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Income Tax Appellate Tribunal, LUCKNOW BENCH A, LUCKNOW
Before: SHRI ANADEE NATH MISSHRA & SHRI SUBHASH MALGURIA
(A) These appeals and the Cross Objection have been filed against the respective impugned appellate orders of learned Commissioner of Income Tax (Appeals) [“CIT(A)” for short]. The grounds taken in the appeals/Cross Objection are as under: “1. BECAUSE, on the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) has erred in law and on facts in deciding the issue of interest income to the extent of Rs.31,64,147/- as an eligible receipt entitled to benefit of deduction u/s 80IA(4) of the Act.
2. BECAUSE, on the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) had relied upon certain judgment of Hon'ble Supreme Court which are wholly inapplicable to the issue involve; and whereas the present issue is otherwise covered in favour of assessee by another judgment of Hon'ble Supreme Court and other Courts.
BECAUSE, on the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) has erred on the fact & law while not dealing with the issue relating to additions u/s 143(3), could be made only against the returned income not against the income computed u/s 143(1) where such glaring mistakes of adjustment u/s 143(1) are brought in the knowledge of Ld. AO.
4. BECAUSE, on the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) has erred in failing to appreciate that the impugned order of assessment is itself bad in law, being barred by limitation and therefore liable to be set-aside and quashed.
BECAUSE, on the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) has erred in law in failing to appreciate that the impugned order of assessment was itself illegal and bad in law as the jurisdictional notice U/s 143(2) of the Income Tax Act has not been issued by the competent officer and in any case the notice Us 143(2) of the Act is itself time barred rendering the order of assessment bad in law and liable to be quashed.
6. BECAUSE, on the facts and in the circumstances of the case, the CIT (A) has passed the order without providing the assessee with a due and proper opportunity of hearing and therefore the impugned order deserves to be set-aside being bad in law.” “1. BECAUSE, on the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) has erred in law and on facts in deciding the issue of interest income, to the extent of Rs.14,61,685/-, as an eligible receipt entitled to benefit of deduction U/s 80IA(4) of the Act.
2. BECAUSE, on the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) as also the Assessing Officer miss-directed itself and had relied upon certain judgment of Hon'ble Supreme Court which are wholly inapplicable to the issue involve; and whereas the present issue is otherwise covered in favour of assessee by another judgment of Hon'ble Supreme Court and other Courts.
3. BECAUSE, on the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) has erred in failing to appreciate that the impugned order of assessment is itself bad in law, being barred by limitation and therefore liable to be set-aside and quashed.
4. BECAUSE, on the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) has erred in law in failing to appreciate that the impugned order of assessment was itself illegal and bad in law as the jurisdictional notice U/s 143(2) of the Income Tax Act has not been issued by the competent officer and in any case the notice U/s 143(2) of the Act is itself time barred rendering the order of assessment bad in law and liable to be quashed.
5. BECAUSE, on the facts and in the circumstances of the case, the CIT(A) has passed the order without providing the assessee with a due and proper opportunity of hearing and therefore the impugned order deserves to be set-aside being bad in law.”
“1. BECAUSE, on the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) has erred in law and on facts in deciding the issue of interest income to the extent of Rs.30,89,939/- as an eligible receipt entitled to benefit of deduction U/s 80IA(4) of the Act.
BECAUSE, on the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) as also the Assessing Officer miss- directed itself and had relied upon certain judgment of Hon'ble Supreme Court which are wholly inapplicable to the issue involve; and whereas the present issue is otherwise covered in favour of assessee by another judgment of Hon'ble Supreme Court and other Courts.
3. BECAUSE, on the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) has erred in failing to appreciate that the impugned order of assessment is itself bad in law, being barred by limitation and therefore liable to be set-aside and quashed.
BECAUSE, on the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) has erred in law in failing to appreciate that the impugned order of assessment was itself illegal and bad in law as the jurisdictional notice U/s 143(2) of the Income Tax Act has not been issued by the competent officer and in any case the notice U/s 143(2) of the Act is itself time barred rendering the order of assessment bad in law and liable to be quashed.
