PCIT Vs Hindustan Aeronautics Ltd. (Karnataka High Court)
Summary: The Karnataka High Court, in , dismissed the Revenue’s appeal concerning disallowance under Section 14A of the Income-tax Act, 1961, read with Rule 8D of the Income-tax Rules, 1962, for Assessment Year 2013–14. The Revenue challenged the Income Tax Appellate Tribunal’s decision holding that Rule 8D could not be applied mechanically in the assessee’s case. The Tribunal had observed that Hindustan Aeronautics Ltd. received dividend income from only one company, M/s Indo Russian Aviation Ltd., and had relied upon an earlier Karnataka High Court decision involving the same assessee. The Revenue contended that the Assessing Officer had recorded the necessary satisfaction in paragraph 2.5 of the assessment order and that the earlier decision was therefore distinguishable.
The Revenue further argued that Section 14A, introduced by the Finance Act, 2001 with retrospective effect from 1 April 1962, authorised disallowance of expenditure attributable to exempt income. It referred to CBDT Circular No. 5/2014 dated 11 February 2014 and questioned the Tribunal’s approach of considering only the company from which dividend income had actually been received for the purposes of Rule 8D. The principal contention before the High Court was that the Tribunal had incorrectly followed the earlier judgment in Hindustan Aeronautics Ltd.’s own case, ITA No. 404/2016 connected with ITA No. 468/2016, decided on 9 December 2020, because the Assessing Officer had allegedly recorded satisfaction in the present assessment.
After examining the assessment order, the High Court rejected the Revenue’s contention. It observed that the Assessing Officer had merely stated that certain heads of expenditure appearing in the accounts could have been incurred towards management activities. According to the Court, this represented the Assessing Officer’s own assessment rather than satisfaction recorded on the basis of the accounts. Consequently, the Court held that the distinction sought to be drawn from the earlier judgment was unsustainable. The Tribunal had correctly followed the Karnataka High Court’s previous decision in the assessee’s own case. The question of law raised by the Revenue was accordingly answered in favour of Hindustan Aeronautics Ltd., and the appeal was found to be without merit.
The High Court also considered the broader issue of litigation between the Union Government and public sector undertakings wholly owned by the Government of India. Senior Advocate A. Shankar, appearing as amicus curiae, referred to four Supreme Court decisions involving Oil and Natural Gas Commission and the Collector of Central Excise, along with the subsequent decision in , reported in (2011) 3 SCC 404. The Court noted that the Supreme Court had recalled the earlier ONGC directions, leaving government-owned companies to decide how to proceed in individual disputes. The amicus curiae also referred to the Ministry of Law and Justice Circular dated 7 August 2009 and submitted that litigation between entities such as Hindustan Aeronautics Ltd., which was regulated by the Ministry of Defence, and the Ministry of Finance was undesirable.
The High Court agreed that unnecessary litigation involving public sector undertakings fully owned and regulated by government ministries should be avoided or minimised. It also considered the reference to Section 48 of the Reserve Bank of India Act, 1934, concerning exemption from income tax and super tax. Expressing concern over inter-departmental litigation, the Court directed the impleadment of the Ministry of Law and Justice and the Ministry of Finance as respondents and instructed them to examine the issue in detail and issue appropriate directions to the concerned public sector undertakings. Copies of the judgment were directed to be forwarded to the respective Ministries for consideration. Ultimately, the Revenue’s appeal was dismissed with these observations, and no costs were awarded.
Cases Discussed
- Hindustan Aeronautics Limited v. Assistant Commissioner and Another, ITA No. 404/2016 connected with ITA No. 468/2016, Karnataka High Court, 9 December 2020 — Earlier decision in the assessee’s own case followed on the requirement to record satisfaction.
- Oil and Natural Gas Commission and Another v. Collector of Central Excise, 1992 Supp (2) SCC 432 (Supreme Court) — Cited in the discussion on government interdepartmental litigation.
- Oil and Natural Gas Commission and Another v. Collector of Central Excise, 1995 Supp (4) SCC 541 (Supreme Court) — Part of the ONGC series discussed.
- Oil and Natural Gas Commission and Another v. Collector of Central Excise, (2004) 6 SCC 437 (Supreme Court) — Part of the ONGC series discussed.
- Oil and Natural Gas Commission and Another v. Collector of Central Excise, (2007) 7 SCC 39 (Supreme Court) — Part of the ONGC series discussed.
