DEPUTY COMMISSIONER OF INCOME TAX, CHANDIGARH vs. ESSIX BIOSCIENCES LIMITED, CHANDIGARH

आदेश/ORDER

PER A.D.JAIN, VICE PRESIDENT

This is Department’s appeal and assessee's Cross

Objections for assessment year 2014-15.

ITA 534/CHD/2023 & C.O. 08/CHD/2024 A.Y.2014-15 2 2. The Cross Objection is time barred by 113 days. In the

application for condonation of delay, accompanied by the

affidavit of Shri Nav Rattan Munjal, Director, it has been

stated that the assessee had received the intimation of

appeal filed by the revenue containing Form 36 and Grounds

of Appeal on 16th September, 2023. However, the office staff

who had received those documents forgot to hand them over

to the Accounts-cum-Tax department of the assessee

company due to which no further action was taken in respect

of those documents received by the assessee.When the notice

of hearing of appeal was received by the assessee on

23.01.2024 from ITAT Bench in respect of schedule of

hearing on 22.02.2024, the same was forwarded to the Tax

Counsel. The tax counsel enquired for the status of Form 36

and Grounds of appeal filed by the revenue. Then the

assessee cross checked from the office and office staff who

had received the documents intimated that the documents

were received by him but he forgot to hand over the same to

the concerned person; then those documents were

immediately handed over by him to the Accounts-cum-Tax

Department of the assessee company and then the same were

ultimately forwarded to the Tax Counsel for necessary

ITA 534/CHD/2023 & C.O. 08/CHD/2024 A.Y.2014-15 3 action; thereafter, the Tax Counsel advised the assessee

company to immediately file the Cross Objections in respect

of the appeal filed by the Department along with the

application for condonation of delay; the assessee company

after consulting its legal counsel immediately took steps to

file the cross objection against the appeal filed by the

Revenue on 06.02.2024 and thus there is a delay in filing of

cross objection by 113 days due to negligence on the part of

the staff working in the office of the assessee company.

assessee was prevented by sufficient cause from filing the

Cross Objections in time. Even otherwise, the assessee

cannot be said to stand to gain anything by deliberately

delaying the filing of the Cross Objections. Therefore, the

delay is condoned.

has raised the following grounds :

(i) The Ld, CTT(A), on facts and circumstances of j the ease, has erred in deleting the disallowance made of Rs. 1,86,96,356/- u/s 40(a)(ia) of the Act by the AO holding that the assessee has failed the mandatory condition of submission of Form 26A to ; the Director General of Income Tax (System) through due procedure as prescribed in section 201 (1) of the Act, 1961 read with Rule 31ACB of Income Tax Rule, 1962.

ITA 534/CHD/2023 & C.O. 08/CHD/2024 A.Y.2014-15 4 (ii) The Ld. CIT(A), on facts and circumstances of the case, has erred in holding that mere non-filing of the Form 26Abfifore the Director General (System), the appellant should not be held as in default with Rule 31 ACB, when furnishing of Form 26A by die assessee to the Director General of income Tax (System) in accordance with the procedures, formats and standards specified in order sub-rule(2) of Rule 31 ACB, is a mandatory condition for not being treated as assessee in default. (iii) That the Ld. CIT(A.) has erred in deleting the disallowance made of Rs. 2,09,78,997/- u/s 14A r.w. Rule 8D by the AO without appreciating the facts of the case. (iv) That the Id. CIT(A), on the facts and circumstances of the case has erred in deleting the disallowance made of Rs. 2,09,78,997/- without considered the fact mat the assessee has not taken interest component into its account as required under role 8D of the l.T.Rules, 1962. (v) That the Ld. CTT(A) has erred in ignoring the legislative intent expressed in clarificatory explanation inserted vide Finance Act, 2022 in Section 14A as, "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 a 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." (vi) That the Ld. CIT(A) has erred in ignoring the legislative intent expressed in CBDT's Circular no. 5/2014 dated 11.02.2014, which explicitly states that expenses relatable to earning of exempt income have to be considered for disallowance irrespective of the fact whether any such income has been earned during the financial year or not; as confirmed by Apex Court in Maxopp Investment Ltd. vs. CIT, 91 Taxman.com 154(SC).