5. BECAUSE, on the facts and in the circumstances of the case, the CIT (A) has passed the order without providing the assessee with a due and proper opportunity of hearing and therefore the impugned order deserves to be set-aside being bad in law.” “1. The Ld. CIT (A) has erred in law and on facts by accepting the computation of claim of deduction u/s 80IA containing the provisions of sub-section (7) of the said section as the claim was not made while filing the return of income.
1.1 The Ld. CIT (A) has erred in law and on facts by exceeding the powers conferred under section 251 of the IT Act, 1961 by directing the Assessing Officer to verify the claim made by the assessee u/s 80IA which amounts to setting aside the issue which is not permissible as per provisions of the aforesaid section.
2. The Ld. CIT (A) has erred in law and on facts by deleting the disallowance of Rs.2,56,56,447/- u/s 14A of the IT. Act read with Rule 8D of the I.T. Rules, 1962. The express provisions of section 14A r.w.r 8D do not draw any relation to such expenditures in relation to exempt income.
2.1 The Ld. CIT (A) has erred in law and on facts as the assessee invested a substantial amount of Rs.15,93,68,990/- in group companies/sister concerns. This entail disallowances to be computed as per the provision of 14A of the IT. Act read with Rule 8D of the IT. Rules, 1962 as in the recent ruling by the Hon'ble Apex Court in Maxopp Investment Ltd. vs. CIT, New Delhi, (2018) 402 ITR 640 (SC), the same position as discussed above has been upheld.” “1. The Ld. CIT (A) has erred in law and on facts by deleting the disallowance of Rs.1,71,63,491/- u/s 14A of the I.T. Act read with Rule 8D of the I.T. Rules, 1962. The express provisions of section 14A r.w.r 8D do not draw any relation to such expenditures in relation to exempt.
2. The Ld. CIT (A) has erred in law and on facts as the assessee invested a substantial amount of Rs. 187 Cr. in group companies/sister concerns which entail disallowances to be computed as per the provision of 14A of the I.T. Act read with Rule 8D of the I.T. Rules, 1962 as in the recent ruling by the Hon'ble Apex Court in Maxopp Investment Ltd. vs. CIT, New Delhi, (2018) 402 ITR 640 (SC), the same position as discussed above has been upheld.” “1. Whether the learned CIT(A) has erred in law and on facts of the case by allowing deductions u/s 80IA treating the assessee (a work contractor) as a developer.
2. Whether the learned CIT(A) has erred in law and on facts of the case by treating bogus purchases as genuine ones after admitting additional evidences in violation of Rule 46A.”
C.O.No.01/Lkw/2025 “1. Because the learned CIT(A) has erred on facts & law not deleting the issue relating to issuance of notice u/s 148 by Assessing Officer not accordance with law and facts.
2. Because the learned CIT(A) has erred in sustaining the addition of Rs.31,64,146/- out of deduction claimed of Rs.6,27,83,808/- u/s 80IA of the Act, disallowed by Assessing Officer. The addition confirmed to the extent of Rs.31,64,146/- is liable to be deleted.
3. Because the learned CIT(A) has erred on facts & law while not considering total income computed by Assessing Officer at Rs.1,84,83,76,293/- subsequently rectified 154/147/143(3) on 15/05/2023 at Rs.1,67,54,56,067/-.”
(A.1) The issues in dispute in these appeals/Cross Objection pertain to assessment years 2016-17, 2017-18 & 2018-19. Although several grounds have been taken in these appeals/Cross Objection, the issues involved in them were summarized by the learned Counsel for the assessee in a tabular form for the convenience of the Bench and the learned Departmental Representative. The aforesaid gist of issues are reproduced below for ready reference:
(A.2) In the course of appellate proceedings in Income Tax Appellate Tribunal (“ITAT” for short), separate paper books were filed from the assessee’s side containing the following particulars for the various assessment years:
(A.3) Written submissions were filed from Revenue side, relevant portion of which is reproduced as under:
(B) for assessment year 1017-18 has been filed by Revenue in which tax effect of disputed issues is Rs.59,39,941/-. This tax effect is below the minimum monetary limit of Rs.60 lacs prescribed by CBDT vide Circular No.09/2024 for filing the appeal in Income Tax Appellate Tribunal against order of the learned CIT(A). If the tax effect is upto Rs.60,00,000/- no appeal should be filed by Revenue before the Income Tax Appellate Tribunal. Representatives of both sides, the learned Sr. D.R. for Revenue and the learned Counsel for the assessee were in agreement that the tax effect being below Rs.60 lac, the appeal filed by Revenue is not maintainable and should be dismissed.
