Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, DELHI “C” BENCH: NEW DELHI
Before: SHRI SUDHIR KUMAR & SHRI MANISH AGARWAL
ORDER
PER MANISH AGARWAL, AM :
The present cross-appeals are filed by assessee and the Revenue against the order dated 03.02.2023 passed by Ld. Commissioner of Income Tax (A), National Faceless Appeal Centre (“NFAC”), Delhi [“Ld. CIT(A)”] in Appeal No. NFAC/2017- & 3225/Del/2024 18/10017467 u/s 250 of the Income Tax Act, 1961 [“the Act”] arising out of assessment order dated 25.03.2021 passed u/s 143(3) r.w.s. 143(3A) & 143(3B) of the Act pertaining to assessment year 2018- 19.
The appeal of the Revenue is delayed by 461 days. Alongwith appeal memo, a petition is filed for condonation of delay wherein it is stated that due to high pendency of time barring matters, the appeal could not be filed in time. As the delay is Bonafide, it is submitted by the AO that the approval was taken from the Competent Authority for filing the appeal from Ld. Pr. CIT after following the new procedure and thus due to these reasons delay was occurred, He requested for condonation of delay.
Heard the contentions of both the parties and perused the material available on record. In the instant case, the order of Ld. CIT(A) was delivered through online on 03.02.2023 thus, it was served upon the assessee as well as on the AO on the very same day however, the appeal is filed by the revenue before the Tribunal on 08.07.2024 thus, it is delayed by 461 days. In the prayer filed, it is stated by the AO that he was preoccupied in heavy time barring issues and therefore, could not be able to file the appeal in time. It is further requested by the AO that this being the first occasion and it will not happen in future thus, delay be condoned.
& 3225/Del/2024 4. Considering the submissions made by the AO, the delay is condoned and the appeal of the Revenue is admitted to decide on merits.
[Assessment Year : 2018-19] [Assessee’s appeal]
5. First, we take the appeal of the assessee in [Assessment Year 2018-19] wherein assessee raised following grounds of appeal:-
1. That on the facts and circumstances of the case and in law, the Commissioner of Income-tax (Appeals) ["Ld. CIT(A)"] has erred in upholding the addition of Rs. 17,09,49,711/- under section 14A of the Income-tax Act, 1961 ("the Act") read with Rule 8D of the Income-tax Rules, 1962 ("the Rules") based on the incorrect appreciation of facts and law and hence this action of Ld. CIT(A) is illegal, bad in law and deserves to be deleted.
2. That the Assessment Order passed and the addition/disallowance made under Section 14A of the Act are illegal, bad in law and is liable to be deleted.
3. That the Ld. CIT(A) has failed to take a judicious view of the facts and circumstances and the Ld. CIT(A) has failed to consider the legal position and various judgments pronounced by various courts. The Ld. CIT(A) was not justified in law in upholding the addition of Rs 17,09,49,711/-.
That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not appreciating the following: a. That the Assessing Officer ("AO") has incorrectly invoked the provision of section 14A of the Act without recording satisfaction in reaching a finding as to the nexus of any expenditure incurred during the year with investments made or exempt income earned. The facts and circumstances do not warrant the invocation of Sec 14A.
& 3225/Del/2024 b. That the majority of investments were made in the past years which yielded the dividend in the subject year and no direct or indirect expenditure was incurred by the Appellant in connection with making and/ or administering these investments in the captioned year. c. That the AO has not pointed out any error/defect in the computation of expenses suo-moto disallowed by the Appellant, which clearly shows correctness of expense suo-moto disallowed by the Assessee. d. That the Appellant has suo moto disallowed a sum of Rs.49,51,789 in the Return of Income ('ROI) based on the similar methodology (certified by the practicing Chartered Account) which was duly accepted by the AO pursuant to the order of Hon'ble Income Tax Appellate Tribunal, Delhi in Assessee's own case for AY 2008-09 to AY 2010-11.
