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Income Tax Appellate Tribunal, CHANDIGARH
Before: SHRI A.D.JAIN & SHRI VIKRAM SINGH YADAV
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.
From the contents of the application, we find that the 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.
The Department in its appeal in 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).
The assessee in its Cross Objections, has taken the 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.
Apropos Ground Nos. 1 & 2 in Revenue’s appeal, the 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.
By virtue of the impugned order, the ld. CIT(A), having 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).
Before us, the ld. DR has contended that the ld. CIT(A) 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 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).
Apropos the question of non-furnishing of Form 26A 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.
Further, as held in “Dy. Commissioner of Income Tax, 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.
For the above discussion, we hold that 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.
Coming to Ground Nos. 5 to 6, the assessee had 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.
Laying stress on the proposition that disallowance u/s 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.
Having considered the matter in the light of the rival 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).
Then, in “M/s SEL Manufacturing Co. Ltd. Vs DCIT, 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.
In keeping with the above decisions, we direct that the 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.
Accordingly, Ground Nos. 3 to 6 of the Department’s appeal are rejected and the Cross Objection filed by the assessee is accepted.
In the result, the appeal filed by the Department is partly allowed and the Cross Objection is allowed.
Order pronounced on 12th April,2024.