Zoetis Pharmaceutical Research P. Ltd. Vs. ACIT (ITAT Mumbai)
Conclusion: When no exempt income was received or receivable on the investments, no disallowance u/s 14A of the Income Tax Act, 1961 is warranted.
Held: The assessee is engaged in the business of trading exports, trading in empty vegetables capsules & research and development in veterinary medicine on lab scale for Zoetis USA and its affiliates. The assessee filed its return in 2014 , wherein disallowance u/s 14A of the Act was taken, but later on the assessee revised its return of income in 2016 u/s 139(5) of the Act, wherein the aforesaid disallowance u/s 14A was withdrawn.
During the course of assessment AO upheld disallowance u/s 14A of the Act by holding that the investments decisions generally requires certain administrative and managerial expenses to be incurred.
The Ld. CIT(A) in the appeal while dismissing the claim of assessee held that , “In the Note to the revised return it has been mentioned that the company has not earned any exempt income and the investments made by the company are strategic in nature. Therefore, revised return is filed by withdrawing disallowance u/s. .14A. It must be noted that these issues are debatable in nature. In the recent judgement, the Hon’ble High Court of Karnataka, in the case of Sharavathy Conductors (P) Ltd. vs. CCIT, 87 taxmann.com 244 (2O17), has held that revised return cannot be filed to make a debatable claim. Therefore, applying the ratio laid down by the Hon’ble High Court of Karnataka, it is held that the revised return filed by the appellant is not a valid revised return u/s. 139(5)”.
The Hon’ble Tribunal after taking into consideration both the views, observed that the assessee had a belief that in view of several decisions of Hon’ble Courts/tribunal no disallowance u/s 14A is warranted in the case of the assesse, as no exempt income was received or receivable by the assessee on these investments during relevant previous year. Another belief which led assessee in filing revised return of income u/s 139(5) was that these investments were strategic investments in subsidiary company and hence Section 14A is not applicable which in any case proposition is now decided against the tax-payer by Hon’ble Supreme Court in the case of Maxopp Investment Limited v. CIT reported in (2018) 402 ITR 640(SC) . The said belief’s which made assessee revise its return of income was found mentioned in note to the revised return of income filed by the assessee with its revised return of income(pb/page 129).
In addition to it, it was observed that the assessee relied upon decision of Hon’ble Delhi High Court in the case of Cheminvest Limited (2015) 378 ITR 33(Del), which was pronounced on 02-09-2015 wherein Hon’ble Delhi High Court has held that in case no exempt income is received or receivable during relevant previous year, no disallowance u/s 14A is warranted . The assessee also relied upon decision of Hon’ble Gujarat High Court in the case of CIT v. Corrtech Energy Private Limited (2014) 45 taxmann.com 116(Guj.) which also held that in case there is no claim for exemption made by the tax-payer, there cannot be any expenses to be disallowed .
Finally, it was held that once the Hon’ble High Courts have laid down the law then reliance on such law to revise return of income within the time frame work provided under the provisions of Section 139(5) cannot be treated as non-bonafide or frivolous ground and could not be a reason for rejecting/discarding such revised return of income.
The Hon’ble Tribunal also placed its reliance on the Judgment of Hon’ble Bombay High Court in the case of The Pr. CIT v. Ballarpur Industries Limited in ITA no. 51 of 2016 vide orders dated 13.10.2016, wherein it was held that when no exempt income was received or receivable on the investments, no disallowance u/s 14A is warranted. And held that no disallowance u/s. 14A of the 1961 Act is warranted in the instant case as the assessee has not received any exempt income during the relevant previous year on investments. Accordingly, the appeal of Assessee was allowed.