following grounds :

(i) On the facts and circumstances of the case, the learned Commissioner of Income Tax (Appeals), Income Tax Department {CIT(A), ITD)} [NFAC] has erred both on facts and in law in

ITA 534/CHD/2023 & C.O. 08/CHD/2024 A.Y.2014-15 5 restricting the disallowance under Section 14A to Rs. 48,48,000/- despite the fact that assessee has earned the exempt income of Rs. 7,12,442/- during the year under consideration.

(ii) On the facts and circumstances of the case, the above action of the Ld. CIT(A), ITD is contrary to the settled position of law that the disallowance under Section 14A cannot exceed the amount of exempt income earned by the assessee. (iii) On the facts and circumstances of the case, the above action of the CIT(A), ITD is contrary to the settled position of law that Income Tax Authorities are duty bound to compute the correct income of the assessee.

Assessing Officer (in short ‘the AO’) asked the assessee to

show cause as to why the disallowance of Rs.1,86,96,356/-

u/s 40(a)(ia) of the Income Tax Act, 1961 be not made, as

TDS was not deducted on the interest paid to M/s Conquer

Investments & Finance Pvt. Ltd., M/s Ind Swift Laboratories

Ltd. and M/s Fortune India Constructions Ltd.

6.1 The assessee, in reply, submitted copy of Form 26A

relating to M/s Conquer Investments & Finance Pvt. Ltd.,

M/s Conquer Investments & Finance Pvt. Ltd., M/s Ind Swift

Laboratories Ltd. and M/s Fortune India Constructions Ltd.,

alongwith their annexures to the AO. Copies thereof have

been placed at APB 75-84.

ITA 534/CHD/2023 & C.O. 08/CHD/2024 A.Y.2014-15 6 6.2 Further, vide reply (APB 85-86) dated 06.12.2016, the

assessee submitted, before the AO, the details of interest on

loan paid to M/s Conquer Investments & Finance Pvt. Ltd.,

M/s Ind Swift Laboratories Ltd. and M/s Fortune India

Constructions Ltd. These are at APB 89.

6.3 The AO, however, passed the assessment order,

making disallowance of Rs.1,86,96,356/- u/s 40(a)(ia) of the

Income Tax Act, for the reason that the assessee had not

filed the Form 26A before the Director General of Income Tax

(Systems). The AO held that as per the provisions of Section

40(a)(ia) read with those of Section 201 of the Act and Rule

37ACB of the Income Tax Rules, the furnishing of Form No.

26A before the Director General of Income Tax (Systems) is

mandatory requirement for allowing claim of expenditure on

interest without deduction of tax; and that since the same

had not been furnished, the addition was being made u/s

40(a)(ia) of the Act.

considered the submissions made on behalf of the assessee,

deleted the disallowance, observing that since the recipients

of the interest had included the same in their total income

ITA 534/CHD/2023 & C.O. 08/CHD/2024 A.Y.2014-15 7 and had paid taxes thereon, the assessee could not be held

as an assessee in default; and that disallowance u/s 40(a)(ia)

of the Act cannot be made merely on the ground that the

assessee has not furnished Form 26A before the Director

General of Income Tax (Systems).

has erred in deleting the disallowance correctly made by the

AO u/s 40(a)(ia) of the Act, since the assessee had failed to

meet the mandatory condition of submission of Form 26A

before the Director General of Income Tax (Systems), through

due procedure as prescribed in Section 201(1) of the Act read

with Rule 36ACB of the IT Rules, 1962. It has been

contended that the ld. CIT(A) erred in holding that mere non

filing of Form 26A before Director General of Income Tax

(Systems) could not lead to the assessee being held as an

assessee in default, when furnishing of Form 26A by the

assessee before the Director General of Income Tax (Systems)