In view of foregoing and as representatives of both sides are in agreement on this, the appeal of Revenue is dismissed in limine without going into the merits of the case.
The appeal filed by the assessee vide is beyond the time prescribed u/s 253(3) of the Act. In the petition filed by the assessee for condonation of delay, it is stated that there is no limitation in view of order of Hon'ble Supreme Court, dated 23/03/2020 taking cognizance for extension of limitation in Suo Motu Writ Petition in the situation arising out of the challenge faced by the country on account of COVID-19 virus. It was accordingly requested to condone the delay. At the time of hearing, the learned Departmental Representative for Revenue did not press the limitation issue, and agreed to the appeal being decided on merits. Accordingly, we do not treat the appeal of the assessee as barred by limitation. The appeal is treated as having been filed in time, and is being decided on merits.
(C.1) In the aforesaid appeals i.e. and 80IA(4) of the Act in respect of interest earned on FDR which were kept for release of security/retention money. In the assessment orders, the Assessing Officer held that the aforesaid income has not been derived from the eligible business of the assessee and he declined the claim of the assessee for deduction u/s 80IA of the Act in respect of the aforesaid amount. At the time of hearing, the learned Departmental Representative relied on the assessment order. However, the learned Authorized Representative for the assessee submitted that the issue is covered in assessee’s favour by order of Hon'ble Supreme Court in the case of Commissioner of Income Tax vs. Reliance Energy Limited [2022] 441 ITR 346 (SC). In this case, Hon'ble Supreme Court held as under:
“7. The contention on behalf of the Revenue before us is that the Assessing Officer was right in holding that the deduction under Section 80-IA of the Act should be restricted to ‘business income’ only. Mr. Arijit Prasad, learned Senior Counsel appearing on behalf of the Revenue, submitted that Section 80AB of the Act contemplates deductions in respect of incomes against income of the nature specified in the relevant section. He further submitted that Section 80- IA(5) makes it clear that the determination of quantum of deduction under sub-section (1) of Section 80-IA should be on the basis that the source of income from the eligible business was the only source of income of an assessee and therefore, the deduction so determined should be allowed only against ‘business income’. According to him, the phrase ‘derived … from’ in sub-section (1) of Section 80-IA of the Act indicates that the computation of deduction is restricted only to the profits and gains from the eligible business. He relied upon the judgment of this Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT followed in Synco Industries Ltd. v. Assessing Officer, Income Tax, Mumbai & Anr. 3 and Anr. Pandian Chemicals Ltd. v. Commissioner of Income Tax, Madurai.
In response, the Assessee supported the order passed by the Appellate Authority which was upheld by the Tribunal and the High Court. It is the argument of Mr. Ajay Vohra, learned Senior Counsel appearing on behalf of the Assessee, that Section 80AB of the Act is with reference to computation of deduction on the basis of net income. He submitted that there is no indication in sub-section (5) of Section 80-IA that the deduction under sub-section (1) is restricted to ‘business income’ only. On the other hand, according to him, subsection (5) deals with determination of the quantum of deduction by treating eligible business as the only source of income of the Assessee. Sub-section (5), therefore, is 2 (1978) 2 SCC 644 3 (2008) 4 SCC 22 4 (2003) 5 SCC 590 concerned with computation of the deduction, which is at a stage prior to allowing the deduction so computed. He submitted that there is no dispute that the computation of deduction is only from the eligible business. The claim of the Assessee, as accepted by the Appellate Authority, is that there is no restriction on taking into account income from any other source while allowing the deduction computed under Section 80-IA, subject to the aggregate of all deductions under Chapter VI-A not exceeding the ‘gross total income’. He relied upon judgments of this Court in CIT (Central), Madras v. Canara Workshops (P) Ltd., Kodialball, Mangalore 5 and Synco Industries (supra) to argue that sub-section (5) of Section 80-IA of the Act does not restrict permissible deduction under sub-section (1) to be allowed against ‘business income’ only. The learned Senior Counsel for the Assessee relied upon the judgment of the Bombay High Court in Commissioner of Income-tax v. Tridoss Laboratories Ltd. 6 to argue that the Appeal should not be allowed.
