ITO 6(3)(2), MUMBAI vs. INDOKEM LTD, MUMBAI

Brief facts of the case are that the assessee is a public limited company engaged in the business of manufacturing and trading of synthetic dyestuff, chemicals and dyes. It filed its return of income for A.Y. 2011-12 on 30.09.2011, declaring ‘Nil’ total income. The case was selected for scrutiny and, accordingly, notices u/s. 143(2) and 142(1) along with detailed questionnaire calling for various details were issued. In response to notices, the AR of the assessee appeared from time to time and filed the details called for. The assessment was completed u/s. 143(3) on 28.03.2014, determining the total income at ` 10,18,63,220/-, inter alia, making additions towards disallowances of expenses incurred in relation to exempt income u/s 14A of the Income tax Act, 1961, additions towards bogus purchases u/s. 69C of the Income tax Act, 1961, and re-computation of Short term capital gain as well as Long term capital gain on depreciable asset by denying set off of unabsorbed depreciation of A.Y. 1996-97. Aggrieved by the assessment order, assessee preferred appeal before the CIT(A).

Before the CIT(A) the assessee has challenged the additions made by the Assessing Officer towards disallowances of expenses incurred in relation to exempt income on the ground that during the year under consideration the assessee has not earned any exempt income. Therefore, no disallowance can be made u/s. 14A of the Income tax Act, 1961. The assessee also made a alternative submission, in as much as its investments yielding exempt income were out of its own funds and in the absence of any findings to the contrary, there was a presumption that investments are made from own funds available to the assessee and, therefore, no disallowance can be made towards expenditure under Rule 8D(2)(ii). In this regard he relied upon the decision of Hon’ble Bombay High Court in the case of Reliance Utilities & Power Ltd. vs. CIT [313 ITR 340]. As regards denial of brought forward unabsorbed depreciation of the assessment years 1996-97 to 2000-01, the assessee submitted that when the amendment was brought to section 32(2) of the Income tax Act, 1961, the period of eight years had not expired allowing indefinite carry forward of the losses. Therefore, the Assessing Officer was incorrect in restricting unabsorbed depreciation set off up to the assessment year 2000-01. Similarly, as regards additions towards bogus purchases, the assessee has filed various details including purchase bills and payment details to M/s. Amrish Traders and S P Corporation. It was argued that merely because third party statement reveals that the parties are hawala operators engaged in providing accommodation entries, purchases from these parties cannot be treated as bogus when the assessee has filed necessary evidences.

The CIT(A) after considering relevant submissions of the assessee and also relying upon the decision of Hon’ble Kerala High Court in the case of State Bank of Travancore [16 taxman.com 289], rejected the arguments of the assessee in so far as disallowance of expenses incurred in relation to exempt income by holding that the Assessing Officer has brought out clear facts that the assessee has earned exempt income, however, failed to disallow any expenses incurred in relation to earning of exempt income. Therefore, there is no reason to interfere in the findings of the Assessing Officer.

As regards rejection of set off of unabsorbed depreciation of A.Ys. 1996-97 to 2000-01, the CIT(A) allowed partial relief to the assessee wherein he has allowed set off towards unabsorbed depreciation for A.Ys 1997-98 to 2000-01 on the ground that brought unabsorbed depreciation for A.Ys 1997-98 to 2000-01 can be carried forward even after amendment to section 32(2) by the Finance Act,2001 as the period of eight years has not expired. However, he confirmed the action of the Assessing Officer in so far as A.Y. 1996-97.

In so far as additions towards unexplained purchases from M/s. Amrish Traders and S P Corporation are concerned, the CIT(A) deleted the additions made by the Assessing Officer by following the jurisdictional High Court judgment in the case of CIT vs. Nikunj Exim Enterprises (Pvt.) Ltd.

The learned AR for the assessee submitted that the learned CIT(A) erred in confirming the additions made by the Assessing Officer towards disallowance of expenses in relation to exempt income without appreciating the fact that the Assessing Officer has failed to establish nexus between exempt income earned and purported expenses incurred to earn such exempt income. The AR further submitted that during the year under consideration, the assessee has not earned any exempt income which do not form part of total income under this act and in view of the decision of Hon’ble Delhi High Court in the case of Cheminvest Ltd [2015] 378 ITR 33 (Del), section 14A will not apply if no exempt income is received or receivable during the relevant previous year. The Assessing Officer has made additions towards expenses u/s. 14A by applying the Special Bench decision of ITAT Delhi in the case of Cheminvest Ltd., but the said decision has been over ruled by the Hon’ble Delhi High Court, wherein it was held that the expression ‘does not part of total income’ in section 14A 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 said income. Since the assessee has not earned any exempt income the question of disallowance of any expenses in relation to exempt income does not arise.

The learned DR, on the other hand, strongly supported the orders of the authorities below.

