Interpretation of Section 14A & Exception to Rule 34(5) of Income Tax Rules, 1963 in view of Covid-19

DCIT Vs JSW Limited (ITAT Mumbai); Appeal No.  ITA No. 6264/Mum/2018; Date of Pronouncement- 14/05/2020; Assessment Year 2013-14

BACKGROUND 

Cross appeals have been filed by the Assessee and the Assessing Officer (AO), against the order dated 01.08.2018 passed by the CIT(A) in the matter of assessment under Section 143(3) of the Income Tax Act, 1961, for the assessment year 2013-14, wherein Assessee had raised a grievance that:

“On the facts and circumstances of the case and in law, the learned Assessing Officer has erred in restricting the disallowance to Rs 80, 51,200 under Section 14A of the Income Tax Act, 1961, without appreciating the fact that the appellant company has not earned any tax-exempt income during the relevant assessment year.”

ANALYSIS OF THE JUDGMENT

Regarding the grievance on disallowance of Rs. 80,51,200 under Section 14A of the Income Tax Act, 1961 (the Act); the Court observed that it is an admitted position that the Assessee did not have any exempted income in the relevant previous year and yet the AO proceeded to make the disallowance under Section 14A of the Act, which is an incorrect in view of PCIT v. Ballarpur Industries Limited (ITA No 51 of 2016; judgment dated 13th October 2016) wherein the Tribunal held that:

provisions of Section 14A of the Income Tax Act, 1961 would not apply to the facts of this case as no exempt income was received or receivable during the relevant previous year. It is not the case of the Assessing Officer that any actual income was received by the Assessee and the same was includible in the total income.”

The Tribunal relied on various cases to enlighten the position of law. The Tribunal noted that in case of CIT v. Holcim India (P.) Ltd. [2015] 57 taxmann.com 28, genuineness of the expenditure incurred by the Assessee was accepted by Revenue as the expenditure incurred was in view to protect investment made.

Tribunal further observed that in the present case, it is an undisputed fact that the investment made by the assessee in the shares of Max India Ltd. is in the form of a strategic investment and business of the assessee is of holding investments. The interest expenditure which was incurred, must be held to have been incurred for holding and maintaining such investment.

In light of the clear exposition of the law in case of Holcim India (P.) Ltd. case (supra) and in view of the admitted factual position in this case Tribunal held that:

“Assessee has made strategic investment in shares of Max India Ltd.; that no exempted income was earned by the Assessee in the relevant AY and since the genuineness of the expenditure incurred by the Assessee is not in doubt, the question framed is required to be answered in favour of the Assessee and against the Revenue.”

Tribunal also provided its views on the decision in case of Maxopp Investment Ltd.’s vs. CIT (Civil Appeal No. 104-109 of 2015) which was relied upon by the Revenue, wherein primary issue was treatment of disallowance of expenditure under Section 14A of the Act, which was incurred in respect of investment of shares of operating companies for acquiring and retaining a controlling interest. However, the Tribunal noted that the facts in present case is completely different as mentioned in Maxxop Investment Ltd. case (Supra) and thus, the decision relied upon by the Revenue cannot be applied in the present case.

The Tribunal after analysing and referring to various case laws held that for disallowance of expenses under Section 14A there must be actual receipt of income which has not been included in the total income in previous year. Section 14A of the Act cannot be applied merely in absence of any exempt income received or receivable during relevant previous year.

The Tribunal further held that:

“since the assessee has not incurred any exempt income in relevant previous year no disallowance can be made under Section 14A of the Act.

Thus, the Tribunal upheld the plea raised by Assessee and deleted disallowance of Rs. 80, 51,200 sustained by CIT(A).

Since the grievance of Assessee has been upheld, other grievances raised by Revenue became infructuous.

RULE 34 OF THE INCOME TAX RULES, 1963

Rule 34 of Income Tax Rules, 1963 (the Rules) provides for the Order to be pronounced, signed and dated.  

Rules 34(5) specifically provides for the provision for Tribunals to pronounce orders within specific period of time after the date of hearing. Rule 34(5) of the Rules provides that:

(5)The pronouncement may be in any of the following manners:—

(a) The Bench may pronounce the order immediately upon the conclusion of the hearing.

(b) In case where the order is not pronounced immediately on the conclusion of the hearing, the Bench shall give a date for pronouncement.