The controversy in this case pertains to the deduction under Section 80-IA of the Act being allowed to the extent of ‘business income’ only. The claim of the Assessee that deduction under Section 80-IA should be allowed to the 5 (1986) 3 SCC 538 6 [2010] 328 ITR 448 (Bombay) extent of ‘gross total income’ was rejected by the Assessing Officer. It is relevant to reproduce Section 80AB of the Act which is as follows:
“80AB. Deductions to be made with reference to the income included in the gross total income. — Where any deduction is required to be made or allowed under any section included in this Chapter under the heading “C. — Deductions in respect of certain incomes” in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income.”
As stated above, Section 80AB was inserted in the year 1981 to get over a judgment of this Court in Cloth Traders (P) Ltd. (supra). The Circular dated 22.09.1980 issued by the CBDT makes it clear that the reason for introduction of Section 80AB of the Act was for the deductions under Part C of Chapter VI-A of the Act to be made on the net income of the eligible business and not on the total profits from the eligible business. A plain reading of Section 80AB of the Act 10 | P a g e shows that the provision pertains to determination of the quantum of deductible income in the ‘gross total income’. Section 80AB cannot be read to be curtailing the width of Section 80-IA. It is relevant to take note of Section 80A(1) which stipulates that in computation of the ‘total income’ of an assessee, deductions specified in Section 80C to Section 80U of the Act shall be allowed from his ‘gross total income’. Sub-section (2) of Section 80A of the Act provides that the aggregate amount of the deductions under Chapter VI-A shall not exceed the ‘gross total income’ of the Assessee. We are in agreement with the Appellate Authority that Section 80AB of the Act which deals with determination of deductions under Part C of Chapter VI-A is with respect only to computation of deduction on the basis of ‘net income’.
Sub-section (1) and sub-section (5) of Section 80-IA which are relevant for these Appeals are as under:
“80-IA. Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc.— (1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing 11 | P a g e the total income of the assessee, a deduction of an amount equal to hundred per cent. of the profits and gains derived from such business for ten consecutive assessment years.
* * * * (5) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of subsection (1) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made.”
The essential ingredients of Section 80-IA (1) of the Act are: a) the ‘gross total income’ of an assessee should include profits and gains; b) those profits and gains are derived by an undertaking or an enterprise from a business referred to in subsection (4); c) the assessee is entitled for deduction of an amount equal to 100% of the profits and gains derived from such business for 10 consecutive assessment years; and d) in computing the ‘total income’ of the Assessee, such deduction shall be allowed.
The import of Section 80-IA is that the ‘total income’ of an assessee is computed by taking into account the allowable deduction of the profits and gains derived from the ‘eligible business’. With respect to the facts of this Appeal, there is no dispute that the deduction quantified under Section 80-IA is Rs.492,78,60,973/-. To make it clear, the said amount represents the net profit made by the Assessee from the ‘eligible business’ covered under sub-section (4), i.e., from the Assessee’s business unit involved in generation of power. The claim of the Assessee is that in computing its ‘total income’, deductions available to it have to be set-off against the ‘gross total income’, while the Revenue contends that it is only the ‘business income’ which has to be taken into account for the purpose of setting-off the deductions under Sections 80-IA and 80-IB of the Act. To illustrate, the ‘gross total income’ of the Assessee for the assessment year 2002-03 is less than the quantum of deduction determined under Section 80-IA of the Act. The Assessee contends that income from all other heads including ‘income from other sources’, in addition to ‘business income’, have to be taken into account for the purpose of allowing the deductions available to the Assessee, subject to the ceiling of ‘gross total income’. The Appellate Authority was of the view that 13 | P a g e there is no limitation on deduction admissible under Section 80-IA of the Act to income under the head ‘business’ only, with which we agree.
