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Income Tax Appellate Tribunal, JAIPUR BENCHES, JAIPUR
Before: SHRI VIJAY PAL RAO, JM & SHRI BHAGCHAND, AM vk;dj vihy la-@ITA No. 755/JP/2017
आयकर अपीलीय अधिकरण] जयपुर न्यायपीठ] जयपुर IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR Jh fot; iky jko] U;kf;d lnL; ,oa Jh Hkkxpan] ys[kk lnL; ds le{k BEFORE: SHRI VIJAY PAL RAO, JM & SHRI BHAGCHAND, AM vk;dj vihy la-@ITA No. 755/JP/2017 fu/kZkj.k o"kZ@Assessment Year: 2014-15 cuke Assistant Commissioner M/s Jainco Enterprises Pvt. Vs. of Income Tax, Ltd., 592, Welcome Tower, Circle-1, Kota. Dadabari, Kota. LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AACCJ 6381 J vihykFkhZ@Appellant izR;FkhZ@Respondent jktLo dh vksj ls@ Revenue by : Shri R.A. Verma (Addl.CIT) fu/kZkfjrh dh vksj ls@ Assessee by : None. lquokbZ dh rkjh[k@ Date of Hearing : 20/12/2017 mn?kks"k.kk dh rkjh[k@ Date of Pronouncement : 26/12/2017 vkns'k@ ORDER
PER: BHAGCHAND, A.M. This is an appeal filed by the revenue emanates from the order of the ld. CIT(A), Kota dated 25/07/2017 for the A.Y. 2014-15, wherein the revenue has taken following grounds of appeal: “On the facts and in the circumstances of the case, the ld. CIT(A) has erred in:- (i) deleting the addition of Rs. 25,00,000/- made by the A.O. after rejection of books of account U/s 145(3) of the IT Act. (ii) deleting the disallowance of Rs. 69,012/- made by the A.O. U/s 2(24)(x) of the IT Act. (iii) deleting the addition of Rs. 7,37,336/- made by the A.O. U/s 14A r.w. Rule 8D.”
ITA 755/JP/2017_ 2 ACIT Vs. Jainco Enterprises Pvt. Ltd.
The assessee company is engaged in executing civil contract. The
assessee has filed its return of income on 27/11/2014 declaring total
income of Rs. 3,13,97,920/-. The case was selected for scrutiny and the
assessment was finalized U/s 143(3) of the Income Tax Act, 1961 (in
short the Act) on 22/12/2016 at total income of Rs. 3,47,04,240/- by
making various additions. The ld. CIT(A) has allowed the appeal of the
assessee.
In the ground No. (i) of the appeal, the issue involved is deleting
the addition of Rs. 25,00,000/- made by the Assessing Officer after
rejection of books of accounts. The ld. CIT(A) has allowed this ground of
appeal by holding as under:
“I have gone through assessee’s submission and AO’s findings.
A regards Ground of appeal no 1, on the issue of rejection of books of accounts in the appellant’s case, if the assessing officer is not satisfied with the book result i.e. gross profit shown by the assessee, he may reject the books under Section 145(3) and estimate gross profit ratio. But before doing that he has to give a clear finding that the there are defects in books of accounts and hence books of accounts are not acceptable.
Non maintenance of stock register on day to day basis by itself should not lead to inference that it is not possible to deduce the true income of the assessee from the accounts maintained by assessee, nor can the accounts be said to be defective or incomplete for this reason alone. If the assessee is dealing in such items where maintenance of stock register is not possible i.e. keeping in mind
ITA 755/JP/2017_ 3 ACIT Vs. Jainco Enterprises Pvt. Ltd.
the quantity, size, varieties, processes involved in production etc it can’t be treated as defect for application of section 145(3) of the Act. –
The Hon’ble Gauhati High Court in the case of Aluminium Industries (P) Ltd. Vs. CIT had held that merely because the profits were low in the instant year was not material to justify addition of profits in the absence of any finding recorded about any serious defects in the maintenance of the books of account.
The Hon'ble Punjab & Haryana High Court in CIT us. Om Overseas (2009) 315 ITR 185 (P&H), have laid down the proposition that in the absence of any specific defect being pointed out in the books of account, there is no justification for the rejection of accounts and making the addition by applying the high GP rate than the one declared by the assessee.