5. That on facts and circumstances of the case and in law, the Ld. CIT(A) has erred in holding that the Assessee has not provided copies of the set-aside assessment order passed by AO on a similar issue in the Assessee s own case for AY 2008-09 to AY 2010-11 pursuant to the orders of Hon'ble Tribunal. The Ld. CIT(A) has to appreciate that the copies of the said orders were submitted during the appellate proceedings and also re-iterated during the course of hearing through video conferencing.
6. That without prejudice to our rights, the addition of Rs 17,09,49,711/- is highly excessive and should be reduced substantially.
That in view of the facts and circumstances of the case and in law the order passed by AO as upheld by Ld. CIT(A) are incorrect, illegal bad in law and based on surmise and conjectures.
That the documents, explanations filed by the assessee and the material available on record has not been properly considered and judicially interpreted and have been wrongfully ignored.
That the AO and Ld. CIT(A) did not grant a proper and sufficient opportunity to the Assessee to present its case and adduce all the evidences in its favour on the issue of addition under Sec 14A.
10. Without prejudice, the disallowance made under Section 14A of the Act is also highly excessive.
That the Assessee reserves the right to add, amend, alter the grounds of appeal.”
6. All the grounds of appeal of the assessee are with respect to the confirmation of the addition of INR 17,09,49,711/- made by the AO u/s 14A of the Act computed by invoking the provisions of Rule 8D of the Income Tax Rules, 1962, thus they are taken together and decided as under.
7. Brief facts of the case are that the assessee has declared exempt income of INR 81,56,75,328/- and claimed finance cost in its P&L Account at INR 117.28 crores. The assessee suo motto disallowed INR 49,51,789/- u/s 14A of the Act and added back to the total income. This amount is disallowed as per the certificate issued by a Chartered Accountant dated 19.03.2021 according to which common indirect expenses were to the tune of INR 1,87,40,905/-. The Auditor further observed that the exempt income is of 18% of the total income declared therefore, he proposed the disallowance of direct expenses of INR 15,41,654/- alongwith 18% of the indirect expenses of INR 1,87,40,905/- as amount of disallowance u/s 14A and accordingly, assessee has made total disallowance of INR 49,51,789/- in the return of income filed.
8. It is relevant to state that assessment order is passed on 25.03.2021 whereas certificate of the Auditor placed before us on & 3225/Del/2024 19.03.2021 and it is not clear whether same was filed before the AO or not. AO after recording the satisfaction for invoking the provision of section 14A has made the disallowance by following the computation as provided in Rule 8D of the Rules and accordingly, a sum of INR 17,09,49,711/- is further added to the total income of the assessee. Ld. CIT(A) confirmed the action of the AO, therefore, the assessee is in appeal before us.
9. During the course of hearing, Ld.AR has made multi-folds arguments and the very basis for argument is that AO has not recorded his satisfaction about the correctness of the claim of the assessee as envisaged in section 14A of the Act according to which AO must record his satisfaction that the claim of the assessee with respect to the expenditure in respect to income which does not form part of the total income is incorrect. He further submits that the assessee has already made the disallowance based on the certificate issued by the Auditors and therefore, no further disallowance could be made.
With regard to the satisfaction, reliance is placed on the orders of Co-ordinate Bench of Mumbai Tribunal in the case of Piem Hotels Ltd. vs DCIT in & 4339/Mum/2023 dated 08.05.2024 wherein Co-ordinate Bench has held that AO should record his satisfaction as to why the claim of the assessee is not correct & 3225/Del/2024 according to him on verification of the financials of the assessee as provided u/s 14A(2) of the Act.
11. Ld.AR for the assessee also submits that in preceding years, disallowance of similar nature was made which stood deleted by Co- ordinate Bench and thus, following the principal of consistency, the disallowance made in this year should be deleted. He prayed accordingly.