The other contention of the Revenue is that sub-section (5) of Section 80-IA refers to computation of quantum of deduction being limited from ‘eligible business’ by taking it as the only source of income. It is contended that the language of sub-section (5) makes it clear that deduction contemplated in sub-section (1) is only with respect to the income from ‘eligible business’ which indicates that there is a cap in sub-section (1) that the deduction cannot exceed the ‘business income’. On the other hand, it is the case of the Assessee that sub-section (5) pertains only to determination of the quantum of deduction under sub-section (1) by treating the ‘eligible business’ as the only source of income. It was submitted by Mr. Vohra, learned Senior Counsel, that the final computation of deduction under Section 80-IA for the assessment year 2002-03 as accepted by the Assessing Officer, was arrived at by taking into account the profits from the ‘eligible business’ as the ‘only source of income’. He submitted that, however, sub-section (5) is a step antecedent to the treatment to be given to the deduction under subsection (1) and is not concerned with the extent to which the computed deduction be allowed. To explain the interplay 14 | P a g e between sub-section (5) and sub-section (1) of Section 80-IA, it will be useful to refer to the facts of this Appeal. The amount of deduction from the ‘eligible business’ computed under Section 80-IA for the assessment year 2002-03 is Rs. 492,78,60,973 /-. There is no dispute that the said amount represents income from the ‘eligible business’ under Section 80-IA and is the only source of income for the purposes of computing deduction under Section 80-IA. The question that arises further with reference to allowing the deduction so computed to arrive at the ‘total income’ of the Assessee cannot be determined by resorting to interpretation of subsection (5).
It will be useful to refer to the judgment of this Court relied upon by the Revenue as well as the Assessee. In Synco Industries (supra), this Court was concerned with Section 80-I of the Act. Section 80-I(6), which is in pari materia to Section 80-IA(5), is as follows:
80-I(6) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an industrial undertaking or a ship or the business of a hotel or the business of repairs to ocean-going vessels or other powered craft to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under subsection (1) for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such industrial undertaking or ship or the business of the hotel or the business of repairs to ocean-going vessels or other powered craft were the only source of income of the assessee during the previous years relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made.
It was held in Synco Industries (supra) that for the purpose of calculating the deduction under Section 80-I, loss sustained in other divisions or units cannot be taken into account as sub-section (6) contemplates that only profits from the industrial undertaking shall be taken into account as it was the only source of income. Further, the Court concluded that Section 80-I(6) of the Act dealt with actual computation of deduction whereas Section 80-I(1) of the Act dealt with the treatment to be given to such deductions in order to arrive at the total income of the assessee. The Assessee also relied on the judgment of this Court in Canara Workshops (P) Ltd., Kodialball, Mangalore (supra) to emphasize the purpose of sub-section (5) of Section 80-IA. In this case, the question that arose for consideration before this Court related to computation of the profits for the purpose of deduction under Section 80-E, as it then existed, after setting off the loss incurred by the assessee in the manufacture of alloy steels. Section 80-E of the Act, as it then existed, permitted deductions in respect of profits and gains attributable to the business of generation or distribution of electricity or any other form of power or of construction, manufacture or production of any one or more of the articles or things specified in the list in the Fifth Schedule. It was argued on behalf of the Revenue that the profits from the automobile ancillaries industry of the assessee must be reduced by the loss suffered by the assessee in the manufacture of alloy steels. This Court was not in agreement with the submissions made by the Revenue. It was held that the profits and gains by an industry entitled to benefit under Section 80-E cannot be reduced by the loss suffered by any other industry or industries owned by the assessee.
In the case before us, there is no discussion about Section 80- IA(5) by the Appellate Authority, nor the Tribunal and the High Court. However, we have considered the submissions on behalf of the Revenue as it has a bearing on the interpretation of sub-section (1) of Section 80-IA of the Act. We hold that the scope of sub-section (5) of Section 80- IA of the Act is limited to determination of quantum of deduction under sub-section (1) of Section 80-IA of the Act by treating ‘eligible business’ as the ‘only source of income’. Sub-section (5) cannot be pressed into service for reading a limitation of the deduction under sub-section (1) only to ‘business income’. An attempt was made by the learned Senior Counsel for the Revenue to rely on the phrase ‘derived … from’ in Section 80-IA (1) of the Act in respect of his submission that the intention of the legislature was to give the narrowest possible construction to deduction admissible under this sub-section. It is not necessary for us to deal with this submission in view of the findings recorded above. For the aforementioned reasons, the Appeal is dismissed qua the issue of the extent of deduction under Section 80-IA of the Act.”