The court held as under:
In the instant case, the revised return of income was filed within time prescribed u/s 139(5) of the 1961 Act and secondly the Courts/tribunals are consistently taking a view that in case no exempt income is received or receivable on exempt income, no disallowance u/s 14A is warranted. Thus the assessee’s action in revising its return of income in line with decision of several Courts and tribunal is held to be bonafide and Tribunal accepted the revised return of income filed by the assessee u/s 139(5) on 30-03-2016 as a valid return of income. Tribunal also noted that the tribunal in assessee’s own case in AY 2006-07 in ITA no. 9145/Mum/2010 vide orders dated 22.11.2017 have also held in favour of assessee by holding that in case no exempt income was received or receivable by the assessee during the relevant previous year, then no disallowance u/s. 14A is warranted, by holding as under:- According to the AO, the tax auditor has quantified the expenditure to be disallowed u/s 14A towards expenditure incurred for setting up STPI unit at Chennai. AO was erred in disallowing expenditure u/s 14A of the Act. Therefore, Tribunal directed the AO to delete addition made towards expenditure incurred for setting up of STPI unit u/s 14A of the Act. Tribunal further directed the AO to delete adjustment made towards book profit computed u/s 115JB of the Income-tax Act, 1961. As a result, grounds raised by the assessee are allowed
Thus keeping in view our aforesaid discussions and reasoning as set out above, Tribunal was of the considered view that no disallowance u/s. 14A of the 1961 Act is warranted in the instant case as the assessee has not received any exempt income during the relevant previous year on investments and Tribunal ordered deletion of the additions as were made by the AO and later sustained by the Ld. CIT(A) by setting aside the orders of authorities below. The assessee succeeds in this appeal. Tribunal ordered accordingly.
In Short, the court concluded that in case no exempt income is received or receivable on exempt income, no disallowance u/s 14A is warranted.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal, filed by assessee, being ITA No. 3715/Mum/2018, is directed against appellate order dated 31.03.2018 passed by learned Commissioner of Income Tax (Appeals)-18, Mumbai (hereinafter called “the CIT(A)”), for assessment year 2014-15, the appellate proceedings had arisen before learned CIT(A) from assessment order dated 28.12.2016 passed by learned Assessing Officer (hereinafter called “the AO”) u/s 143(3) of the Income-tax Act, 1961 (hereinafter called “the Act”) for AY 2014-15.
2. The grounds of appeal raised by the assessee in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called “the tribunal”) read as under:-
“1. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in upholding the disallowance under section 14Aof the Act of Rs. 3,67,78,220.
2. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in ignoring the contention of the appellant that since the appellant has not earned any exempt income during the relevant previous year, no disallowance ought to be made under section 14A of the Act.
The Appellant craves leave to add to, omit or alter all or any of the above Grounds of Appeal before or during the hearing of aforesaid matter.”
3. The assessee has filed following additional grounds of appeals for admission before the tribunal as under:
“3. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) – 18 [‘CIT(A)’] erred in not considering the revised return of income filed by the Appellant u/s 139(5) of the Income-tax Act, 1961 (‘Act’), wherein the Appellant sought to rectify the wrongful disallowance of expenditure made u/s. 14A of the Act in the original return of income.
4. Without prejudice to the Ground Nos. 2 and 3, the CIT(A) ought to have considered the additional claim of the Appellant that, no disallowance could be made u/s 14A of the Act since no exempt income was earned by the Appellant during the year under consideration in exercise of its powers u/s 251 of the Act.”
The Ld. Counsel for the assessee submitted that these additional grounds of appeal are legal grounds which does not require investigation of fresh facts and these legal grounds goes to the root of the matter. It was submitted that keeping in view decision of Hon’ble Supreme Court in the case of National Thermal Power Company Ltd. v. CIT (1998) 229 ITR 383 (SC), these additional grounds of appeal need to be admitted in the interest of justice . The assessee also relied upon the following decisions:-
1. CIT v. S. Nelliappan [16 ITR 722 (SC)]
2. Ahmadabad Electricity Co. Ltd. and Godavari Sugar Mills Ltd. v. CIT [199 ITR 351 (Bom)]
3. National Thermal Power Co. Ltd. v. CIT 229 ITR 383(SC)
4. Ashok Vardhan Birla v. CWT [208 ITR 958 (Bom)]
5. Inaroo Ltd. v. CIT [204 ITR 312 (Bom)]
6. CIT vs. Govindram Bros. P. Ltd. [141 ITR 626 (Bom)]
The Ld. DR objected to the admission of the additional ground but however left the matter to the discretion of the Bench to decide as to admission of these additional grounds of appeal
4. We have heard both the rival parties and gone through the grounds of appeal no. 3 and 4 raised by the assessee vide additional grounds of appeal before the tribunal. We are of the considered view that both this additional grounds of appeal are purely legal grounds which does not required investigations into fresh facts and are requires to be admitted in the interest of substantial justice keeping in view ratio of decision of Hon’ble Supreme Court in the case of NTPC Ltd.(supra). Thus we are admitting both the additional grounds of appeal to be adjudicated on merits in accordance with law.We order accordingly.
