PCIT Vs Gujarat State Fertilizers And Chemicals Ltd (Gujarat High Court)
Summary: The Gujarat High Court considered a Revenue appeal under Section 260A of the Income Tax Act, 1961 arising from the order dated 17.12.2024 passed by the Income Tax Appellate Tribunal, “A” Bench, Ahmedabad in ITAT No. 538/Ahd/2020 for Assessment Year 2016-17. The substantial question concerned whether the disallowance under Section 14A of Rs.2,50,39,551/- towards administrative expenses attributable to activity generating tax-exempt income was required to be added back while computing book profit under Section 115JB, on the footing that the amount disallowable under Section 14A read with Rule 8D was covered by clause (f) of Explanation 1 to Section 115JB(2).
The respondent-assessee, Gujarat State Fertilizers and Chemicals Ltd., was engaged in manufacturing and selling fertilizers and chemicals. For AY 2016-17, it filed its return on 29.11.2016 declaring total income of Rs.4,53,30,15,020/- and book profit of Rs.5,38,85,05,347/-. The Assessing Officer passed the assessment order dated 25.12.2018 under Section 143(3), making several additions in the normal computation and book profit which resulted in disallowance of Rs.54,57,00,943/-. The assessee appealed to the Commissioner of Income Tax (Appeals), which partly allowed the appeal. Both the Revenue and assessee thereafter appealed to the Tribunal. The assessee’s appeal was partly allowed, while the Revenue’s appeal was dismissed. The present Tax Appeal arose from the partial allowance granted to the assessee.
Before the High Court, the Revenue submitted that the issue was no longer res integra and was squarely covered by the Gujarat High Court’s decision in Principal Commissioner of Income Tax v. Gujarat Urja Vikas Nigam Ltd., Tax Appeal No. 63 of 2020, dated 17.02.2020. That decision had followed Principal Commissioner of Income Tax v. Gujarat Fluorochemicals Ltd., Tax Appeal No. 28 of 2019, dated 17.06.2019. In Principal Commissioner of Income Tax v. Gujarat Fluorochemicals Ltd., the Court had considered the question whether a Section 14A disallowance could be added while computing book profit under Section 115JB and had held that no addition in book profit could be made on the basis of calculations worked out under Section 14A.
The judgment records the earlier conflicting Tribunal views and the Special Bench proceedings in Vireet Investment P. Ltd. The Revenue-side reasoning had relied upon the view that the Section 14A disallowance calculated under Rule 8D should be considered for Section 115JB purposes. Reference was made to decisions including DCIT v. Viraj Profiles Ltd., CIT v. Geotze India Ltd., Vodafone India Services P. Ltd. v. ACIT, CIT v. Goetze (India) Ltd., and Principal Commissioner of Income Tax v. Bhushan Steel Ltd. The Special Bench in Vireet Investment had considered conflicting Delhi High Court decisions and, relying inter alia on CIT v. Vegetable Products Ltd., had addressed which judicial view should be followed by a subordinate authority.
The Court particularly noted the Gujarat High Court’s earlier decision in Alembic Ltd., where the issue was whether adjustment on account of Section 14A disallowance could be made in computing book profit under Section 115JB. That discussion relied upon the Gujarat High Court’s decision in Commissioner of Income-tax-I v. Gujarat State Fertilizers & Chemicals Ltd., reported in (2013) 358 ITR 323, in which the Court had confirmed deletion of an addition under Section 115JB relating to expenditure estimated as incurred for earning dividend income under Section 14A. The Court had held that the deletion was justified and answered the relevant questions in favour of the assessee and against the Revenue.
The judgment also considered the Bombay High Court decision in Bengal Finance & Investments P. Ltd. There, the Tribunal had followed its decision in M/s. Essar Teleholdings Ltd. Vs. DCIT and held that an amount disallowed under Section 14A could not be added to arrive at book profit for Section 115JB purposes. The Bombay High Court noted that the Revenue’s appeal against the Essar Teleholdings decision had been dismissed and concluded that the question did not raise a substantial question of law. The decision was therefore another basis for the proposition that Section 14A calculations could not be imported into the Section 115JB book-profit computation.
After considering these authorities, the Gujarat High Court held that the issue was squarely covered by the settled legal position. The Court concluded that the Tribunal was right in partly allowing the assessee’s appeal and in holding that no addition to book profit could be made on the basis of calculations worked out under Section 14A. Consequently, no question of law, much less a substantial question of law, arose on the facts of the case. The Tax Appeal was accordingly dismissed, with no order as to costs.