In the instant case, the A.O did not bring out specific defects in the books of the assessed but mentioned general defects like non maintenance of physical labour and stock register and site inventory of goods, and voucher based records of details of expenses on repairs and maintenance, travelling, conveyance etc being unverifiable.
I have held that in cases of civil contractors quantitative tally of stocks at sites is not practical to be maintained.
Assessing Officer has failed to appreciate that when the books of accounts were duly audited, it was presumed that books of accounts and method of accounting are in order, and, therefore, in order to displace that presumption, it is for the Assessing Officer to establish, by cogent evidence, that the books of the assessee are indeed not correct or complete or the method of accounting is therefore not in order.
ITA 755/JP/2017_ 4 ACIT Vs. Jainco Enterprises Pvt. Ltd.
As the A.O has not brought out any specific points like how the defects were affecting the business results especially when the net profit was higher as compared the earlier year and the fact that the A.O used the terminology that profit “must have been higher than what the assessee has declared”, it cannot be said that the A.O had exercised proper judicious discretion while rejecting the books of accounts. Further, since there were other incomes as well like from the subcontracts and investments, the A.O could have brought some comparable cases for showing that the N.P was on the lower side as compared to the others in the same business (the assessee has shown an N.P of 6.93% on self executed contracts which is in the acceptable band when compared to earlier years.
In the absence of the proper analysis to reach the conclusion to reject the books of accounts, I disagree with the actions of the A.O and do not uphold the decision to reject the books of accounts and make an addition to the N.P of Rs.25, 00,000/- on an ad hoc basis. The addition is accordingly directed to be deleted.” 4. After hearing the revenue on this issue, we hold that the ld. CIT(A)
has passed a detailed speaking order. The Assessing Officer had not
brought out any specific defects which could affect the business results
in terms of not profit. The book results are better than earlier year. The
A.O’s presumption that profit must be higher than declared by the
assessee is not based on any specific findings. The revenue was not able
to controvert the findings as recorded by the ld. CIT(A) in his order on
facts as well as on law. Therefore, we find no reason to interfere in the
ITA 755/JP/2017_ 5 ACIT Vs. Jainco Enterprises Pvt. Ltd.
order of the ld. CIT(A) and the same stands uphold. Accordingly, ground
No. (i) of the revenue’s appeal stands dismissed.
The issue involved in ground No. (ii) of the appeal is deleting the
disallowance of Rs. 69,012/- U/s 2(24)(x) of the Act. The ld. CIT(A) has
allowed this ground of appeal by holding as under: As regards Ground of appeal no 4, I have decided this issue in the assessee’s favour in another case in the of Ravindra P.Singh vide order in appeal no 326/14- 15 order dated 3/5/2017 holding that- Section 36(1)(va) states that “any sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 apply, if such sum is credited by the assessee to the employees account in the relevant fund or funds on or before the due date.” HIGH COURT OF RAJASTHAN in Commissioner of Income-tax Udaipur v. Udaipur Dugdh Utpadak Sahakari Sangh Ltd. in 35 taxmann.com 616 (Rajasthan) has held- Section 43B, read with section 36(1)(va), of the Income-tax Act, 1961- Business disallowance - Certain deductions to be allowed only on actual payment [Provident fund] - Assessment year 2006-07. Assessee had deposited amount received from his employees as contributions in provident fund and ESI fund of employees after due date, i.e., after 15th of next month, but before due date of filing return - Assessing Officer added said amount to income of assessee as per provisions of section 36(1)(va) read with section 2(24)(x) - Whether since assessee had deposited said amount in provident fund and ESI fund of employees before due date of filing return, Assessing Officer was wrong in adding impugned amount to income of assessee- Held, yes Following the same line of decision in the light of the jurisdictional High Court order, I hold the disallowance of Rs. 69,012/- on account of late deposit of PF and ESI contribution (paid before filing of the return) to be not justified and directed to be deleted. This Ground of appeal is allowed.
ITA 755/JP/2017_ 6 ACIT Vs. Jainco Enterprises Pvt. Ltd.