(C.1.1) As the issue is covered in favour of the assessee by order of Hon'ble Supreme Court in the case of CIT vs. Reliance Energy Ltd. (supra), the Assessing Officer is directed to allow deduction u/s 80IA of the Act in respect of interest earned by the assessee from FDR kept for release of security/retention money.
(D) The appeal filed by Revenue is beyond the time prescribed u/s 253(3) of the Act by 35 days. In the petition filed by Revenue for condonation of delay, it is stated that there is no limitation in view of order of Hon'ble Supreme Court, dated 23/03/2020 taking cognizance for extension of limitation in Suo Motu Writ Petition in the situation arising out of the challenge faced by the country on account of COVID-19 virus. It was requested to condone the delay. Accordingly, we do not treat the appeal of Revenue as barred by limitation. The appeal is treated as having been filed in time, and is being decided on merits. In this appeal filed by Revenue, first issue in dispute is assessee’s claim for deduction u/s 80IA of the Act amounting to Rs.2,21,72,493/-. The Assessing Officer disallowed this claim of the assessee on the ground that depreciation of Rs.2,21,72,493/- was not allocated which resulted in excess claim of depreciation of Head Office. In the impugned appellate order, the learned CIT(A) directed the Assessing Officer to verify the assessee’s submissions in this regard and to allow deduction u/s 80IA of the Act if the assessee’s claim is found to be legally and factually correct. We find no infirmity in this direction given by learned CIT(A). Therefore, the ground taken by Revenue on this issue is dismissed.
(D.1) The second issue in this appeal is regarding the disallowance made by the Assessing Officer under section 14A of the Act, amounting to Rs.2,56,56,447/-. The Assessing Officer disallowed the aforesaid amount holding that this amount represented interest expenses in relation to making investments, income from which would not be includable in the assessee’s hand. In the impugned appellate order, the learned CIT(A) deleted the aforesaid addition after considering the assessee’s submission that the exempt income, not included in taxable income of the assessee was nil. The assessee further submitted that the assessee had not incurred any expenses against exempt income. The relevant portion of the impugned order of learned CIT(A) is reproduced as under:
(D.1.1) There is no dispute on the fact that the assessee’s exempt income, not included in taxable income of the assessee, during the year was nil. It was held by Hon'ble Delhi High Court in the case of Cheminvest Ltd. vs. CIT [2015] 61 taxmann.com 118 (Delhi) that disallowance u/s 14A of the Act is not attracted when exempt income during the year is nil. In this case, Hon'ble Delhi High Court held as under:
“5. In the AY in question, the Appellant borrowed funds on which interest expenditure of Rs.1,21,03,367/- was incurred. The factual assertion of the Appellant, which has not been controverted, is that in the relevant AY no dividend income was earned by the Appellant from the amount invested in various shares. For the AY in question, the Appellant filed a return of income declaring a loss of Rs.13,84,086/-. This case was picked up for scrutiny and the Assessing Officer (AO) completed the assessment under Section 143(3) of the Act disallowing Rs.97,87,570/- out of the total expenditure incurred during the year under Section 14A of the Act. The reason recorded by the AO for this disallowance was that the borrowed funds were utilized for the purpose of purchase of shares for the purpose to earn dividend income which is exempted under section 10(33) of the Act and thus, not forming a part of the total income, and therefore the interest paid thereon had to be disallowed under Section 14A.
It may be mentioned at this stage that the Assessee has made a distinction between investments in unquoted shares, which was in the sum of Rs.4,16,155/-, and investments in shares (other than trade) on long term basis to the extent of Rs.6,88,70,000/-. Based on the aforementioned distinction, the AO in the assessment order dated 28 th December, 2006, computed the disallowance as Rs.97,87,570/- being the interest paid on borrowed funds invested in long terms shares.