is entirely in accordance with the mandatory procedure

prescribed in Rule 31ACB(2) of the Rules. It has been

contended that as rightly held by the ld. CIT(A), the

provisions of Section 40(a)(ia) read with those of Section

201(1) of the Act unambiguously lay down and if an assessee

ITA 534/CHD/2023 & C.O. 08/CHD/2024 A.Y.2014-15 8 fails to deduct the whole or any part of the tax in accordance

with the provisions of Chapter XVII-B on any such sum but

that any person, including the principal officer of a

company, who fails to deduct the whole or any part of the tax

in accordance with the provisions of this Chapter on the sum

paid to a resident or on the sum credited to the account of a

resident shall not be deemed to be an assessee in default in

respect of such tax if such resident has (i) furnished his

return of income under section 139; (ii) has taken into

account such sum for computing income in such return of

income; and(iii) has paid the tax due on the income declared

by him in such return of income and the person furnishes a

certificate to this effect from an accountant in such form as

may be prescribed, then it shall be deemed that the assessee

has deducted and paid the tax on such sum on the date of

furnishing of return of income by the resident payee referred

to in the said proviso.

8.1 It has further been contended that Rule 31ACB of the

IT Rules prescribes the norm for furnishing certificate of the

Accountant under the 1st proviso to Section 201(1), i.e.,

Form 26A; that sub-rule (2) of Rule 31ACB unequivocally

provides that the Director General of Income Tax (Systems)

ITA 534/CHD/2023 & C.O. 08/CHD/2024 A.Y.2014-15 9 shall specify the procedures, formats and standards for the

purposes of furnishing and verification of the Form 26A and

shall be responsible for the day to day administration in

relation to furnishing and verification of the Form 26A in the

manner specified. It has been contended that since these

mandatory provisions were violated by the assessee by not

furnishing the Form 26A before the Director General of

Income Tax (Systems), the AO was entirely correct in making

the disallowance and the ld. CIT(A) has erred in deleting the

same.

8.2 On the other hand, strongly supporting the impugned

order, the ld. Counsel for the assessee has contended that

the assessee had duly submitted the Form 26A relating to

the three parties, i.e., M/s Conquer Investments & Finance

Pvt. Ltd., M/s Ind Swift Laboratories Ltd. and M/s Fortune

India Constructions Ltd. before the AO, and that the AO had

not doubted such Form 26A. The CIT(A)’s reliance on the

decision of the Cuttack Bench of the Tribunal in the case of

“Jai Mata Di Vs ITO” in ITA No. 508/CTK/2017, vide order

dated 23.04.2018 : [2018] 5 TMI 1481-ITAT Cuttack has been

reiterated.

ITA 534/CHD/2023 & C.O. 08/CHD/2024 A.Y.2014-15 10 8.3 Further, reliance has also been placed on the decision

of the Agra Bench of the Tribunal in the case of “DCIT,

Circle-1(1) Vs Swastik Roadlines Pvt. Ltd.”, 2020(1) TMI

1341-ITAT-Agra for the proposition that when the contents of

the Form 26A are not disputed, the assessee is entitled to

the benefit of the proviso to Section 40(a)(ia) of the Act.

8.4 Then, to support the unopposed proposition that the

payee has filed its return of income disclosing the payment

received by it and has also paid tax on such income, and so,

the assessee cannot be treated as a person in default u/s

201(1) of the Act, reliance has been placed on “CIT -1 Vs

Ansal Land Mark Township (P) Ltd.”, 2015(9) TMI 79-Delhi

High Court.

8.5 Reliance has also been placed on the decision of the

Hon'ble Punjab & Haryana High Court in the case of “Pr.

CIT-2, Chandigarh Vs Shri Shivpal Singh Chaudhary”,

2018(7) TMI 1850 (P&H).

8.6 It has been contended that in view of the facts as

narrated and the law as cited, the order passed by the ld.

CIT(A) on this issue be confirmed while rejecting ground Nos.

1 & 2.