Per contra, Ld. CIT DR for the Revenue supports the orders of the lower authorities and submits that amendment was made in Rule 8D of the Rules w.e.f. 01.04.2016, according to which upon satisfied about the correctness of the claim of expenditure, the disallowance u/s 14A would be aggregate of the expenditure directly relatable to earning exempt income and 1% of the average investment i.e. monthly average of opening and closing value of investment, income from which does not form part of total income. He further submits that as per amended Rule 8D there is no scope left with the AO to restrict the disallowance to the amount of expenditure directly or indirectly relatable to earn exempt income and it is further expanded to add 1% of monthly average value of investment therefore, the AO has rightly computed the disallowance which deserves to be uphold. Regarding satisfaction, ld. CIT DR drew our attention to the assessment order wherein the AO in clear terms has recorded his satisfaction under the tile “reason for satisfaction for disallowance & 3225/Del/2024 u/s 14A” and further stated that assessee has declared substantial amount of exempt income and claimed expenditure towards the finance cost. As per ld. CIT DR, the AO further observed that the assessee has failed to file the details as called for therefore, he recorded his satisfaction that the claim of the assessee regarding disallowance u/s 14A is not correct. Ld. DR further submits that certificate issued by the auditors was never submitted before the AO thus, the correctness of the expenditure claimed as incurred directly and indirectly to earn such exempt income was not verified by the AO. He thus, requested for the confirmation of the orders of the lower authorities.
Heard the contentions of both the parties and perused the material available on record. The provision as contained in section 14A is as under:-
“14A. Expenditure incurred in relation to income not includible in total income. (1) Notwithstanding anything to the contrary contained in this Act, for the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.
& 3225/Del/2024 (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act : Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001. 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.”
Rule 8D of the Rules as amended w.e.f. 01.04.2016 is as under:- “8D: Method for determining amount of expenditure in relation to income not includible in total income. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with— (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:— (i) the amount of expenditure directly relating to income which does not form part of total income; and (ii) an amount equal to one per cent of the annual average of the monthly averages of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income: Provided that the amount referred to in clause (i) and clause (ii) shall not exceed the total expenditure claimed by the assessee.]”
From the perusal of the above, it is evident that as per sub- section 2 of section 14A, AO should record his satisfaction about the correctness of the claim of the assessee in respect of expenditure in relation to income which does not form part of total income. From the perusal of the assessment order, we find that AO has recorded his satisfaction by referring to the exempt income earned, investments made and the finance cost claimed in the P&L Account. The assessee has filed to file the month-wise precise details of the investment made during the year on account of shares as well as mutual funds from where it earned exempt income nor had provided the working of suo motto disallowance made in the computation of income. Therefore, AO reached to the conclusion that assessee has not disallowed the expenditure directly relatable to earn exempt income. The judgment of the Co-ordinate Bench of Mumbai Tribunal as relied upon by Ld. AR in the case of Peim Hotels Ltd. (supra), the Co-ordinate Bench has observed that there was no whisper in the assessment order about the examination of the claim of the assessee for holding such claim as not correct by examining the accounts of the assessee however, in the instant case as observed above, the AO in categorical terms has not only examined the financial statements of the assessee but also & 3225/Del/2024 considered the expenses claimed and then reached to the conclusion that claim of the assessee of having expenditure of INR 49,51,789/- incurred to earn such exempt income is incorrect and thereafter, he proceeded to re-compute the expenditure relatable to earn such exempt income in the manner as provided in Rule 8D of the Rules. Under these circumstances, we inclined to interfere in the order of the lower authorities with respect to the satisfaction recorded before invoking the provision of section 14A r.w. Rule 8D of the Rules.
Now coming to the amount of disallowance, as stated above, in Rule 8D, the disallowance should be the aggregate of the amount directly or indirectly related to income which does not form part of the total income added by the amount equal to 1% of monthly average of the opening and closing balance of the value of the investments, income from which does not or shall not form part of the total income. From the perusal of the assessment order, we find that AO has taken 1% of the average value of total income irrespective of facts whether such investment had yielded exempt income or not.