5. The assessee is engaged in the business of trading exports, trading in empty vegetables capsules & research and development in veterinary medicine on lab scale for Zoetis USA and its affiliates. The assessee filed its return of income originally for impugned assessment year on 30.11.2004 , wherein in the return of income so filed it made a suo-moto disallowance u/s 14A of the 1961 Act of Rs. 3,67,78,220/-by applying Rule 8D(2)(iii) of the Income-tax Rules, 1962. Later on the assessee revised its return of income on 30.03.3016 u/s 139(5) of the 1961 Act, wherein the aforesaid disallowance u/s 14A r.w.r. 8D of the 1962 Rules was withdrawn by the assessee. During the course of assessment u/s 143(3) r.w.s. 143(2) of the 1961 Act, the AO show-caused assessee as to why disallowance u/s 14A of the 1961 Act as was originally made by the assessee in the return of income filed with the Revenue be not upheld in the assessment framed u/s 143(3) of the 1961 Act. The assessee filed a detailed submissions before the AO vide letter dated 22-12-2016 citing various judicial precedents to support its contentions. The AO rejected contentions of the assessee that no expenses were incurred w.r.t. these investments and upheld disallowance of Rs. 3,67,78,220/- u/s 14A vide assessment order dated 28-12-2016 passed u/s 143(3) of the 1961 Act , by holding that the investments decisions generally requires certain administrative and managerial expenses to be incurred.
6. The assessee carried the matter by filing first appeal before Ld. CIT(A) , which was dismissed by Ld. CIT(A) vide appellate order dated 31.03.2018 , by holding as under:
“4.3. Decision: I have considered the submissions of the appellant, perused the assessment order and the facts of the case carefully.
4.3.1 In the instant case, the appellant has made suo-moto disallowance in its original return of income of Rs.3,67,78,220/-u/s.14A r.w Rule 8D. Subsequently, the appellant filed revised return on 30.03.2016 in which the said suo-moto disallowance u/s.14A r.w. Rule 8D was withdrawn. The Assessing Officer has issued a show cause to the appellant as to why disallowance u/s.14A should not be made as suo-moto disallowance was made by the assessee in the original return of income. The Assessing Officer has not accepted the contention of the assessee that no expenditure has been incurred on the investments made. Therefore, he disallowed Rs.3,67,78,220/-u/s.14A of the I. T. Act.
4.3.2 During the appellate proceedings, the Ld. AR has made elaborate submissions claiming that no disallowance u/s. 14A can be made when no exempt income has been earned. Further, he relied on the decision of ITAT, Mumbai in appellant’s own case for A.Y. 2006-07.
4.3.3 The most important issue to be decided is whether a return of income could be revised to claim debatable benefit or deduction. Further, what are the conditions to be fulfilled for filing valid revised return u/s. 139(5).
4.3.4 It must be noted that revised return is filed u/s. 139(5). For appreciating the issue in proper perspective, the provisions of sub section 5 of section 139 are reproduced below:
5) If any person, having furnished a return under sub-section (1) or sub-section (4), discovers any omission or any wrong statement therein, he may furnish a revised return at any time before (the expiry of one year) from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier.}
4.3.5 It may be noted from section 139{5) that there are three ingredients to be fulfilled. One, the Assessee should discover. Two, discovery should be of omission. Three, discovery should be of any wrong statement in the original return of income.
4.3.6 The term “discovers” as per Oxford English dictionary means “the finding out or bringing to light that which was previously unknown”. The term “omission” connotes an unintentional act or neglect to perform what the law requires (Addl. CIT vs. Radhe Shyam (ALL) (01 Taxman 29). The term “wrong statement” means statement which is factually incorrect or false statement.
4.3.7 In the instant case, the appellant has suo-moto made disallowance of Rs.3,67,78,220/- u/s.14A r.w. Rule 8D. The basis of the said disallowance is audited accounts. In clause 21(h) of Form No.3CA (Audit Report), the Auditor has arrived at disallowance u/s.14A r.w. Rule 8D at Rs.3,67,78,220/-. The working of the disallowance is annexed to the audit report as Enclosure F. The working as per Enclosure F is as under:
Clause 21(h) : Amount of deduction inadmissible in terms of section 14A in respect of the expenditure incurred in relation to income which does not form part of the total income.