ITA 534/CHD/2023 & C.O. 08/CHD/2024 A.Y.2014-15 11 9. The facts are not disputed. The issue is as to whether

the Department is right in contending that as held by the

AO, since the assessee had not furnished the Forms 26A with

regard to the three parties before the Director General of

Income Tax (Systems), the disallowance ought to have been

sustained by the ld. CIT(A).

before the Director General of Income Tax (Systems), we find

that the ld. CIT(A) has correctly placed reliance on the

decision of the Cuttack Bench of the Tribunal in the case of

“Jai Mata Di” (supra). Therein, the Tribunal held that for

non-filing of Form 26A before the Director General of Income

Tax (Systems), the assessee can be visited with penalty as

provided under the Income Tax Act, but no disallowance of

the expenditure can be made u/s 40(a)(ia) of the Act. For

holding so, the Bench followed the decision of the Mumbai

Bench of the Tribunal in the case of “Karwat Steel Traders Vs

ITO”, 145 ITD 370 (Mum)., wherein, it was held that the

amount cannot be allowed as deduction only in the event

when tax is deductible at source under Chapter VII-B and

such tax has not been deducted or, after deduction, has not

been paid; that the assessee was to deduct tax under the

ITA 534/CHD/2023 & C.O. 08/CHD/2024 A.Y.2014-15 12 provisions of Section 194A; that Section 194A is further

clarified by the provisions of Section 197A(1A), wherein, if a

person furnishes a declaration in writing in the prescribed

form and verified in the prescribed manner to the effect that

tax on his estimated total income is to be included in

computation will be ‘nil’, there is no need to deduct tax; that

the assessee had received such forms as prescribed, from

those persons to whom interest was paid/being paid and,

accordingly, no deduction of tax was to be made in such

cases; and that the penalty for non-furnishing of the

declarations to the Commissioner, as prescribed, may result

in invoking penalty as per the provisions u/s 272A(2)(i), for

which, separate provision/procedure is prescribed under the

Act.

Circle-1(1) Vs Swastik Roadlines Pvt. Ltd.” (supra), once the

contents of the Form 26A were not doubted or disputed by

the AO, the assessee was entitled to the benefit of the

proviso to Section 40(a)(ia) of the Act. In “Swastik

Roadlines” (supra), the Bench relied on the decision of the

Hon'ble Supreme Court in the case of “Ansal Landmark

Township” (supra).

ITA 534/CHD/2023 & C.O. 08/CHD/2024 A.Y.2014-15 13 12. In “Ansal Landmark Township” (supra), the Hon'ble

Supreme Court has also held that where the payee has filed

its return of income disclosing the payment received by it,

and has also paid tax on such income, the assessee would

not be treated to be a person in default, as is the case

herein. “Shiv Pal Singh Chaudhary” (supra) is also to the

same effect, rendered by the jurisdictional High Court qua

the assessee.

cannot be put to disallowance u/s 40(a)(ia) of the Act,

holding it to be a person in default, particularly when the AO

has not called into question the contents of the Forms 26A.

For the mere reason of non-filing of Form 26A before the

Director General of Income Tax (Systems) also, where the

payee has filed its return of income disclosing the payment

received by it and has also paid tax thereon. Accordingly,

finding no merit therein, ground Nos. 1 & 2 are rejected,

upholding the order passed by the ld. CIT(A) on this issue.

earned dividend income of Rs.7,12,442/-, as is available

from APB- 50, i.e., Note No. 26 to the assessee's account,

ITA 534/CHD/2023 & C.O. 08/CHD/2024 A.Y.2014-15 14 Non Operating Income. The same was exempt u/s 10(34) of

the Act. As per APB-2, which is a copy of the computation of

income at APB 87, i.e., the details of expenditure disallowed,

the assessee had made a suo-moto disallowance of

Rs.48,48,048/- (98,64,65,171+95,27,54,300/-/2* 0.5%). The

AO made a further disallowance of Rs.2,09,78,997/- u/s 14A

of the Act over and above the said disallowance of

Rs.48,48,048/- made suo-moto by the assessee. While doing

so, the AO observed that disallowance u/s 14A of the Act

read with Rule 8D of the Rules was being made; that the

assessee had made disallowance of Rs.48,48,048/- in its

return of income, being 0.5% of the average investments,

while totally ignoring the interest element, which was being

considered in computing the disallowance as per Rule 8D.

