PCIT Vs Jindal Saw Ltd. (Delhi High Court)
HC Rejects Revenue Challenge to Section 14A Disallowance Without Exempt Income; HC Upholds ITAT Order on Section 115JB Book Profit Adjustment Under Section 14A; HC Holds Section 40(a)(ia) Disallowance Unsustainable After Tribunal Sets Aside Default Order
The Delhi High Court considered the Revenue’s appeal raising questions regarding the deletion of disallowances under Sections 14A and 40(a)(ia) of the Income-tax Act, 1961, and the computation of book profit under Section 115JB.
On the issue of disallowance under Section 14A, the assessee submitted that the matter had already been decided against the Revenue by the Delhi High Court in CIT vs. Caraf Builders & Constructions Pvt. Ltd., and that the Special Leave Petition filed against that decision had also been dismissed by the Supreme Court.
With respect to the disallowance of 3,31,95,556 under Section 40(a)(ia), the assessee submitted that the Assessing Officer had made the disallowance solely because tax had been deducted under Section 194C instead of Section 194I. It was further submitted that the order dated 28.03.2011 passed under Sections 201(1) and 201(1A), on which the Assessing Officer had relied, had already been set aside by the Tribunal. Since the Tribunal had reversed the finding that the assessee had deducted tax under the wrong provision, there was no basis for disallowing the expenditure.
The High Court held that where appropriate tax had been deducted, the assessee could not be treated as an assessee in default merely because tax had been deducted under a different provision. It further observed that, particularly after the Tribunal had set aside the order treating the assessee as in default, there was no justification for invoking Section 40(a)(ia). Accordingly, these grounds were decided against the Revenue.
Regarding the adjustment to book profits under Section 115JB based on Explanation 1(f) read with Section 14A and Rule 8D, the assessee submitted that the issue stood covered by the Delhi High Court’s decision in CIT v. Bhushan Steel Ltd. The Revenue did not dispute this legal position.
Following its earlier decisions, the High Court decided all the questions against the Revenue and dismissed the appeal. All pending applications, including those seeking condonation of delay in filing and re-filing, were also disposed of.
FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT
1. The instant appeal has been preferred on the following questions:-
“2.1 Whether on the facts and the circumstances of the case, ITAT is justified in deleting the disallowance under section 14A of the l.T. Act amounting to Rs.8,51,49,991/-
2.2 Whether for application of Section 14A of the Income Tax Act, 1961 the earning of exempt income is an essential legal requirement?
2.3 Whether the term in relation to’ as used in Section 14A of the Act contemplates a direct and proximate nexus between ‟expenditure incurred’ and earning of exempt income?
2.4 Whether ITAT is legally justified in deleting disallowance under section 14A of the Act because the assessee had not earned tax exempt income during the year, under considering the legislative intent of introduction of Section 14A by the Finance Act, 2001 and subsequent clarification issued by CBDT vide circular No. 5/2014 dated 10/02/2014?
2.5 Whether the ITAT is legally justified in deleting the disallowance under section 14A of the Act by not considering a legal principle that allowablity/disallowability of expenditure under the Act is not conditional upon the earning of the income as held by Hon’ble Supreme Court in the case of CIT Vs Rajendra Prasad Moody (1978) 1.
2.6 Whether on the facts and circumstances of the case ITAT is justified in deleting the disallowance u/s 40(a)(ia) of the Income-tax Act, 1961 amounting to Rs. 3,31,95,556/-?
2.7 Whether on the facts and circumstances of the case ITAT is justified in deleting the disallowance under section 40(a)(ia) of the Income-tax Act, 1961 amounting to Rs. 3,31,95,556/- by ignoring the order under sections 201(1) and 201(1A) passed by ITO(TDS) on 28.03.2011.
2.8 Whether on the facts and circumstances of the case ITAT is justified in deleting the disallowance u/s 40(a)(ia) of the Income-tax Act, 1961 amounting lo Rs. 3,31,95,556/- by ignoring the detailed finding of the Assessing Officer?
2.9 Whether on the facts and circumstances of the case ITAT is justified in ignoring the Explanation 1(f) to section 115JB (2) of the Income Tax Act, 1961 which provides for the calculation of book profit as increased by the amount or amounts of expenditure relatable to any income to which section 10 (other than the provision in clause (38) shall apply. Hence, the disallowing under section 14A read with Rule 8D has been rightly made while computing book profit under section 115JB of the Income Tax Act 1961?”
2. Mr.Jain, learned counsel appearing on behalf of the respondent-assesee, at the outset, submitted that so far as the first issue regarding deletion of disallowance under Section 14A of the Income Tax Act, 1961 (hereinafter referred to as „the Act of 1961‘) concerned, the same has been decided by this Court against the Department in the case of CIT vs. Caraf Builders & Constructions Pvt. Ltd. 101 Taxmann.com 167 and an SLP filed there against also has been rejected by the Hon’ble the Supreme Court.
3. While adverting to question Nos. 2.7 and 2.8 relating to Section 40(a)(ia) of the Act of 1961, he submitted that the Assessing Officer (hereinafter referred to as „AO‘) had disallowed the expenditure of Rs.3,31,95,556/-, simply because the assessee had deducted tax under Section 194C of the Act of 1961 whereas according to the AO, it should have been under Section 194I of the Act of 1961.
4. Mr. Jain, further submitted that the order dated 28.03.2011 passed under 201(1) and 201(1A) of the Act relied upon by the AO are concerned, the Tribunal has set aside the same and since the AO’s view that the tax was deducted under the wrong provision itself has been reversed, there cannot be any justification for disallowing the expenditure.
5. Having heard learned counsel for the parties, we are of the view that when appropriate tax has been deducted, simply because it has been deducted under a provision, the assessee can neither be held to be in default nor can the amount be disallowed by invoking Section 40(a)(ia) of the Act of 1961. More particularly, when the Tribunal has set aside the order holding the assessee to be in default, these grounds of appeal are, therefore, also decided against the Revenue.
6. The next question is question no.2.9, which is reproduced hereunder:-
“2.9. Whether on the facts and circumstances of the case ITAT is justified in ignoring the Explanation 1(f) to section 115JB (2) of the Income Tax Act, 1961 which provides for the calculation of book profit as increased by the amount or amounts of expenditure relatable to any income to which section 10 (other than the provision in clause (38) shall apply. Hence, the disallowing under section 14A read with Rule 8D has been rightly made while computing book profit under section 115JB of the Income Tax Act 1961?”
7. In relation to above question, Mr. Jain, learned counsel for the assessee submitted that the same has been decided by this Court in ITA 593/2015 titled CIT v. Bhushan Steel Ltd.
8. Mr. Gaurav Gupta, learned Senior Standing Counsel for the Revenue, is not in a position to dispute the aforesaid position of fact and law.
9. The aforesaid ground of appeal too is, therefore, decided against the Revenue in light of judgment in the case of Bhushan Steel (supra).
10. As a result, the appeal filed by the Revenue is hereby dismissed.
11. All pending applications, including the application(s) seeking condonation of delay in filing/re-filing also stand disposed of.