Cases Discussed
- Principal Commissioner of Income Tax v. Gujarat Urja Vikas Nigam Ltd., Tax Appeal No. 63 of 2020, dated 17.02.2020
- Principal Commissioner of Income Tax v. Gujarat Fluorochemicals Ltd., Tax Appeal No. 28 of 2019, dated 17.06.2019
- CIT v. Alembic Ltd., Tax Appeal No. 1249 of 2014
- Commissioner of Income-tax-I v. Gujarat State Fertilizers & Chemicals Ltd., (2013) 358 ITR 323 (Gujarat)
- CIT v. Bengal Finance & Investment P. Ltd., Tax Appeal No. 337 of 2013
- ACIT/CIT v. Vireet Investment P. Ltd., 165 ITD 27 (Delhi ITAT Special Bench)
- DCIT v. Viraj Profiles Ltd., (2016) 46 ITR (Trib) 0626 (Mum)
- CIT v. Goetze (India) Ltd., ITA No. 1179/2010, order dated 09.12.2013
- Vodafone India Services P. Ltd. v. Additional Commissioner of Income Tax & Ors., (2014) 361 ITR 531 (Bom)
- Principal Commissioner of Income Tax v. Bhushan Steel Ltd., ITA No. 593/2015, order dated 29.09.2015
- CIT v. Vegetable Products Ltd., 88 ITR 192 (SC)
- Apollo Tyres Ltd. v. Commissioner of Income Tax, 255 ITR 273 (SC)
- M/s. Essar Teleholdings Ltd. Vs. DCIT, ITA No. 3850/Mum/2010
FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT
1. Heard learned Senior Standing Counsel Mr. Karan Sanghani appearing for the appellant – Revenue.
2. This Tax Appeal is filed under Section 260A of the Income Tax Act, 1961 (For Short “the Act”) by the appellant – Revenue raising following substantial question of law arising out of the order dated 17.12.2024 passed by the Income Tax Appellate Tribunal, “A” Bench, Ahmedabad (For Short “the Tribunal”) in ITAT No. 538/Ahd/2020 for the Assessment Year 2016-17 :
“(i) Whether on the facts and circumstances of the case and in law, the Appellate Tribunal is justified in holding that the disallowance under Section 14A (Rs.2,50,39,551/- made on account of administrative expenses attributable to activity generating tax exempt income), cannot be considered for computation of book profit under Section 115JB of the Income Tax Act, without appreciating that the amount disallowable under Section 14A read with Rule 8D of the Act is covered under clause (f) of Explanation 1 to Section 115JB (2) and thus, the said amount has to be added back while computing the book profits?”
3. Brief facts of the case are as under :-
3.1. The respondent – assessee is engaged in the business of manufacturing and selling of fertilizers and chemicals and inter alia filed its return of income on 29.11.2016 for Assessment Year 2016-17 declaring income of Rs.4,53,30,15,020/- and book profit of Rs.5,38,85,05,347/- and paid tax on normal income while filing return of income. The case of the respondent – assessee was taken for assessment and the Assessing Officer passed the Assessment Order dated 25.12.2018 under Section 143(3) of the Act. The Assessing Officer made several additions in the normal computation of total income and book profit resulting into disallowance of Rs.54,57,00,943/-. On basis of such disallowance, the Assessing Officer calculated tax liability accordingly.
3.2. Being aggrieved by the order passed by the Appellate Authority, the assessee filed appeal before the Commissioner of Income Tax (Appeals). The Appellate Authority partly allowed the appeal preferred by the respondent – assessee.
3.3. Being aggrieved by the order passed by the Appellate Authority, the appellant – Revenue as well as the respondent – assessee both preferred appeal before the Tribunal. The appeal preferred by the respondent – assessee was partly allowed and the appeal preferred by the Revenue was dismissed by the impugned order dated 17.12.2024, which has resulted into filing of the present Tax Appeal which is against the partial allowance of the appeal filed by the assessee.
4. At the outset, learned Senior Standing Counsel Mr. Karan Sanghani appearing for the appellant has submitted that the issue is no more res integra and is squarely covered by the decision of this Court in case of the Principal Commissioner of Income Tax v. Gujarat Urja Vikas Nigam Ltd., rendered in Tax Appeal No. 63 of 2020 dated 17.02.2020.