After hearing the revenue on this issue, we find that the ld. CIT(A)
has passed a detailed speaking order and the revenue was not able to
controvert the findings as recorded by the ld. CIT(A) in his order on
facts as well as on law. Therefore, we find no reason to interfere in the
order of the ld. CIT(A) and the same stands uphold. Accordingly, ground
No. (ii) of the revenue’s appeal stands dismissed.
In the ground No. (iii) of the appeal, the issue involved is deleting
the addition of Rs. 7,37,336/- U/s 14A r.w. Rule 8D. The ld. CIT(A) has
allowed this ground of appeal by holding as under:
“As regards Ground of appeal no 3, since the rejection of books has not been upheld, the issue is being dealt on its merits.
The assessee has not earned any exempted income on his investments made nor has the firm received any dividend. The investment has been made in the shares of a JV company for obtaining a Toll contract for a long duration and can at best be called a strategic investment.
In view of the latest judicial opinion in this regard, the A.O’s working of disallowance based on rule 8D is not justified.
In the following cases, this proposition is more than amply clarified- HIGH COURT OF MADRAS in Redington (India) Ltd. v. Additional Commissioner of Income-tax, Co. Range-V, Chennai 77 taxmann.com 257 (Madras) held-
Section 14A of the Income-tax Act, 1961, read with rule 8D of the Income-tax Rules, 1962 - Expenditure incurred in relation to income not includible in total income (Condition precedent) - Assessment year 2007-08 - Whether provision of section 14A is relatable to earning of actual income and not notional or anticipated income, hence, where there is no exempt income in a year, there
ITA 755/JP/2017_ 7 ACIT Vs. Jainco Enterprises Pvt. Ltd.
cannot be a disallowance of expenditure in relation to an assumed income - Held, yes (Relevant extract)
..7. Per contra, Sri. T. Rauikumar appearing on behalf of the revenue drew our attention to the marginal notes of S.14A pointing out that the provision would apply not only where exempted income is 'included' in the total income, but also where exempt income is 'includable' in total income.
He relied upon a Circular issued by the Central Board of Direct Taxes in Circular No, 5 of 2014 dated 11.2.2014 to the effect that s. 14A was intended to cover even those situations whether there is a possibility of exempt income being earned in future. The Circular, at paragraph 4, states that it is not necessary for exempt income to have been included in the income of a particular year for the disallowance to be triggered. According to the Learned Standing Counsel, the provisions of S.14A are made applicable, in terms of sub- section (1) thereof to income 'under the act' and not 'of the year' and a disallowance under s. 14A r.w. Rule 8D can thus be effected even in a situation where a tax payer has not earned any taxable income in a particular year.
We are unable to subscribe to the aforesaid view. The provisions of section 14A were inserted as a response to the judgments of the Supreme Court in CIT v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452 and Rajasthan State Ware Housing Corpn. v. CIT [2000] 242 ITR 450/109 Taxman 145 in terms of which, expenditure incurred by an assessee carrying on a composite business giving rise to both taxable as well as non-taxable income, was allowable in entirety without apportionment. It was thus that s. 14A was inserted providing that no deduction shall be allowable in respect of expenditure incurred in relation to the earning of income exempt from taxation. As observed by the Supreme Court in the judgment in the case of CIT v. Walfort Share & Stock Brokers (P.) Ltd. [2010] 326 ITR 1/192 Taxman 211.
'The mandate of s. 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by way of an exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income.'
The provision thus is clearly relatable to the earning of actual income and not notional or anticipated income. The submission of the Department to the effect that S.14A would be attracted even to exempt income includable' in total
ITA 755/JP/2017_ 8 ACIT Vs. Jainco Enterprises Pvt. Ltd.
income would entail the assessment of notional income, assumed to be exempt in the future, in the present assessment year. The computation of total income in terms of s. 5 of the Act is on real income and there is no sanction in law for the assessment of admittedly notional income, particularly in the context of effecting a disallowance in connection therewith.
The computation of disallowance in terms of Rule 8D is by way of a determination involving direct as well as indirect attribution. Thus, accepting the submission of the Revenue would result in the imposition of an artificial method of computation on notional and assumed income. We believe this would be carrying the artifice too far.
