Road Infrastructure Development Company of Rajasthan Limited Vs ACIT (ITAT Jaipur)
Jaipur ITAT: No Section 14A Disallowance Without Exempt Income; 2022 Explanation Is Prospective – Contractually Mandated Socio-Economic Expenses Also Allowable u/s 37(1)
The assessee, a 50:50 joint venture between the Government of Rajasthan and IL&FS, was engaged in development and maintenance of the Mega Highway Project in Rajasthan. Three disallowances remained in dispute before the ITAT: ₹15.72 lakh under Section 35D, ₹1 lakh under Section 14A and ₹25.29 lakh of socio-economic expenditure under Section 37(1).
Section 35D – share capital expenditure: The assessee had incurred ₹78.62 lakh for increase in authorised share capital and claimed one-fifth thereof by way of amortisation. The identical claim for the first year had already been allowed by the ITAT in the assessee’s own case. Relying on Shasun Chemicals & Drugs Ltd. v. CIT, the Tribunal held that once Section 35D amortisation has been allowed in the initial year, it cannot be denied in subsequent years of the same amortisation period. The ₹15.72 lakh disallowance was therefore deleted.
Section 14A – no exempt income: It was undisputed that the assessee had earned no exempt income during AY 2014-15. Following Cheminvest Ltd., the ITAT held that no Section 14A disallowance can be made where there is no exempt income.
Importantly, the Tribunal rejected CIT(A)’s reliance upon CBDT Circular No. 5/2014 and the Explanation to Section 14A inserted by Finance Act, 2022. Following Era Infrastructure India Ltd. and Williamson Financial Services Ltd., it held that the 2022 Explanation operates prospectively and cannot apply to AY 2014-15. It further observed that a CBDT Circular cannot override the statute or binding judicial precedent. The ₹1 lakh disallowance was deleted.
Section 37(1) – socio-economic expenditure: The assessee had incurred ₹25.29 lakh on an HIV/AIDS awareness and prevention programme pursuant to its contractual obligations under the Concession/Partnership and Development Agreement with the Rajasthan Government. The ITAT held that this was not a voluntary donation, but expenditure directly connected with the highway business and incurred out of commercial expediency, making it deductible under Section 37(1).
The Tribunal further held that Explanation 2 to Section 37(1), which disallows CSR expenditure covered by Section 135 of the Companies Act, was inserted with effect from 1 April 2015 and applies only from AY 2015-16 onwards. Being a disabling provision, it could not be retrospectively applied to AY 2014-15. The entire ₹25.29 lakh disallowance was therefore deleted.
The assessee’s appeal was consequently partly allowed, with all three substantive disallowances challenged before the Tribunal being deleted; the ground concerning initiation of penalty proceedings was dismissed as premature.
Cases Discussed:
- Williamson Financial Services Ltd. Vs. CIT (Gauhati High Court), [2024] 301 Taxman 102 (Gauhati)
- PCIT Vs Era Infrastructure India Ltd. (Delhi High Court), [2022] 448 ITR 674
- Road Infrastructure Development Company of Rajasthan Limited (ITAT Jaipur), ITA Nos. 668 to 670/JP/2019 dated 31.07.2020
- Shasun Chemicals & Drugs Ltd. Vs. CIT (Supreme Court), [2016] 388 ITR 1 (SC)
- Cheminvest Ltd. Vs. CIT (Delhi High Court), [2015] 378 ITR 33 (Delhi)
- PSIDC Vs. CIT (Supreme Court), (1997) 225 ITR 792 (SC)
- Radhasoami Satsang Vs. CIT (Supreme Court), [1992] 193 ITR 321 (SC)
- CIT Vs. Multi Metals Ltd. (Rajasthan High Court), [1991] 188 ITR 151 (Raj.)
- CIT Vs. Navsari Cotton & Silk Mills Ltd. (Gujarat High Court), [1982] 135 ITR 546 (Guj.)