14.1 The ld. CIT(A) agreed with the assessee's contention

that the disallowance u/s 14A of the Act cannot exceed the

amount of exempt income earned by the assessee. The

Department is aggrieved of this action of the ld. CIT(A). The

ld. CIT(A), however, restricted the disallowance u/s 14A of

the Act to the amount of suo-moto disallowance made by the

assessee, i.e., Rs.48,48,048/-. The Cross Objection of the

assessee is aimed against this. The ld. CIT(A) held that

ITA 534/CHD/2023 & C.O. 08/CHD/2024 A.Y.2014-15 15 reliance was being placed on various judicial decisions

including that of the jurisdictional High Court, that

disallowance u/s 14A read with Rule 8D cannot exceed the

exempt income, but since the assessee itself had suo-moto

disallowed an amount of Rs.48,48,000/- u/s 14A, the AO

was being directed to restrict the disallowance u/s 14A to

Rs.48,48,000/-.

14.2 The Department, thus, prays that the entire

disallowance, amounting to Rs.2,09,78,999/- be restored,

whereas it is the request of the assessee that the entire

disallowance be ordered to be done away with in place of the

restriction to the amount of Rs.48,48,000/- as ordered by

the ld. CIT(A).

14.3 The ld. DR has drawn our attention to para 4.1 of

the assessment order, wherein the AO has observed that

investment to the tune of Rs.95,27,54,3000/- in quoted and

unquoted shares was made by the AO and dividend income of

Rs.7,12,442/- was claimed as exempt u/s 10(34) of the Act.

It has been contended that the AO has made the

disallowance by applying the provisions of Rule 8D(ii) and

(iii). It has also been averred that CBDT Circular No.5 of

ITA 534/CHD/2023 & C.O. 08/CHD/2024 A.Y.2014-15 16 2014, dated 11.02.2014 is relevant in this regard. Further,

mention has been made of the amendment brought in by the

Finance Act of 2022, whereby, Explanation to Section 14A

was added. It has been contended that by virtue of this

position, the interest component qua the investments had

been rightly considered by the AO, which had not been taken

into account by the assessee, in violation of Rule 8D of the

Rules. It has been contended that CBDT Circular No. 5 of

2014 clearly states that expenses relatable to earning of

exempt income have to be considered for disallowance,

irrespective of the fact whether any such income has been

earned during the Financial Year or not. It has further been

submitted that the Explanation inserted in Section 14A by

the Finance Act, 2022 is a clarificatory provision, which

states that notwithstanding anything to the contrary

contained in the Act, the provisions of Section 14A shall

apply and shall be deemed to have always applied in a case

where the income, not forming part of the total income under

the 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

ITA 534/CHD/2023 & C.O. 08/CHD/2024 A.Y.2014-15 17 income. It has been stated that so, the ld. CIT(A) has erred

in not sustaining the entire disallowance correctly made by

the AO u/s 14A of the Act read with Rule 8D of the Rules.

14A of the Income Tax Act, 1961 cannot exceed the exempt

income earned during the relevant assessment year,

irrespective of whether a larger amount was disallowed by

the assessee u/s 14A of the Act, the ld. Counsel for the

assessee has sought to place reliance on the decision of the

Hon'ble Madras High Court in the case of “M/s Marg Ltd. Vs

CIT, Chennai”, [2020] (10) TMI 102 (Madras High Court).

Further, reliance has also been placed on the following

decisions :

i) Ansal Buildwell Limited Versus ACIT, Circle-2 (2) New, Delhi ii) GMR Enterprises Pvt. Ltd. (successor to GMR Holdings Pvt. Ltd. Versus The Dy. Commissioner of Income-tax, Central Circle 2 (2) Bangalore., 2021 (11) TMI 565 – ITAT Bangalore iii) Dy. CIT, Circle-13 (2) , New Delhi Versus M/s JITF Shipyard Ltd. and M/s JITF Shipyard Ltd. versus Asstt. CIT, Circle-13 (2) , Central Revenue New Delhi, 2023 (4) TMI 144 – ITAT Delhi.

contentions and the material brought on record, we find

that, shorn of the undisputed facts, in “M/s Marg Ltd.”