HIGH COURT OF DELHI in Cheminvest Ltd. v. Commissioner of Income-tax-IV 61 taxmann.com 118 (Delhi) held-
Section 14A of the Income-tax Act, 1961 - Expenditure incurred in relation to income not includible in total income (Applicability) - Assessment year 2004-05. Whether section 14A envisages that there should be an actual receipt of income which is not includible in total income; hence, section 14A will not apply where no exempt income is received or receivable during relevant previous year - Held, yes
(Relevant extract)
Turning to the central question that arises for consideration, the Court finds that the complete answer is provided by the decision of this Court in CIT v. Holcim India (P.) Ltd. [2015] 57 taxmann.com 28. In that case a similar question arose, viz., whether the ITAT was justified in deleting the disallowance under Section 14A of the Act when no dividend income had been earned by the Assessee in the relevant AY? The Court referred to the decision of this Court in Maxopp Investment Ltd's, case (supra) and to the decision of the Special Bench of the ITAT in this very case i.e. Cheminvest Ltd. v. ITO [2009] 121 ITD 318. The Court also referred to three decisions of different High Courts which have decided the issue against Revenue. The first was the decision in CIT v. Lakhani Marketing Inc . [2014] 226 Taxman 45/49 taxmann.com 257 of the High Court of Punjab and Haryana which in turn referred to two earlier decisions of the same Court in CIT v. Hero Cycles Ltd. [2010] 323 ITR 518/189 Taxman 50 and CIT v. Winsome Textile Industries Ltd . [2009] 319 ITR 204. The second was of the Gujarat High Court in CIT v. Corrtech Energy (P.) Ltd. [2014] 223 Taxman 130/ 45 taxmann.com 116 and the third of the Allahabad High Court in CIT v.
ITA 755/JP/2017_ 9 ACIT Vs. Jainco Enterprises Pvt. Ltd.
Shivam Motors (P.) Ltd. [2015] 230 Taxman 63/55 taxmann.com 262. These three decisions reiterated the position that when an Assessee had not earned any taxable income in the relevant AY in question "corresponding expenditure could not be worked out for disallowance."
In Holcim India (P) Ltd’s case (supra), the Court further explained as under:
"15. Income exempt under Section 10 in a particular assessment year, may not have been exempt earlier and can become taxable in future years. Further, whether income earned in a subsequent year would or would not be taxable, may depend upon the nature of transaction entered into in the subsequent assessment year. For example, long term capital gain on sale of shares is presently not taxable where security transaction tax has been paid, but a private sale of shares in an off market transaction attracts capital gains tax. It is an undisputed position that respondent assessee is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to management. Possibility of sale of shares by private placement etc. cannot be ruled out and is not an improbability. Dividend may or may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend. When declared, it is subjected to dividend distribution tax."
On facts, it was noticed in Holcim India (P.) Ltd's, case (supra) that the Revenue had accepted the genuineness of the expenditure incurred by the Assessee in that case and that expenditure had been incurred to protect investment made.
In the present case, the factual position that has not been disputed is that the investment by the Assessee in the shares of Max India Ltd. is in the form of a strategic investment. Since the business of the Assessee is of holding investments, the interest expenditure must be held to have been incurred for holding and maintaining such investment. The interest expenditure incurred by the Assessee is in relation to such investments which gives rise to income which does not form part of total income.
ITA 755/JP/2017_ 10 ACIT Vs. Jainco Enterprises Pvt. Ltd.
In light of the clear exposition of the law in Holcim India (P.) Ltd's, case (supra) and in view of the admitted factual position in this case that the Assessee has made strategic investment in shares of Max India Ltd.; that no exempted income was earned by the Assessee in the relevant AY and since the genuineness of the expenditure incurred by the Assessee is not in doubt, the question framed is required to be answered in favour of the Assessee and against the Revenue.
Since the Special Bench has relied upon the decision of the Supreme Court in Rajendra Prasad Moody's case (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:
"What s. 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 s. 57(iii) and that purpose must be making or earning of income, s. 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There is in fact nothing in the language of s. 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 s. 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's case (supra) was
ITA 755/JP/2017_ 11 ACIT Vs. Jainco Enterprises Pvt. Ltd.
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's case (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.
In the impugned order, the ITAT has referred to the decision in Maxopp Investment Ltd's, case (supra) and remanded the matter to the AO for reconsideration of the issue afresh. The issue in Maxopp Investment Ltd's, case (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.