FULL TEXT OF THE ORDER OF ITAT JAIPUR
1. This appeal by the assessee is directed against the order of the learned Additional/Joint Commissioner of Income Tax (Appeals), Agra [hereinafter referred to as “the Addl./JCIT(A)”] dated 14.08.2025 for the Assessment Year 2014-15, arising out of the assessment order dated 27.12.2016 passed by the Assistant Commissioner of Income Tax, Circle-06, Jaipur [hereinafter referred to as “the AO”] under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”). ITA No:1425/JPR/2025 Assessment Year: 2014-15
2. The grounds of appeal raised by the assessee in the memorandum of appeal in Form No. 36 read as under:
1. That the order passed by the Learned Commissioner of Income Tax (Appeals) [Ld. CIT(A)] under Section 250 of the Income-tax Act, 1961, is bad in law and on facts, and contrary to the principle of natural justice. The order has been passed without properly appreciating the facts, evidence and legal submissions on record.
2. Disallowance u/s 35D: That the Ld. CIT(A) erred in confirming the disallowance of Rs 15,72,414 being one-fifth of the expense of Rs 78,62,069 incurred towards increase in authorised share capital, ignoring that such expenditure was incurred wholly and exclusively for the expansion of business operations and is eligible for amortisation u/s 35D. The appellant relies on the Hon’ble Rajasthan High Court decision in the case of Multi Metal Limited (188 ITR 151) and the Hon’ble Delhi High Court decision in the case of Hindustan Insecticides Limited (250 ITR 338).
3. Disallowance u/s 14A: That the Ld. CIT(A) erred in upholding the addition of Rs 1,00,000 u/s 14A read with Rule 8D despite the fact that the appellant had not earned any exempt income during the year. The reliance placed by the Ld. CIT(A) on CBDT Circular No. 5/2014 and the Explanation inserted by the Finance Act, 2022 is misplaced and inapplicable for the year under appeal. The Ld. CIT(A) erred in law in applying the Explanation to section 14A, inserted by the Finance Act, 2022, retrospectively for the AY 2014-15, even though substantive amendments cannot be applied retrospectively unless expressly provided by law. The Appellant prays that the addition confirmed by the Ld. CIT(A) be deleted.
4. Disallowance u/s 37(1) towards socio-economic expenses: That the Ld. CIT(A) erred in confirming the disallowance of Rs 25,29,506 incurred towards socio-economic expenses u/s 37(1), treating the same as voluntary donations or Corporate Social Responsibility (CSR) expenditure, without appreciating that this expenditure was incurred pursuant to the contractual obligations under the Concession/Partnership & Development Agreement (PDA) with the Government of Rajasthan and is directly connected with the appellant’s business operations.
5. The initiation of penalty proceedings u/s 271(1)(c) is invalid and mechanical, without specifying the precise charge. The Appellant prays that the penalty proceedings initiated should be dropped.
6. The Appellant reserves the right to add, alter, amend, vary or withdraw any ground of the appeal, as may be deemed necessary, at any point of time during the proceedings.
3. Briefly stated, the facts of the case are that the assessee is a company, being a joint venture between the Government of Rajasthan and Infrastructure Leasing and Financial Services Limited (IL&FS) in the ratio of 50:50. The assessee is engaged in the development and maintenance of the Mega Highway Project in Rajasthan and follows the mercantile system of accounting. The return of income for the year under consideration was selected for scrutiny under CASS. The AO completed the assessment under section 143(3) of the Act by making the following additions/disallowances:
| Particulars | Amount (Rs) |
|---|---|
| Interest income capitalised incorrectly | 5,19,673 |
| Disallowance of share capital expenses under section 35D of the Act | 15,72,414 |
| Disallowance under section 14A of the Act | 1,00,000 |
| Disallowance of CSR expenses under section 37(1) of the Act | 25,29,506 |
4. Aggrieved, by the said additions, the assessee carried the matter in appeal before the learned Addl./JCIT(A), who confirmed all the additions except the addition relating to interest income. The assessee is therefore in appeal before us in respect of the three remaining disallowances.