4.1. This Court in case of Gujarat Urja Vikas Nigam Ltd. (supra) had followed the decision of this Court in case of Principal Commissioner of Income Tax v. Gujarat Flurochemicals Ltd. rendered in Tax Appeal No. 28 of 2019 dated 17.06.2019 and had observed as under :-
“7 The issue as to whether the addition made under Section 14A of the Act, 1961 while computing book profit under Section 115JB of the Act, 1961 is no more res integra. Accordingly, this Court in the case of Principal Commissioner of Income Tax vs. Gujarat Fluorochemicals Ltd [Tax Appeal No.28 of 2019 decided on 17th June 2019] has dismissed the appeal filed by the Revenue by holding as under:
“22. The third question proposed by the revenue is in context with the adjustment made on account of the disallowance under section14A in computing the book profit. In this context, the findings recorded by the ITAT are as follows:
17. Next common issue involved in both years is, whether the amount disallowed under section 14A read with rule 8D deserves to be added back in the book profit for the purpose of section 115JB. In other words, whether the additions which have been confirmed by the Tribunal at Rs.1.55 crores in the assessment year 201213 and Rs.75 lakhs in the assessment year 201314, deserves to be added back in the book profit computed for the purpose of section 115JB.
17.1 The ld. Counsel for the assessee at the very outset contended that this issue is covered in favour of the assessee by the judgment of Hon’ble Gujarat High Court in the case of CIT Vs. Alembic Ltd. in Tax Appeal No.1249 of 2014 as well as decision of Hon’ble Bombay High Court in the case of CIT Vs. Bengal Finance & Investment P. Ltd. in Tax Appeal No.337 of 2013. He placed on record copies both these decisions. Apart from the above, he placed upon reliance Special Bench decision of the ITAT in the case of CIT Vs. Vireet Investment P. Ltd. 165 ITD 27. On the other hand, ld. CITDR relied upon the order of DRP.
18.We have duly considered rival contentions and gone through the record carefully. We find that ld. DRP has relied upon the order of the ITAT, Mumbai in the case of DCIT Vs. Viraj Profiles Ltd., (2016) 46 ITR (Trib) 0626 (Mum) and held that addition required to be made in the book profit could be calculated as per Rule 8D of the Income Tax Rules. The ld. DRP thereafter made reference to decision of Hon’ble Delhi High Court in the case of CIT Vs. Geotze India Ltd., 361 ITR 505. According to the ld. DRP, this decision has been considered by the Special Bench in the case of Vireet Investment P. Ltd. (supra) but placed reliance upon Hon’ble Bombay High Court in the case of Vodafone India Services P. Ltd. ACIT, 361 ITR 0531 (Bom) and held that DRP is not bound by the ratio laid down by the Special Bench. The discussion made by the DRP on this issue in the assessment year 201314 reads as under:
“10.3 In the case of Viraj Profiles Ltd. [2015] 64 taxmann.com 52 (Mum Trib), the Hon’ble Bench has elaborately discussed the issue and held that the disallowance is liable to be calculated as per Rule 8 D of the Rules. After discussing the decisions which have also been relied on by the appellant, the Hon’ble Bench has concluded that; “In view of our foregoing discussion, we find no infirmity with the orders of the AO and we hold that the AO has rightly disallowed the expenditure of Rs.73,07,018/by invoking the provisions of Section 14a of the Act read with the Rule 8D of Income Tax Rules, 1962 for computing book profit u/s.115JB(2) of the Act read with clause (f) to Explanation 1 to clause 115JB(2) of the Act. We, therefore, set aside the orders of the CIT(A) and restore the orders of the AO. We order accordingly. In the case of CIT (Central-II) Vs. Goetze (India) Limited, the Hon’ble Delhi High Court has in ITA No.1179/2010 vide order dated 09.12.2013, held that the disallowance u/s.14A is to be taken into consideration for the purposes of calculating book profits u/s.115JB. The relevant paras of the judgment are reproduced below.
“36. By order dated 16th May, 2012, the following substantial questions of law were framed in the present appeals:”
(i) Whether the Income Tax Appellate Tribunal was right in holding that while computing book profit under Section 115JA (sic. Section 115JB) of the Income Tax Act, 1961, no disallowance under Section 14A was required to be made? Learned counsel for the respondents-assessee, during the course of hearing, has fairly conceded that the first question has to be answered in favour of the Revenue and against the assessee in view of specific provisions in the Explanation 1 below Section 115JB(2) clause (f).
The Assessing Officer it is stated had made an addition of Rs.88,292/- to the book profits towards expenditure incurred having nexus with dividend income, which were exempt under Section 10(33). Recording the said statement, the first question is answered in favour of the appellant-Revenue and against the respondent-assessee.”
