2020-21
Per : Narender Kumar Choudhry, Judicial Member:
This appeal has been preferred by the Assessee against the order dated 31.01.2025, impugned herein, passed by the Ld.
Principal Commissioner of Income Tax (in short Ld. PCIT) u/s 263 of the Income Tax Act, 1961 (in short ‘the Act’) for the A.Y. 2020-21. 2. In the instant case, the Assessee had declared its total income at Rs.122,00,02,040/- by filing its return of income on dated 30.01.2021, which was selected for scrutiny and resulted into passing the assessment order dated 12.09.2022 u/s 143(3) r.w.s.
144B of the Act determining the total income of the Assessee at M/s. Jindal Drugs Private Limited
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Rs.122,01,12,013/- after making the addition of Rs.1,09,973/- on account of income from house property.
Subsequently, the return of income and financials of the Assessee company were perused by the Ld. PCIT who found that the Assessee during the assessment year under consideration had made investment in unlisted equity investments of Rs.119,90,00,000/- in its own subsidiary companies. It was further noted that non-current investments in exempt income yielding instruments were continued to be held by the Assessee. As per section 14A of the Act, the disallowance should be made as per Rule 8D of the Income Tax Rules, 1962 (in short “the Rules”). The Ld. PCIT while relying on the CBDT Circular No.5/2014, wherein it is stated that the disallowance u/s. 14A is to be considered, even if no exempt income is earned. The Ld. PCIT further observed that moreover the assessment order was passed without making appropriate enquiries or verification on the issue, which should have been made and corresponding additions/disallowances, after making such enquiries, ought to have been made.
The Ld. PCIT therefore on the aforesaid reasons, issued notice u/s 263 of the Act to the Assessee.
The Assessee, in response to the notice u/s 263 of the Act, filed its submission vide letter dated 05.12.2024 inter-alia claiming that the Ld. FAO during the assessment proceedings had conducted detailed enquiry and investigation and examined the details and therefore the grounds on which the revision proceedings are proposed to be undertaken, are erroneous, arbitrary and untenable in law. M/s. Jindal Drugs Private Limited
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6. Though the Ld. PCIT considered the aforesaid claim of the Assessee, however, found the same as baseless and untenable in law and un-acceptable and thus rejected the same and consequently directed the AO to disallow the correct amount u/s 14A of the Act r.w.r 8D of the Rules, after due verification and giving opportunity of being heard to the Assessee.
The Assessee contradicted the impugned order, whereas the Ld. D.R. supported the same.
We have heard the parties and perused the material available on record. Admittedly, the AO vide notice dated 12.08.2022 u/s 142(1) of the Act along with annexure/questionnaire, specifically asked the Assessee to:
“i. Provide the details of interest expenses made during the year and explain whether these expenses are attributable to investment made by the company.
ii. Provide details of concern and investments made by the company.
iii. Provide details regarding exempt income earned during the year under consideration along with any expenditure incurred towards the same.
iv. Specify the applicability of section 14A of the Act, if “yes” then submit computation for disallowance u/s 14A r.w.r 8D.
v. Furnish the details of actual monthly average of the monthly opening balances of value of investment (including investments in any partnership firm and subsidiaries) the income from which shall not on part of total income”.
The Assessee, in response to the aforesaid notice, vide reply dated 30.08.2022 answered the aforesaid queries in detail, relevant part of which is reproduced herein below: M/s. Jindal Drugs Private Limited
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“1b. Please provide details of source of investments made by the company.
Investment of Rs. 119,90,00,000/- was made in a subsidiary in the year 2014 out of surplus owned funds.
Apart from the above equity investment in subsidiary, the company routinely invests surplus cash flows and accumulated free reserves in treasury instruments such as bank fixed deposits, debt mutual funds, PSU bonds, etc., all of which yield taxable incomes in the form of interest or capital gains.