ITA 534/CHD/2023 & C.O. 08/CHD/2024 A.Y.2014-15 18 (supra), the Hon'ble Madras High Court held that even the

large disallowance proposed by the assessee himself in the

computation of disallowance under Rule 8D made by him,

cannot be approved. Relying on “Pragati Krishna Gramin

Bank” [2018] (6) TMI 1283 – (Karnataka High Court), it was

held that the legal position, as interpreted by various

judgements, remains that the disallowance of expenditure

incurred to earn exempt income cannot exceed the exempted

income itself and neither the assessee, nor the Revenue are

entitled to take a deviated view of the matter; that the

indicative figure of disallowance cannot amount to

hypothetical taxable income in the hands of the assessee;

that the disallowance of expenditure incurred to earn

exempted income has to be a smaller part of such income

and should have a reasonable proportion to the exempted

income earned by the assessee in that year, which can be

computed as per Rule 8D only after recording of the

satisfaction by the assessing authority that the

apportionment of such disallowable expenditure u/s 14A

made by the assessee, or his claim that no expenditure was

incurred is validly rejected by the assessing authority by

recording reasonable and cogent reasons conveyed to the

ITA 534/CHD/2023 & C.O. 08/CHD/2024 A.Y.2014-15 19 assessee and after giving opportunity of hearing to the

assessee in this regard. It was, thus, held that the

disallowance under Rule 8D of the IT Rules read with Section

14A of the Act can never exceed the exempted income earned

by the assessee during the particular assessment year and,

further, without the recording of the satisfaction by the

assessing authority that the apportionment of such

disallowable expenditure made by the assessee with respect

to the exempted income is not acceptable for reasons to be

assigned by the assessing authority, he cannot resort to the

computation method under Rule 8D of the Rules.

16.1 “M/s Marg Ltd.” (supra) has been followed in “M/s

GMR Enterprises Pvt. Ltd.” (supra).

16.2 “M/s Marg Ltd.” (supra) and ‘M/s GMR Enterprises

Pvt.Ltd.” (supra) have been followed in “Ansal Buildwell Pvt.

Ltd.” (supra).

16.3 ‘M/s GMR Enterprises Pvt. Ltd.” (supra) has been

followed in “JITF Shipyard Ltd.” (supra).

Central Circle-III, Ludhiana” vide order dated 28.02.2019,

ITA 534/CHD/2023 & C.O. 08/CHD/2024 A.Y.2014-15 20 passed in ITA 157/CHD/2018, a Co-ordinate Bench of the

Tribunal, at Chandigarh, has held that disallowance u/s 14A

cannot exceed the total exempt income earned by the

assessee during the year.

17.1 No contrary decision has been brought to our notice.

disallowance u/s 14A of the Act should be restricted to

Rs.7,12,442/-, which is the amount of dividend income

earned by the assessee during the year under consideration.

appeal are rejected and the Cross Objection filed by the

assessee is accepted.

partly allowed and the Cross Objection is allowed.

Order pronounced on 12th April,2024.

Sd/- Sd/- (VIKRAM SINGH YADAV) (A.D.JAIN ) VICE PRESIDENT ACCOUNTANT MEMBER “Poonam”

ITA 534/CHD/2023 & C.O. 08/CHD/2024 A.Y.2014-15 21

आदेश क� �ितिलिप अ�ेिषत/ Copy of the order forwarded to : 1. अपीलाथ�/ The Appellant 2. ��यथ�/ The Respondent 3. आयकर आयु�/ CIT 4. िवभागीय �ितिनिध, आयकर अपीलीय आिधकरण, च�डीगढ़/ DR, ITAT, CHANDIGARH 5. गाड� फाईल/ Guard File आदेशानुसार/ By order, सहायक पंजीकार/ Assistant Registrar