The assessee has relied upon the judgment of ITAT special bench in the case of Vireet Investment Pvt. Ltd. In this regard, it is pertinent to mention that Hon’ble Bombay High Court in the case of Vodafone India Services Pvt. Ltd. Vs. Additional Commissioner of Income Tax & Ors. (2014) 264 CTR 0030 (Bom) : (2013) 96 DTR 0193 (Bom) : (2014) 361 ITR 0531 (Bom) : (2014) 221 Taxman 0166 (Bom); has held that the proceedings before DRP are extension of assessment proceedings. Therefore, they are not bound by the decision of Tribunals unlike CIT(A) as long as the issue is not acceptable on merit and/or the issue is being contested by the department. In this case, the decision of Hon’ble Delhi High Court in the case of Goetze (India) Ltd cited above is also in favour to the department on this issue which also shows that the view of AO confirmed by the Panel is a plausible view.
19.There were contradictory orders at the end of the Tribunal. Therefore, Special Bench was constituted to consider the following question:
“Whether expenditure incurred to earn exempt income computed under section 14A could not be added while computing book profit under section 115JB of the Act.”
20.When the Special Bench has considered this question, it was confronted with two decisions of the Hon’ble Delhi High Court diagonally opposite to each other. One referred by the ld. DRP also in the present case, rendered in the case of CIR Vs. Goetze India Ltd. (Supra) and other in the case of Pr. CIT Vs. Bhushan Steel. ITAT, Special Bench has reproduced both these orders in Vireet Investment P. Ltd. (supra) and thereafter it considered as to which decision ought to be followed by a subordinate authority. The department advanced an argument that in the case of Bhushan Steel, Hon’ble Delhi High Court failed to consider subsequent decision of CIT Vs. Goetze India Ltd. (supra).
However, the Tribunal after placing reliance upon the decision of Hon’ble Supreme Court in the case of CIT Vs. Vegetable Products Ltd., 88 ITR 192 (SC) and other decisions has held that it is incumbent upon it follow the decision of Hon’ble Delhi High Court in the case of Bhushan Steel. In this case, Hon’ble Delhi High Court has held as under:
“ However, Ld. Senior Counsel has relied on the decision in the case of Bhushan Steel Ltd. (supra) wherein it has been held as under:
“ ITA 593/2015
PR. CIT …..Appellant
Through: Mr. N.P. Sahni, Senior Standing Counsel with Mr. Nitin Gulati, Advocate Versus
BHUSHAN STEEL LTD. …Respondent
Through: Ms. Kavita Jha, Advocate with Ms. Roopali Gupta, Advocate.
ORDER 29.09.2015
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7. Question No.6 concerns deletion of addition of Rs.89,00,000 made by the AO for computation of the income fore the purposes of Minimum Alternate Tax (MAT) under section 115JB of the Act. This pertained to the expenditure incurred for earning exempt income under section 14A read with Rule 8D. The ITAT has rightly held that this being in the nature of disallowance, and with Explanation 115JB not specifically mentioning Section 14A of the Act, the addition of Rs.89,00,000 was not justified. The view taken by the ITAT cannot be faulted with. It is consistent with the decision in Apollo Tyres Ltd. V. Commissioner of Income Tax 255 ITR 273 (SC) which held that “the Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to Section 115J.” The Court declines to frame a question on the above issue.”
21.Apart from the above, we have a binding precedent before us – one from Hon’ble jurisdictional High Court and other from the Hon’ble Bombay High Court. The question considered by the Hon’ble Gujarat High Court in the case of Alembic Ltd. (supra) is as under:
“ Whether on the facts and in the circumstances of the case and in law, the ITAT was justified in holding that adjustment made on account of disallowance u/s.14A of the Act in computation of book profit u/s. 115JB of the Act is not as per law without appreciating that the amount disallwable under section 14A is covered under clause (f) of Explanation to section 115JB(2) and, thus, said amount has to be added back while computing amount of book profit?
22. The Hon’ble Gujarat High Court has replied this question as under:
7. So far as issue Nos.(iii) and (iv) are concerned, the learned counsel for the assessee has relied on the decision of this court in the case of Commissioner of Incometax-I v. Gujarat State Fertilizers & Chemicals Ltd., reported in (2013) 358 ITR 323 (Gujarat) Where this court has held in paragraph Nos.6 to 6.5 this court has observed as under:
6. So far as the fourth question is concerned, it pertains to addition of Rs.1,14,43,040/under Section 115JB of the Act being the expenditure estimated on earning of dividend income under Section 14A of the Act.