This being so, we direct the AO to compute the disallowance as per Rule 8D(2)(ii) on the amount of investment which had yielded exempt income only. The hon’ble jurisdictional high court in the case of Crago Motors Pvt. Ltd. Vs. DCIT reported in (2023) 453 ITR 554 (Delhi) and the Special Bench of ITAT Delhi in the case of Vireet Investments P Ltd reported in (2017) 82 taxmann.com 415 (Delhi)
& 3225/Del/2024 held that for the purpose of computing the disallowance u/s 14A of the Act, the investments which has yielded exempt income should only be considered for the purpose of computing the amount of disallowance in terms of rule 8D(2)(ii) of the Income Tax Rules, 1962. Thus, by respectfully following the aforesaid judgements of hon’ble jurisdictional high court and of the special bench of Tribunal, we direct the AO to recompute the amount of disallowance as per Rule 8D(2)(ii) of the Rules by considering those investments which yielded exempt income. With these directions, all the grounds taken by the assessee are partly allowed.
With these directions, all the grounds raised by the assessee are partly allowed.
In the result, appeal of the assessee is partly allowed.
[Assessment Year 2018-19] [Revenue’s appeal] 20. In appeal filed by the Revenue, solitary ground of appeal taken is with respect to the deletion of the addition of INR 1,94,37,33,111/- made on account of surcharge on delayed payments from the debtors.
Heard the contentions of both the parties and perused the material available on record. At the outset, it is seen from the order
ITA No.961/Del/2023 & 3225/Del/2024 of Ld. CIT(A) that he has followed the order of Assessment Year 2015- 16 vide order dated 26.09.2018 wherein Ld. CIT(A) has deleted the additions made by AO following the order of Co-ordinate Bench of the Tribunal. Ld. CIT(A) has observed that there is no change in the circumstances as existed in the preceding years and the year under appeal. It is further seen that Co-ordinate Bench of Tribunal in assessee’s own case in while deleting the additions made, placed reliance on the judgement of the Hon’ble Punjab & Haryana High Court in the case of DCIT vs M/s Dakshin Haryana Bijli Vitran Nigam Ltd. in dated 01.04.2014 however, has direct the AO to verify the year in which the surcharge income has been offered to tax. The relevant observation in para 5 to 7 of the order of Co-ordinate Bench of Tribunal is reproduced as under:-
“Learned counsel for the assessee has pointed out that in so far as the issue of taxability of surcharge income is concerned, the issue is squarely covered by the judgment of Hon'ble Punjab & Haryana High Court in of 2014 dated Ist of April 2014 in the case of CIT vs. Dakshin Haryana Bijli Vitran Nigam Ltd., Hissar wherein the Hon'ble High Court while affirming the order of ITAT has observed as under: “The question that calls for an answer, in the facts of this case, is whether surcharge for delayed payment reflected in the bills raised by the assessee and its accounts, would invite payment of a tax dehors recovery/payment/receipt of surcharge. The Assessing Officer, took a view that a surcharge levied upon delayed payments of bills is reflected in the bills and the accounts of the assessee, the fact that the surcharge may or may not be paid or recovered or may eventually be waived, is entirely irrelevant as the assessee maintains a mercantile system of accounting. Aggrieved by the aforesaid finding, the assessee filed an appeal. The CIT(Appeals) vide order dated 06.11.2009, set aside the addition made by the Assessing Officer by holding as follows:-
& 3225/Del/2024 "The issue involved and the submissions made by the appellant have been considered. It is undisputed that the appellant is following mercantile system of accounting: it is levying surcharge on delayed payment of bills by the consumers; the surcharge is taken as income as and when it is collected, however a provision for charge is made as noted above under the head 'provision of surcharge not realized'. This method has been regularly followed by the appellant. During appeal proceedings before the undersigned the appellant has produced bills pertaining to as many as 50 parties of various places and has shown that the bills are accepted even without payment of surcharge by the consumers and that surcharge is shown in the books as income as and when it is collected/received. It is settled law that, "Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt, but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book keeping an entry is made about a 'hypothetical income". Which does not materialize. Where income has, in fact, been received and is subsequently given up, in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account in view of the aforesaid and the Accounting Standard (AS)-1 and Accounting Standard (AS)-9, issued by the institute of Chartered Accountant of India the addition made by