Mr. Ajay Vohra, learned Senior counsel appearing for the Assessee, produced the balance sheet and profit and loss account as well as the computation of income prepared by the Assessee for the AY in question i.e. 2004-05. In the balance sheet, it is seen that the investment in quoted shares of Max India Limited is shown under the head „quoted-other than trade-long term‟. An investment of approximately Rs.2,13,38,698 over the previous year has been made in the shares of Max India Ltd. It is also seen that the investments in other investment companies to the extent of Rs.4,61,155 is shown under the sub-head „unquoted-trade-long term‟. This figure has remained unchanged over the previous year. In the computation filed for the purposes of the income tax return, the details of investments have been shown in two broad categories of „capital assets‟ and „trading assets‟ and the investment in Max India Limited is under the head „trading assets‟ with the investments in the investment companies shown under the head of „capital assets‟.
8. The AO appears to have proportionately disallowed, for the purposes of Section 14A of the Act, the interest attributable to the long term investment (other than trade) for the purposes of earning exempted income. Since the unsecured loan borrowed for the purpose was Rs.6,88,70,000 the disallowance of the amount under Section 14 A of the Act was calculated thus: "1,21,03,367 x 6,88,70,000 = Rs. 97,87,570 8,51,65,000"
(D.1.1.1) Further the assessee’s claim that no disallowance u/s 14A of the Act is attracted is also supported by orders of Hon'ble Supreme Court cases of South Indian Bank Limited vs. CIT [2021] 130 taxmann.com 178 / 283 Taxman 178 (SC) and CIT vs. UTI Bank Limited [2022] 142 taxmann.com 136 / 289 Taxman 238 (SC). The assessee’s contention is further supported by order of Hon'ble Gujarat High Court in the case of Pr. CIT vs. Sintex Industries Ltd. [2017] 82 taxmann.com 171 (Guj). SLP filed by Revenue against the order of Hon'ble Gujarat High Court was dismissed by Hon'ble Supreme Court in [2018] 93 taxmann.com 24 / 255 Taxman 171 (Supreme Court).
(D.1.1.2) Our attention was drawn by learned Departmental Representative to explanation inserted by Finance Act, 2022 in amendment of section 14A of the Act, reproduced below for the ease of reference:
“[Explanation.—For the removal of doubts, it is hereby 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 a 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.] (D.1.1.3) The learned D.R. contended that the explanation has retrospective effect and the assessee is hit by the aforesaid explanation. She further submitted that considering the aforesaid explanation, the disallowance made by the Assessing Officer u/s 14A of the Act should be confirmed. The learned Authorized Representative for the assessee submitted that the aforesaid explanation to section 14A of I.T. Act is prospective in nature; and in view thereof, it has no application to the present case.
(D.2) Whether the aforesaid explanation to section 14A of the Act is retrospective or prospective has been considered by various Hon'ble High Courts in the cases reported as Pr. CIT vs. Era Infrastructure (India) Ltd. [2022] 141 taxmann.com 289 (Delhi), Williamson Financial Services Ltd. vs. CIT [2024] 166 taxmann.com 607 (Gauhati) and Pr. CIT vs. Avantha Realty Ltd. [2024] 164 taxmann.com 376 (Calcutta). In these decisions, Hon'ble High Courts have held that the amendment to section 14A of the Income Tax Act, whereby the aforesaid explanation was inserted, is prospective in nature, and not retrospective. Respectfully following the aforesaid decisions of Hon'ble High Courts, it is held that explanation to section 14A of the Act, inserted by amendment brought about by Finance Act, 2022, with effect from 01/04/2022, is prospective in nature and has no application to the assessment year 2016-17 to which this appeal pertains. Accordingly, it is held that the assessee is not hit by the aforesaid explanation to section 14A of the Act in so far as assessment year 2016-17 is concerned. Further, in respectful consideration of precedents mentioned in foregoing paragraphs (D.1.1) and (D.1.1.1) of this order; it is held that no disallowance is attracted u/s 14A of IT Act in assessment year 2016-17. In view of the foregoing, we decline to interfere with the order of learned CIT(A) on this issue.
(D.3) The third issue in dispute is regarding assessee’s claim for deduction u/s 80IA of Income Tax Act, in respect of interest earned on FDR kept for release of security/retention money. Identical issue has already been decided in foregoing paragraph No. (C.1.1) of this order for assessment year 2016-17. No material facts or circumstances or provisions of law or decided precedents have been brought for our consideration by either side to distinguish the disputed issue in assessment year 2017-18 from assessment year 2016-17. Following the same reasoning, therefore, the issue is decided in favour of the assessee.