Following table shows that since FY13-2014 till FY19-20, the company always had enough surplus funds, which were far greater than the amount of investments, and hence borrowed funds were never used or required for making any investments:
Particulars
FY20
FY1S
FY1B
FY17
FY16
FY1S
FY14
Share Capital
12,15,34,270
12,15,54,270
12,15,54,270
12,15.54,270
12,15,54,270
11,67,50,000
11,67,50,000
Reserves & Surplus
11,94,39,33,694 11,04,17,79,947
9,93,27,57,850 8,48,02,74,187 9,42,07,59,672 8,08,84,12,379
7,56,91,46,368
Free Funds (A)
12,06,54,87,964 11,16,33,34,217 10,05,43,12,120 8,60,18,28,457 9,54,23,13,942 8,20,51,62,379
7,68,58,96,368
Particulars
FY20
FY19
FY18
FY17
FY16
FY15
FY14
Cash & Cash
Equivalents
7,56,96,03,924
5,88,27,62,032
3,88,98,52,653
1,73,25,19,056 2,28,75,83,482 37,30,85,167
1,00,77,87,562
Liquid Funds in MF
11,56,930
10,93,660
2,17,66,40,103 87,63,07,192
1,36,71,26,900 1,32,73,00,000
Liquid Funds(B)
7,56,96,03,924
5,88,39,18,962
3,89,09,46,313
3,90,91,59,159 3,16,38,90,674 1,74,02,12,067 2,33,50,87,562
The company had free reserves of Rs. 756.91 crs in FY13-14
when the investment in subsidiary was originally made. Even after making the investment, there was surplus liquid funds and cash balance of Rs. 233.51 crs, parked in bank FDs and mutual funds yielding taxable interest and capital gains incomes.
Since such initial year of investment till current financial year, the free reserves have always been much higher than the investment of Rs. 119.90 crs made in the subsidiary, and there has not been any further investment in the subsidiary in any subsequent year, neither have other transactions of any kind been undertaken with the subsidiary. Similarly, the company has always more than sufficient free reserves vis-à-vis total investments made in other treasury instruments in each of the above financial years, including the current year under assessment (as seen from the above table).
1c. Provide details regarding exempt income earned during the year under consideration, along with any expenditure incurred to earn the same.
M/s. Jindal Drugs Private Limited
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As stated in point no.1b, an investment was made by the company in a wholly owned subsidiary in 2014 for the purpose of investing specifically in treasury instruments as a dedicated line of business. This was a long term strategic investment where the subsidiary operated independently and was assessed to tax as a separate entity. This subsidiary has never declared any dividends since inception till date.
For the year under consideration, this fact can be observed from nature of incomes of the company presented under 'Note 25
Revenue from Operations' and 'Note 26 Other Income' of the financials at page 21, which do not contain any sort of exempt dividend income from any source.
The only investment income derived by the company is either interest on bank fixed deposits or capital gains / unrealized MTM gains on mutual fund investments, all of which are duly offered to tax as per the relevant provisions of the Income Tax Act. We have attached Ledger of Investment in Subsidiary as Annexure3, which shows that there has been no movement in this investment since 2014. In addition, we are also attaching Directors' Report of the subsidiary for FY19-20 as Annexure2, which shows at point
2 on page 1 that no dividend has been declared for FY19-20. This subsidiary is run independent of any support or dependence on the parent company, and it has its own management which operates the company independently. It has sufficient own funds and no external liabilities, therefore, support from parent is not required. The parent company (Jindal Drugs) in turn has sufficient own funds and reserves, and the entire investment was made in this subsidiary in 2014 from own reserves, without any external borrowings. Jindal Drugs management or employees do not have any role to play in the subsidiary, and do not invest any time, efforts or resources in the operation or oversight of the subsidiary, which has its own management team and employees to run their company. Except for the initial investment in 2014, there has been never been any further resource deployment by Jindal Drugs in relation to the subsidiary, which is the only investment capable of yielding exempt dividend income, but as mentioned earlier, has never declared any dividends till date and is merely held as a long term investment.
Therefore, as would be seen from the above facts, the investments held by the company are either yielding taxable income or not yielding any income. Hence, there is no investment which has earned any exempt income during the year. No expenditures were incurred either during the year, in relation to such investments which are capable of yielding any exempt income.
M/s. Jindal Drugs Private Limited
1d. Please specify the applicability of section 14A of I.T. Act, 1961
in your case. If yes, please submit computation for disallowances u/s 14A r.w. Rule 8D:
As stated above in point no. 1c, there is no exempt income earned by the company during the year, neither has the company incurred any expenditure or spent any time, resource or effort in relation to such subsidiary during the year, and therefore disallowance u/s 14A r.w. Rule 8D is not applicable.
It is important to note that the investment in subsidiary was made in 2014 and has been brought forward year-on-year 'as is'
without any change or further investment or other transaction of any nature being undertaken with the subsidiary ever since. The subsidiary conducts its business independently and meets its own expenses, and the parent company in turn never incurs any expenditure for the subsidiary, which is the only investment capable of yielding exempt income (but never actually having yielded any income, whether exempt or otherwise).