5. The learned Authorised Representative (hereinafter referred to as “AR”) for the assessee submitted that the disallowance of Rs 15,72,414 under section 35D of the Act represents one-fifth of the total expenditure incurred in the Financial Year 2011-12 to increase the authorised share capital, which the AO treated as capital in nature. He submitted that this expenditure was incurred wholly and exclusively for the expansion of business operations, is eligible for amortisation under section 35D of the Act and is being claimed over a period of five financial years. He further submitted that the identical issue in the assessee’s own case for the Assessment Years 2011-12 to 2013-14 in ITA Nos. 668 to 670/JP/2019 dated 31.07.2020 was allowed by this Bench.
6. In respect of the disallowance of Rs 1,00,000 made by the AO under section 14A of the Act, the learned AR submitted that the assessee had not earned any exempt income during the year under consideration. He submitted that the reliance placed by the learned Addl./JCIT(A) on CBDT Circular No. 5/2014 and on the Explanation inserted by the Finance Act, 2022 is not applicable to the year under consideration. He further submitted that this issue also stands adjudicated by this Bench in the assessee’s own case referred to above.
7. In respect of the disallowance of Rs 25,29,506 towards socio-economic expenses, the learned AR submitted that the expenditure was incurred for HIV-AIDS awareness and prevention program; incurred pursuant to the contractual obligations under the Concession/Partnership and Development Agreement with the Government of Rajasthan; directly connected with the assessee’s business and therefore, the same is allowable under section 37(1) of the Act. He submitted that this issue too stands covered by the order of this Bench in the assessee’s own case referred to above.
8. In sum and substance, the learned AR submitted that all three disallowances challenged by the assessee stand adjudicated in its favour on identical facts in its own case for the earlier assessment years in the appeal before this Bench referred to above.
9. The learned Departmental Representative (hereinafter referred to as “DR”) submitted that the AO had relied on the judgment of the Hon’ble Supreme Court in the case of PSIDC vs. CIT [1997] 225 ITR 792 in respect of the disallowance under section 35D of the Act. In respect of the remaining disallowances, he submitted that the order of the learned Addl./JCIT(A) is correct and may be upheld.
10. We have heard both the parties and perused the material available on record. We have also gone through the order of this Bench in the assessee’s own case for the Assessment Years 2011-12 to 2013-14 in ITA Nos. 668 to 670/JP/2019 dated 31.07.2020.
11. As regards the disallowance of Rs. 15,72,414 made under section 35D of the Act, we note that the assessee incurred a total expenditure of Rs. 78,62,069 in the Financial Year 2011-12 towards the increase in its authorised share capital, and has claimed one-fifth thereof by way of amortisation for the year under consideration. The year before us is the second year of the assessee’s claim of amortisation under section 35D of the Act, the first year (Assessment Year 2012-13) having already been decided in the assessee’s favour by this Bench in its own case in ITA Nos. 668 to 670/JP/2019 dated 31.07.2020. We find that the facts of the present appeal are identical to those considered in that appeal. From the discussion in paragraph nos. 52 and 53 of the said Order, it is clear that one-fifth of the expenditure incurred by the assessee (being the first year of the claim under section 35D) was allowed by this Bench by following the applicable judicial precedents, including the judgment of the Hon’ble Supreme Court in Shasun Chemicals & Drugs Ltd. Vs. CIT [2016] 388 ITR 1 (SC) and that of the Hon’ble jurisdictional High Court of Rajasthan in CIT Vs. Multi Metals Ltd. [1991] 188 ITR 151 (Raj.). In Shasun Chemicals (supra), the Hon’ble Supreme Court held that once the benefit of amortisation under section 35D has been granted in the initial year and the clock has begun to run in favour of the assessee, the same cannot be denied in the subsequent years of the amortisation period. The claim before us being the second instalment of the very amortisation already allowed for the first year on identical facts, the assessee is, on the ratio of Shasun Chemicals (supra) and on the well-settled rule of consistency enunciated by the Hon’ble Supreme Court in Radhasoami Satsang Vs. CIT [1992] 193 ITR 321 (SC), entitled to succeed. The learned DR relied on the judgment of the Hon’ble Supreme Court in PSIDC Vs. CIT (1997) 225 ITR 792 (SC); however, that decision stands considered and distinguished by this Bench in the assessee’s own case (supra), and the learned DR has not been able to place before us any contrary decision of the Hon’ble jurisdictional High Court or of the Hon’ble Supreme Court that would warrant a departure from the view already taken. Respectfully following the judgments of the Hon’ble Supreme Court, the Hon’ble jurisdictional High Court and the Order of this Bench in the assessee’s own case, we hold that the assessee is entitled to the deduction claimed under section 35D of the Act. Ground No. 2 is accordingly allowed and the AO is directed to delete the disallowance of Rs. 15,72,414.