We have heard both the parties and perused the material available on record. At the time of hearing, the learned AR for the assessee submitted that the issue is covered in favour of the assessee by the decision of Hon’ble Delhi High Court in the case of Cheminvest Ltd [2015] 378 ITR 33 (Del), wherein it has been categorically held that section 14A will not apply if no exempt income is received or receivable during the relevant previous year. There is no dispute with regard to the fact that the assessee has not earned any exempt income during the year under consideration. Although the assessee has claimed exemption u/s. 10(34) for dividend income received from co-operative bank, such claim has been withdrawn before the Assessing Officer by stating that dividend received from co-operative bank is not exempted u/s. 10(34) and the claim made in the return of income by mistaken facts has been withdrawn. We further observed that the Hon’ble Delhi High Court in the case of Cheminvest Ltd (supra), in para 23 observed that the expression ‘does not part of total income’ in section 14A 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 said income. In other words, section 14A will not apply if no exempt income is received or receivable during the relevant previous year. In this case, on perusal of facts, we find that the assessee has not earned any exempt income, which form part of total income. Therefore, we are of the considered view that the Assessing Officer has erred in computing disallowance u/s. 14A by invoking Rule 8D(2)(ii) of the Income tax Rule, 1962. Hence, we direct the Assessing Officer to delete the additions made u/s. 14A of the Income tax Act, 1961.

The next issue that came up for consideration from the assessee’s as well as Revenue’s appeal is disallowance of carry forward unabsorbed depreciation loss of A.Ys. 1996-97 to 2000-01. The Assessing Officer has disallowed unabsorbed depreciation loss set off against income of current year on the ground that by virtue of amendment to section 32(2) of the Income tax Act, 1961, by the Finance Act 2001, from A.Y. 2002-03, the unabsorbed depreciation of upto A.Y. 2001-02 can be carried forward up to eight years. According to the Assessing Officer, depreciation loss of earlier years can be carried forward up to maximum eight years by virtue of section 32 of I.T.Act. However, such restrictions have been removed from A.Y. 2002-03 onwards, where assessee can carry forward depreciation for indefinite period. Since the assessee has carried forward unabsorbed depreciation of A.Ys 1996-97 to 2001-02 against current year income under the head income from capital gains, disallowed unabsorbed depreciation of earlier years.

The learned AR for the assessee, at the time of hearing, submitted that the issue is squarely covered in favour of the assessee by the decision of the Tribunal in its own case for A.Y. 2009-10, wherein similar issue has been decided in favour of the assessee by following the judgment of Hon’ble Gujarat High Court in the case of General Motors Pvt. Ltd. (2012) 25 taxman.com 364, wherein the Co-ordinate Bench held the unabsorbed depreciation prior to A Y 1997-98 and after A.Y. 2003-04, set off after a period of eight years in regards with section 32(2) of the Act, is to be allowed in view of amendment by the Finance Act, 2001.

Having heard both the sides, we find that the issue is no longer res integra and the co-ordinate Bench of ITAT, Mumbai Benches, vide order dated 09.06.2017, in assessee’s own case for A.Y. 2009-10 in after considering the ratio laid down by Hon’ble Gujarat in the case of General Motors Pvt. Ltd. (supra), held that unabsorbed depreciation loss can be carried forward without any limitation to pre-amended and post-amended period. The relevant portion of the order is extracted below:

We have heard the rival contentions and gone through the facts and circumstances of the case. We find that the issue is squarely covered in favour of assessee reason being the claim of carry forward of unabsorbed depreciation pertains to AY 1995-96 and 1997-98 and this restriction came from AY 1997-98 to 2001-02. This period is outside the ambit of restriction period and in view of the decision of the Hon'ble Gujarat High Court in the case of General Motors India Pvt. Ltd (Supra), which has interpreted the restricted period and hold the issue in favour of assessee. Respectfully, following the same, we allow the claim of the assesseee. The issue of appeal of assessee is allowed.”

In this view of the matter and being consistent with the view taken by the Co-ordinate Bench of this Tribunal in assessee’s own case for A.Y. 2009-10, we direct the Assessing Officer to allow set off of unabsorbed depreciation of A.Y. 1996- 97 to AY. 2000-01.

The next issue that came up for consideration from Revenue’s appeal is addition towards unexplained purchases from M/s. Amrish Traders and S P Corporation for `.8,08,500/- . The Assessing Officer made additions towards purchases from above two parties on the ground that the assessee has failed to file any evidences in support of purchases from the above parties in view of the findings of the Investigation Wing of Maharashtra VAT department, that these parties were involved in providing accommodation entries. The Assessing Officer further observed that the assessee even failed to produce the parties in question for examination therefore, opined that purchases from the said parties are bogus in nature and accordingly, made addition u/s. 69C of the Income tax Act, 1961.

It is the contention of the assessee that purchases from above parties are supported by valid documents including purchase bills, purchase orders, goods receipt entry notes, ledger accounts, payment for said purchases has been made through banking channel and all these evidences have been placed before the Assessing Officer, but he made the additions only on the basis of information from third parties ignoring the fact that the assessee has made VAT payment on the said purchases.

We have heard both the sides and have perused the material available on record. The learned CIT(A) has recorded categorical finding in the light of evidence filed by the assessee that purchase from M/s. Amrish Traders and S P Corporation amounting to ` 8,08,500/- are supported by valid documents. The relevant portion of the order is extracted below:

In the result, the Revenue’s appeal is dismissed and that of the assessee is allowed.