Brief facts of the case pertaining to section 14A of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) –
Everest Kento Cylinders Ltd. (hereinafter referred to as the “Assessee” or the “Respondent”) was engaged in making High Pressure Gas Cylinder services and compressed natural gas cylinder. The Assessee company filed an E-return on 31.10.2007 declaring total income of Rs.71,90,77,156/- under the Act and showing book profit of Rs.70,18,79,265/- under section 115JB of the Act. The return was processed under section 143(1) of the Act on 3.12.2008.
The Assessee had received dividend of Rs. 31,91,330/- and claimed exemption under section 10(33) of the Act. The Assessee was informed that as per Rule 8D of the Income Tax Rules, the total interest under section 14A was disallowable. In response to the same the Assessee during the course of assessment proceedings admitted an amount of Rs. 4,47,649/- to be disallowed under section 14A of the Act. Further with specific reference to investments the Assessee contended it made investments out of surplus funds available during financial year 2005-06 from an initial public offering. Dismissing Assessee’s contention the Assessing Officer disallowed a sum Rs. 20,27,896/- under section 14A of the Act.
Aggrieved by the additions the Assessee filed an appeal before Commissioner of Income-tax (Appeals) who confirmed the additions and upheld the order of Assessing Officer relying on the decision of Bombay High court in case of Godrej and Boyce Manufacturing Co. Ltd. On second appeal to Income Tax Appellate Tribunal the quantum of disallowance under section 14A of the Act was reduced and restricted to an estimated amount of Rs. 1 lakh only.
Against the above relief received by the Assessee the Revenue filed appeal before the Hon’ble Bombay High Court for admitting the following relevant questions of law:
“(1) Whether on the facts and in the circumstances of the case and in law, order passed bearing ITA No.542/Mum/2012 dated 23.11.2012 (A.Y. 2007-08) by ignoring the Income Tax (fifth amendment) Rules 8D for disallowing of the interest u/s 14A of the I.T. Act 1961 was perverse?
(2) Whether on the facts and circumstance of the case and in law the ITAT Mumbai Bench “K” Mumbai was justified in restricting the disallowance u/s 14A of the I.T. Act 1961 to Rs.1,00,000/-. When the Assessee Company itself had made disallowance of Rs.4,47,649/- ?”
Contention of Assessee/ Respondent –
The Counsel appearing on behalf of the Assessee pointed out that as regards to the issue of disallowing interest under section 14A of the Act, the order of the tribunal was perfectly justified and the disallowance of Rs. 1 lakh is also justified in view of the fact that the adjustment to the extent of Rs. 4,47,649/- that was offered before the Assessing Officer was not based on the original return at all. It was pointed out that the original return did not contain any such concession and adhoc figure was something that the Assessee submitted during the course of assessment. The admission was thus not a part of the return filed and which was before the Assessing Officer and the Assessee could not be bound by it. Therefore it was submitted that the qualification made by the Tribunal was appropriate considering the facts of the case. The investment was made from the surplus funds and nothing was brought on record to show otherwise. The tribunal observed that after having considered fund flow statement there was no scope of supporting the views of the Commissioner of Income Tax and the Assessing Officer that the Assesee has made investment out of interest bearing funds. Therefore, considering the fact that the interest bearing funds were not used and providing for some administrative costs, a fair assessment of Rs. 1 lakh is arrived at by the Tribunal for the purpose of disallowance under section 14A of the Act.
Contention of Revenue/Appellant –
The Revenue relied on the order passed by the Assessing Officer and further contended that the Assessee itself has stated that a disallowance of Rs. 4,47,649/- could be made under section 14A of the Act. Thus the Revenue appealed for disallowance of Rs. 20,27,896/- as disallowed by the Assessing Officer in assessment order subject to minimum amount of Rs. 4,47,649/- as offered by the Assessee during the course of assessment proceedings.
Decision of Hon’ble Bombay High Court –
Having heard the Appellant as well as the Respondents the Hon’ble High Court held that “we are of the view that the order of the Tribunal as regards disallowance under section 14A and restricting the same to Rs.1 lac was justified in view of the material before the Tribunal. Furthermore, having considered the fact that a sum of Rs.4,47,649/- was not conceded in the return but was adhoc acceptance during the course of assessment, the assessee could not be bound by it. The Tribunal as the second fact finding authority had gone into factual aspects in great detail and therefore having interpreted the law as it stood on the relevant date the order passed cannot be faulted.”
Relying on the above decision of Hon’ble Bombay High Court an Assessee cannot be compelled with the quantum of additions as admitted during the course of assessment proceedings if the said additions were not offered to tax in the return of income. An insight to the above decision provides room to the following questions:
Thus the decision of Bombay High Court may be used by the Assessee as well as Revenue to suite the need of situation and hence may lead to litigation to an extent.
(Compiled by our team member CA Chirag Jobanputra)