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 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.
THE ITAT DELHI BENCH 'A' in Ms. Amita Verma v. Assistant Commissioner of Income-tax, Central Circle-13, New Delhi 71 taxmann.com 91 (Delhi - Trib.)
Section 14A of the Income-tax Act, 1961 - Expenditure incurred in relation to income not includible in total income (Dividend) - Assessment years 2006-07 to 2010-11 - Assessee contended that during year it had no exempt income and, therefore, no disallowance under section 14A could be made - Assessing Officer relying upon decision of Tribunal rendered in case of Cheminvest Ltd. v. ITO [2009] 121 ITD 318 (Delhi) (SB) rejected assessee's
ITA 755/JP/2017_ 12 ACIT Vs. Jainco Enterprises Pvt. Ltd.
contention - Whether since above decision of Tribunal had been reversed by jurisdictional High Court in case of Cheminvest Ltd. v. CIT [2015] 378 ITR 33/234 Taxman 761/61 taxmann.com 118 (Delhi), it would have to be held that no disallowance under section 14A can he made, where there is no exempt income - Held, yes
THE ITAT CHANDIGARH BENCH in Assistant Commissioner of Income-tax, Circle- 2, Ludhiana v. Pardeep Kumar Aggarwal 70 taxmann.com 154 (Chandigarh - Trib.)
Section 14A of the Income-tax Act, 1961 - Expenditure incurred in relation to income not includible in total income (Condition precedent) - Assessment year 2011-12 - Whether no disallowance can be made under section 14A where no exempt income had been earned by assessee during year - Held, yes
(relevant extract)
We have heard the learned representatives of both the parties, perused the findings of the authorities below and considered the material available on record. On perusal of the order of the learned CIT (Appeals), we do not find any infirmity in the same as the proposition laid down by the Punjab & Haryana High Court in the case of Lakhani Marketing Inc (supra) is squarely applicable to the facts of the present case, as no exempt income has been earned by the assessee during the year. As regards the contention of the learned D.R. that the said judgment was delivered before the insertion of Rule 8D, we are of the view that the Rule 8D is just a mechanism provided to compute the disallowance under section 14A of the Act. The provisions of the Rules can never prevails over the provisions of the Act. The judgment has been given in the context of the provisions of the section. If the situation demands for no disallowance, the computational provision does not come into the picture at all. In view of this, we uphold the action of the learned CIT (Appeals) in deleting the disallowance. The grounds raised by the Revenue are dismissed.
Based on the above legal precedents relevant to the facts of this case where no exempt income has been earned by the appellant to warrant disallowance as per the provisions laid down u/s 14A rwr 8D, the addition of Rs. 7,37, 336/- is accordingly directed to be deleted.
ITA 755/JP/2017_ 13 ACIT Vs. Jainco Enterprises Pvt. Ltd. This ground of appeal is treated as allowed.” 8. After hearing the revenue on this issue, we find that the ld. CIT(A) has passed a detailed speaking order and the revenue was not able to controvert the findings as recorded by the ld. CIT(A) in his order on facts as well as on law. Therefore, we find no reason to interfere in the order of the ld. CIT(A) and the same stands uphold. Accordingly, ground No. (iii) of the revenue’s appeal stands dismissed.
In the result, the appeal of the revenue stands dismissed. Order pronounced in the open court `on 26/12/2017. Sd/- Sd/- ¼fot; iky jko fot; iky jko½ ¼Hkkxpan Hkkxpan½ ½ ½ ½ fot; iky jko fot; iky jko Hkkxpan Hkkxpan (VIJAY PAL RAO) (BHAGCHAND) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member Tk;iqj@Jaipur fnukad@Dated:- 26th December, 2017 *Ranjan आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू vihykFkhZ@The Appellant- The ACIT, Circle-1, Kota. 1. izR;FkhZ@ The Respondent- M/s Jainco Enterprises Pvt. Ltd., Kota. 2. vk;dj vk;qDr@ CIT 3. vk;dj vk;qDr¼vihy½@The CIT(A) 4. विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत 5. xkMZ QkbZy@ Guard File (ITA No. 755/JP/2017) 6.
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