6.1 The Assessing Officer on referring to the said provision of Section 115JB(2) of the Act added the said amount considering that any amount of expenditure relatable to the income exempted under Section 10 of the Act shall need to be added in the profit shown in the ‘Profit and Loss Account’. When the matter travelled to the CIT (Appeals), since it deleted the addition of Rs.1,14,43,040/while deciding the question No.1, it consequently deleted such addition under Section 115JB of the Act on the ground that this would not serve any purpose. The Tribunal decided the said issue as follows:
“94. We have considered the rival submissions and we find that similar issue was raised by Revenue as per ground No.3 above in respect of regular assessment of income and while deciding that ground, we have already upheld that disallowance of Rs.5 lakh in respect of administrative expenses will meet the ends of justice and no disallowance is called for in respect of interest expenditure. Hence, for the purpose of computing book profit u/s.115JB of the Act also, we hold accordingly and confirm the addition of Rs.5 lakh. This ground of Revenue’s appeal is partly allowed.”
As rightly held by both, the CIT (Appeals) and the Tribunal, this issue has a direct correlation with the first question. It was argued by the Revenue that while computing the book profit under Section 115JB of the Act, the disallowance of interest expenditure on exempt income was wrongly negatived by both the authorities on the ground that it was not the liability for expenses, but a liability relating to assets.
We find no fault in the approach adopted by both the authorities. The addition under section 115JB of the Act of a sum of Rs.1,14,43,040/-when was made as an expenditure estimated on earning of dividend income under Section 14A of the Act, without reiterating the rationale of confirming deletion of such amount as has been elaborately done at the time of deciding question No.1, this deletion requires to be confirmed.”
8. Taking into consideration the evidence on record and considering the decision of this court in the case of Commissioner of Incometax-I vs. Gujarat State Fertilizers & Chemicals Ltd. (supra), we are of the opinion that issue Nos.(iii) and (iv) required to be answered in favour of the assessee and against the revenue. In that view of the matter, we answer questions (iii) and (iv) referred to us in favour of the assessee and against the revenue. The appeal of revenue is dismissed.
23. Similarly, Hon’ble Bombay High Court has formulated following question in the case of Bengal Finance & Investments P. Ltd. (supra) and replied as under:
(b) Whether on the facts and in the circumstances of the case, and in law, the ITAT is justified in deleting the addition of Rs.78,84,387/- under clause (f) of Explanation 1 to Section 115JB relying upon the decision in the case of Goetze (India) Ltd. Vs. CIT (2009) 32 SOT 101 (Del.), which has been followed by ITAT, Mumbai in the cases referred to in para 5 of the impugned order without appreciating that the above decision in the case of Goetze (India) Ltd. was rendered by the ITAT, Delhi Bench on completely distinguishable set of facts, peculiar to the said case?”
……
4. So far as question (b) is concerned, the impugned order of the Tribunal followed its decision in M/s. Essar Teleholdings Ltd. Vs. DCIT in ITA No.3850/Mum/2010 to held that an amount disallowed under section 14A of the Act cannot be added to arrive at book profit for purposes of Section 115JB of the Act. The Revenue’s Appeal against the order of the Tribunal in M/s. Essar Teleholdings (supra) was dismissed by this Court in Income Tax Appeal No.438 of 2012 rendered on 7th August, 2014. In view of the above, question (b) does not raise any substantial question of law.
24. Respectfully following the above decision, we hold that no addition in the book profit would be made on the basis of calculations worked out under section 14A of the Act. We allow this ground of appeal in both the years and delete the additions.”
23.We take notice of the fact that in context with the third proposed question, the ITAT placed reliance on the following decisions:
(1) CIT Vs. Alembic Ltd. (Tax Appeal No.1249/2014)
(2) CITI Vs. Gujarat State Fertilizers & Chemicals Ltd. (2013) 358 ITR 323
24. The issue is squarely covered and in our opinion, no error could be said to have been committed by the ITAT in taking the view that no addition in the book profit can be made on the basis of the calculations worked out under section14A of the Act.
5. In view of the settled legal position, the Tribunal was right in partly allowing the appeal filed by the respondent – assessee and further holding that no addition in the book profit can be made on the basis of the calculations worked out under Section 14A of the Act.
6. In view of the same, no question of law much less any substantial question of law can be said to have arisen in the facts of the present case.
7. This Tax Appeal is accordingly dismissed. No orders as to cost.