(c )  In a case where no date of pronouncement is given by the Bench, every endeavour shall be made by the Bench to pronounce the order within 60 days from the date on which the hearing of the case was concluded but, where it is not practicable so to do on the ground of exceptional and extraordinary circumstances of the case, the Bench shall fix a future day for pronouncement of the order, and such date shall not ordinarily be a day beyond a further period of 30 days and due notice of the day so fixed shall be given on the notice board.”

Therefore, in view of the present facts wherein the time period of 90 days’ for the pronouncement of the orders from the date of final hearing has exceeded, the Tribunal has provided a detailed reasoning for the delay along with the interpretation of Rule 34(5) in view of COVID-19 pandemic.

The Tribunal has discussed the principle judgment of Shiv Sagar Veg Restaurant v. ACIT [(2009) 317 ITR 433 (Bom)] wherein the directions were issued to the president of Appellate Tribunal as under:

“to frame and laid down the guidelines to decide the matter heard by them within a period of three months from the date judgement is closed.”

The said observation was made by the Tribunal on the similar lines as laid down by the Apex Court in the case of Anil Rai v. State of Bihar (2001) 7 SCC 318.

From the above judgement, the Tribunal elucidated and explained the term ‘Ordinarily’ as mentioned in Rule 34(5)(c) of the Rules. The term ordinarily states that under normal circumstances the order should be passed within 90 days from the date of concluding the hearing. However Tribunal observed the extraordinary circumstances wherein order has been passed beyond the 90 days.

The Tribunal has considered the current COVID-19 pandemic and noted the measures which have been initiated by the Government of India and how the current pandemic has been dealt in view of period of limitations as provided in the case pronounced by the Apex Court of India dated 23.03.2020 wherein for the first time in history of India, the Apex Court has extended the period of limitation by excluding the period of lockdown and a few days prior to it.

Further, the High Court of Bombay on 15.04.2020 has extended the validity of all interim orders. The Tribunal also highlighted on the order issued by the Government of India dated 19.02.2020 wherein the current pandemic was considered as a case of natural calamity and FMC (i.e. force majeure clause).

Tribunal while considering the position of current pandemic has stated on the time limit of 90 days as per the Rule 34(5) of the Rules that:

“taking a pedantic view of the rule requiring pronouncement of orders within 90 days, disregarding the important fact that the entire country was in lockdown, we should compute the period of 90 days by excluding at least the period during which the lockdown was in force.”

The Tribunal further noted that the judgement of Otters Club Vs DIT [(2017) 392 ITR 244 (Bom)] wherein the Court has held that:

“the rule 34(5)(c) read with rule 34(8) of the Tribunal Rules mandate the Tribunal to pronounce its order at the very latest on or before the 90th day, after the conclusion of the hearing and did not approve an order being passed by the Tribunal beyond a period of 90 days.”

However, recently the High Court of Bombay vide order dated 15.04.2020 has taken a different view in light of the current pandemic and has held that:

“while calculating the time for disposal of matters made time bound by this Court, the period for which the order dated 26th March 2020 continues to operate shall be added and time shall stand extended accordingly.”

The Tribunal further stated that the extraordinary steps taken by High Court of Bombay and the Apex Court clearly indicates that the period of lockdown cannot be treated as an ordinary period during which the normal time limits are to remain in force.

Thus in finality, the Tribunal held that “even without the words “ordinarily”, in the light of the above analysis of the legal position, the period during which lockout was in force is to excluded for the purpose of time limits set out in rule 34(5) of the Appellate Tribunal Rules, 1963,” and considered the current pandemic as an exception to Rule 34(5)(c) of the Rules  in light of the judicial precedents of High Court of Bombay and the Apex Court which have taken suo-moto actions on excluding the period of lockdown from the calculation of period of limitation such period cannot be treated as ‘ordinarily’.

CONCLUSION

The present case has again established a clear picture on the interpretation of Section 14A of the Act, with detailed explanation of various cases. It clearly explains that Section 14 of the Act will not apply if no exempt income is received or receivable during the relevant previous year.

The cream factor of the present case is interpretation of Rule 34(5) of the Rules.  The judgment has provided a shield of an exception to the Rule 34(5)(c) in line with judicial precedents, which have considered the current pandemic and have provided the relief on the limitation law.

The said Rules provide for the time limit of 90 days within which the Tribunals have to pronounce the order from the date of final hearing. The current pandemic has been considered by the Tribunal in the present case as an extraordinary situation to pronounce the judgement beyond 90 days. However, the interpretation in the present case is to be considered as an exceptional case in view of COVID-19 and shall not be treated as a legal weapon to delay the legal proceedings.

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