12. As regards the disallowance of Rs. 1,00,000 made under section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962, it is not in dispute that the assessee did not earn any exempt income during the year under consideration. It is now well settled that where an assessee has not earned any exempt income in the relevant previous year, no disallowance under section 14A of the Act can be made, as held by the Hon’ble Delhi High Court in Cheminvest Ltd. Vs. CIT [2015] 378 ITR 33 (Delhi). On this short ground alone, the disallowance cannot be sustained. The learned Addl./JCIT(A) sought to sustain the disallowance by relying on CBDT Circular No. 5/2014 and on the Explanation to section 14A inserted by the Finance Act, 2022. That reliance is misplaced. The said Explanation is prospective in operation, as held by the Hon’ble High Court of Gauhati in Williamson Financial Services Ltd. Vs. CIT [2024] 301 Taxman 102 (Gauhati), by the Hon’ble High Court of Delhi in PCIT Vs Era Infrastructure India Ltd. [2022] 448 ITR 674, and by various coordinate benches of the Tribunal, and therefore has no application to the Assessment Year 2014-15; a CBDT Circular can, in any event, neither override the statute nor displace the binding judicial precedent on the point. The facts are, moreover, identical to those in the assessee’s own case decided by this Bench vide Order dated 31.07.2020, and the Revenue has not placed before us any contrary decision of the Hon’ble jurisdictional High Court or of the Hon’ble Supreme Court. Respectfully following the Order of this Bench in the assessee’s own case and the judgments referred to above, we allow Ground No. 3 and direct the AO to delete the disallowance of Rs. 1,00,000.
13. As regards the disallowance of Rs. 25,29,506 towards socio-economic expenses under section 37(1) of the Act, we note that the facts in the present appeal are identical to those adjudicated in the assessee’s own case by this Bench, referred to above. The expenditure was incurred on an HIV-AIDS awareness and prevention programme, pursuant to the contractual obligations under the Concession/Partnership and Development Agreement executed with the Government of Rajasthan, and is directly connected with the carrying on of the assessee’s business of development and maintenance of the Mega Highway Project. Such expenditure, having been incurred wholly and exclusively for the purposes of business and out of commercial expediency, is allowable under section 37(1) of the Act, as held by this Bench following the judgment of the Hon’ble Gujarat High Court in CIT Vs. Navsari Cotton & Silk Mills Ltd. [1982] 135 ITR 546 (Guj.). The learned Addl./JCIT(A) treated the expenditure as a voluntary donation or Corporate Social Responsibility (CSR) expenditure. In this regard we may observe that Explanation 2 to section 37(1), which provides that expenditure incurred on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to be expenditure incurred for the purposes of business, was inserted by the Finance (No. 2) Act, 2014 with effect from 01.04.2015 and applies only from the Assessment Year 2015-16 onwards. Being a disabling provision, it operates prospectively and has no application to the Assessment Year 2014-15 presently before us. The Revenue has not been able to place before us any contrary decision of the Hon’ble jurisdictional High Court or of the Hon’ble Supreme Court on this issue. Respectfully following the Order of this Bench in the assessee’s own case, we allow Ground No. 4 and direct the AO to delete the disallowance of Rs. 25,29,506.
14. Ground Nos. 1 and 6 are general in nature and require no adjudication.
15. Ground No. 5, relating to the initiation of penalty proceedings under section 271(1)(c) of the Act, is premature and is accordingly dismissed.
16. In the result, the appeal filed by the assessee is partly allowed.
Order pronounced in the open court on 13.08.2026