1e. Please furnish the details of annual monthly average of the opening and closing balances of the value of investment
(including investments in any partnership firm and subsidiaries), the income from which shall not form part of total income:
The only investment capable of yielding exempt income (but never actually having yielded any income to the company) is the equity investment in wholly owned subsidiary made in 2014. This subsidiary has never declared any dividends since inception till date. We have attached Ledger of Investment in Subsidiary as Annexure3, which shows that there has been no movement in this investment since 2014 to till date. Therefore, the annual monthly average of opening and closing balances of the value of investment will be the same during the year. However, this clause (arising from Rule 8D) has no applicability in view of the fact that neither has any exempt income been earned from such subsidiary, nor has any expenditure (whether direct or indirect) been incurred by the company in relation to such investment. As explained at pt. 1d. above, Section 14A r.w. Rule 8D is not applicable to the company during the year, and therefore, individual computation limbs of Rule 8D are also not applicable.”
The Assessee has claimed that it had made investment in its subsidiary in the year 2014 as a long term strategic investment and no dividend is declared by the subsidiary. No expenses were incurred with respect to investment in subsidiary during the year M/s. Jindal Drugs Private Limited
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under consideration. Further, the Assessee did not receive any exempt income during the year under consideration on the investments made in its subsidiary. However, other investment incomes were duly offered to tax .
The AO though considered the aforesaid issue during the assessment proceedings, however, vide assessment order dated 12.09.2022 u/s 143(3) r.w.s. 144B of the Act ultimately made no addition u/s 144 of the Act.
We have given thoughtful consideration to the peculiar facts and circumstances of the case and rival claim of the parties. Admittedly, the detailed enquiry was carried out by the AO on the issue under consideration, which was the subject matter of the impugned order u/s 263 of the Act. Though the AO has not mentioned anything about this particular issue in the assessment order, however, it is a fact that proper and detailed enquiry was carried out by him, as observed by us above.
We further observe that the Ld. PCIT while invoking the provisions of section 263 of the Act, had taken the refuge of CBDT’s Circular No.5/2014, whereas, admittedly the said circular came into consideration before the Hon’ble High Court of Delhi in the case of Pr. Commissioner of Income Tax-04 vs. IL & FS Energy Development Company Ltd. (2017) 84 taxmann.com 186 (Del.) wherein the Hon’ble High Court has clearly held as under:
“That the circular cannot override the express provisions of section 14A r.w.r. 8D of the Rules. Where no exempt income is earned by the Assessee in the relevant assessment year, no disallowance u/s 14A of the Act can be made”.
M/s. Jindal Drugs Private Limited
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10. The Hon’ble Delhi High Court in the case of Principal
Finance Act, 2022, as well as the aforesaid judgment rendered by Hon’ble High Court and ultimately held as under:
“ That the amendment of section 14A, by which it is clarified that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in case where the income, not forming part of the total income under this Act, 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 income not forming part of the total income, would be applicable prospectively but not retrospectively”.
From the above, it is clear that if prior to 01.04.2022, the Assessee has not earned any exempt income, then no addition u/s 14A r.w.r 8D of the Rules could be made.
Coming to the judgments relied on by the Revenue Commissioner of Income Tax (2024) 168 taxmann.com 197 (Del.), we observe that in both the cases, no enquiry was raised by the AO during the original assessment proceedings on the issues involved in the proceedings u/s 263 of the Act and therefore the Hon’ble High Courts have affirmed the decisions of the Pr. CITs u/s 263 of the Act but here admittedly the instant case is factually dissimilar to the aforesaid cases and therefore the said judgements would not applicable to the instant case . M/s. Jindal Drugs Private Limited
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13. As we have held above that the AO in the original assessment proceedings, duly made the proper and effective enquiry qua the issue in hand. Even otherwise we did not find any material and/or reason available on record to declare the assessment order under consideration, as erroneous and prejudicial to the interest of the Revenue. Thus on the aforesaid analyzations, the impugned order under consideration is un-sustainable and consequently the same is quashed.
In the result, the appeal of the Assessee is allowed.
Order pronounced in the open court on 23.04.2025. (PRABHASH SHANKAR)
(NARENDER KUMAR CHOUDHRY)
ACCOUNTANTMEMBER JUDICIAL MEMBER
[
* Kishore, Sr. PS
Copy to: The Appellant
The Respondent
The CIT, Concerned, Mumbai
The DR Concerned Bench
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By Order
Dy/Asstt.