the Assessing Officer is deleted." The revenue thereafter filed an appeal before the ITAT, which affirmed the order passed by the CIT (Appeals) and dismissed the appeal. A relevant extract from the order passed by the ITAT is as follows:- "In our considered opinion, all the above judgment clearly favour the stand taken by the assessee. We may hasten to mention that looking at the intricacies the facts may vary, therefore, basic principles of accrual or mercantile system as laid down by various authorities are to be applied in a careful manner. The assessee being a sate PSU; the surcharge on delayed payment being disputable item; was not mandatorily payable at the time of payment of electricity consumption bill; was not an accrued receipt in view of the accounting policy accepted by the revenue. Therefore, such amount of surcharge cannot be held to be taxable as it is not the real income of the assessee and is hypothetical by nature in given facts and circumstances. In view of the foregoing, we are of the view that the amount of surcharge not realized by the assessee, does not amount to accrued & 3225/Del/2024 of receipt taxable as income, CIT(A) has rightly deleted the addition, which we uphold." We have duly considered arguments but are unable to accept the contentions advanced by counsel for the appellant. Admittedly, Rs.2,25,18,23,535/-was added by the assessing officer as reflecting levy of surcharge on delayed payment of bills. Admittedly, this amount has neither been paid nor recovered by the assessee. Admittedly, the surcharge is a disputable item and may at any time be reduced or waived and, therefore, despite the fact that the assessee maintains a mercantile system of accounting, the ITAT and the CIT (Appeals) have rightly set aside the order passed by the assessing officer adding surcharge to the income of the assessee. It would be appropriate to point out that income tax is fundamentally a levy on income and though the Act may prescribe different points in time at which liability to taxation ensures still remains a tax on receipt of income. A hypothetical income that may or may not materialize should not be made subject matter of tax merely because of an entry in the accounts books maintained by an assessee. A reference in this regard may be made to a judgment of the Hon'ble Supreme Court in "Commissioner of Income-tax Vs. Shoorji Vallabhdas and Co." [1962] 046 ITR 0144, wherein it has held as follows:- "Income-tax is a levy on income. Though the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt, yet the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a “hypothetical income”, which does not materialize. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even through an entry to that effect might, in certain circumstances, have been made in the books of account.” In view of what has been recorded hereinabove, we find no error in the impugned orders and while dismissing the appeal record that as and when the assessee receives payment of surcharge, it would be obliged to pay tax on such amount.”
After considering the facts of the case of assessee before us and those in the case CIT vs. Dakshin Haryana Bijli Vitran Nigam Ltd. (supra), we are of the view that there is parity in the facts of both the cases and the proposition of law, held by Hon’ble Punjab and Haryana High Court, squarely applies to the issue before us.
& 3225/Del/2024 7. In the case of Dakshin Haryana Bijli Vitran Nigam Ltd. (supra) there was CAG audit which fact is missing in present so Assessing Officer has to verify the fact as to when the surcharge was realized and offered as income. Thus while allowing the grounds in all the appeal covered by this issue, we direct the assessing officer to consider the claim of the assessee after verifying the year in which the surcharge income has been offered to tax.”
In the instant case, admittedly there is no change in the facts and circumstances of the case as in the instant year also assessee has made provision of the unrealized surcharge. Ld. CIT(A) also by following the orders of the previous year, deleted the additions.
In view of these facts and by respectfully following the judgement of Co-ordinate Bench and by placing reliance on the judgement of Hon’ble Punjab & Haryana High Court in the case of Dakshin Haryana Bijli Vitran Nigam Ltd. (supra), we direct the AO to delete the additions made on account of surcharge on the delayed payments from debtors. However, we direct the AO to consider the claim of the assessee after verifying the facts as to when surcharge was realized and offered as income. With these directions, appeal of the Revenue is dismissed.
In the result, appeal of the Revenue is dismissed.
ITA 25. In the final result, appeal of the assessee in No.961/Del/2023 [AY 2018-19] is partly allowed and appeal of the Revenue in [AY 2018-19] is dismissed.
Order pronounced in the open Court on 19.11.2025.