(E) In the aforesaid appeal i.e. filed by the assessee, the issue in dispute vide ground No. 1 & 2, is regarding assessee’s claim of deduction u/s 80IA(4) of the Act amounting to Rs.31,64,147/- being interest earned on FDR kept for release of security/retention money. Identical issue has already been decided in foregoing paragraph No.((C.1.1) of this order for assessment year 2016-17. No material facts or circumstances or provisions of law or decided precedents have been brought for our consideration by either sides to distinguish the disputed issue in assessment year 2018-19 from assessment year 2016-17. Following the same reasoning, therefore, the issue is decided in favour of the assessee.
(E.1) Ground No. 3 of the appeal was not pressed by learned Counsel for the assessee, as the assessee has obtained desired relief in order dated 02/02/2024 passed by the Assessing Officer u/s 154 of the Act. Therefore, this ground is dismissed, being not pressed. and C.O.No.01/Lkw/2025 The Assessing Officer made addition of Rs.6,27,83,808/- in respect of assessee’s claim u/s 80IA(4) of the Act. The learned CIT(A) sustained the disallowance amounting to Rs.31,64,146/-, and deleted the remaining amount of disallowance. The relevant portion of the order of the learned CIT(A) is reproduced as under:
(F.1) Revenue has agitated against relief given to the assessee, in appeal no.623/Lkw/2024. The assessee has agitated against the disallowance sustained by the learned CIT(A) amounting to Rs.31,64,146/-. We have heard the learned representatives of both the sides; and we have also perused the materials on record.
However, on perusal of the impugned order of learned CIT(A), relevant portion of which has already been reproduced in foregoing paragraph No.(F) of this order, we find no infirmity in the order of learned CIT(A) on this issue. Therefore, the grounds taken by Revenue on this issue in appeal No. 623/Lkw/2024 and by the assessee in the Cross Objection filed by the assessee, are dismissed.
(F.1.1) The other issue in dispute in is regarding the disallowance of alleged bogus purchase. In the impugned appellate order dated 22/08/2024 of the learned CIT(A), the aforesaid disallowance has been deleted. The relevant portion of the order of the learned CIT(A) is reproduced below:
(F.1.2) In the hearing before us, the learned Departmental Representative for Revenue relied on the assessment order, whereas the learned Authorized Representative for the assessee relied on the impugned appellate order passed by learned CIT(A). On careful perusal of the impugned order of the learned CIT(A), we find no infirmity in it. Therefore, we decline to interfere with the order of learned CIT(A), on this issue.
(F.2) The third issue in dispute in this appeal of Revenue is regarding assessee’s claim for deduction u/s 80IA(4) of the I.T. Act in respect of interest earned on FDR kept for release of security/retention money. Identical issue has already been decided in foregoing paragraph No. (C.1.1) of this order for assessment year 2016-17. No material facts or circumstances or provisions of law or decided precedents have been brought for our consideration by either side to distinguish the disputed issues in assessment year 2018-19, to which this appeal pertains, from assessment year 2016-17. Following the same reasoning, therefore, the issue is decided in favour of the assessee.
(F.2.1) Appeal of Revenue vide and Cross Objection of the assessee vide C.O.No.01/Lkw/2025 are treated as disposed of in accordance with aforesaid directions contained in earlier part of this order. For statistical purposes; the appeal vide and Cross Objection vide C.O.No.01/Lkw/2024; both are treated as dismissed.
(G) As we have decided the issues on merits, the technical grounds and other remaining grounds taken in these appeals and in the Cross Objection have become merely academic in nature; and need not be decided. Hence, we decline to express any opinion on the same.
(H) In the result, appeals vide and I.T.A. No.623/Lkw/2024 are treated as dismissed; appeal vide I.T.A. No.17/Lkw/2024 is treated as partly allowed; appeal vide I.T.A. No.356/Lkw/2020 and Cross Objection vide C.O. No.01/Lkw/2025 is treated as dismissed; for statistical purposes.
(Order pronounced in the open court on 02/04/2025)