- Electronics Corporation of India Ltd. v. Union of India and Others, (2011) 3 SCC 404 (Supreme Court) — Noted as recalling the directions in the ONGC cases.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
Heard Shri E.I.Sanmathi, learned Standing Counsel for the appellants, Ms. Tanmayee Rajkumar, learned advocate for first respondent and Shri A.Shankar, learned Senior Advocate as Amicus curiae.
2. Revenue has presented this appeal for framing the following questions of law;
“(a) Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the provisions of Rule 8D should not have been applied without appreciating that the provisions of section 14A introduced by the Finance Act, 2001 is applicable with retrospective effect from 01.04.1962?
b. Whether on the facts and circumstances of the case, the Hon’ble Tribunal was correct in holding that the only company from which dividend is received shall be considered for the purpose of Rule 8D?
c. Whether on the facts and in the circumstances of the case, the Tribunal’s order can be said as perverse in nature in holding that assessing authority is not right in making addition under section 14A of the Act even when CBDT Circular No.5/2014 dated 11.02.2014 clarifying that section 14A was introduced by the Finance Act, 2001 with retrospective effect from 01.04.1962 highlighting the intent of the legislature is to allow only that expenditure which is relatable to earning of exempt income have to be considered for disallowance, irrespective of the fact whether any such income has been earned during the FY or not and interpretation of Hon’ble Tribunal that only company from which dividend is received shall be considered for the purpose of Rule 8D is grossly unjustified?”
3. Shri Sanmathi submitted that the Assessing Officer added certain income to profit under Section 14A of the Income Tax Act, 1961 among other additions. The appeal filed before the CIT (Appeals)1 was partly allowed. Assessee challenged the same before the ITAT2. Revenue also filed its cross objections. Tribunal has held that Assessee has received dividend income from only one company namely M/s. Indo Russian Aviation Ltd., and in the facts of the case, the provisions of Rule 8D of Income Tax Rules should not have been applied mechanically. Shri Sanmathi submitted that ITAT has allowed the appeal by following the decision in Assessee’s own case in ITA No.404/2016 c/w ITA.No.468/20163, wherein Assessee’s appeal in ITA No.404/2016 has been allowed on the premise that the Assessing Officer had not recorded satisfaction. In contradistinction, at Para 2.5 of its order, the Assessing Officer has recorded his satisfaction. Therefore, facts of this case are different from those in ITA No.404/2016.
4. Miss Tanmayee Rajkumar for the Assessee argued opposing the appeal.
5. We have carefully considered the rival contentions and perused the records.
6. In Para 17.2 of its order, ITAT has placed reliance on ITA No.404/2016 while allowing assessee’s appeal.
The solitary contention urged by Shri Sanmathi that the facts of the instant case are different and it is based on the findings recorded in Para 2.5 of the Assessing Officer’s order. We have carefully considered the same. The Assessing Officer has recorded that accounts had revealed that there were certain heads of expenditure which could have been incurred towards the management. Thus, the Assessing Officer hasmade his own assessment and not recorded the satisfaction based on the record. In that view of the matter, the solitary ground urged by Shri Sanmathi is untenable. The Tribunal has rightly followed the decision of this Court in ITA No.404/2016. Hence, this question of law raised by the Revenue is answered in favour of the Assessee. Resultantly, this appeal does not merit any consideration.
7. Before parting with the case, we had requested the learned advocates on both sides and also Shri A.Shankar, learned Senior Advocate as amicus curie to assist this Court with regard to the cases pending between the Union of India and the companies fully owned by the Government of India. In the instant case, the Assessee is Hindustan Aeronautics Ltd. The appellant is the Government of India represented by the Ministry of Finance. Shri Shankar pointed out that the Supreme Court had considered this aspect in the four cases, Oil and Natural Gas Commission and Another Vs. Collector of Central Excise4, Oil and Natural Gas Commission and Another Vs. Collector of Central Excise5, Oil and Natural Gas Commission and Another Vs. Collector of Central Excise6 and Oil and Natural Gas Commission and Another Vs. Collector of Central Excise7. Subsequently, in the case of Electronics Corporation of India Ltd. Vs. Union of India and Others8, Supreme Court has recalled the orders passed in the aforesaid ONGC cases. The resultant position is, companies owned by State or Central Government have to take their call in individual cases. He has also placed, for our consideration, Circular No.F.32(2)/2009-Judl. dated 07.08.2009 by Ministry of Law and Justice, whereby the Assistant Solicitors General in High Courts were requested to appraise the court of the existing practice and composition of committees. He has also placed for our consideration a list of Public Sector Undertakings fully owned by the Central or State Government. He submitted that there could be some difficulty in framing policies in some of the public sector companies like HMT9 as there are other private companies who also manufacture similar machines. He contended that the companies/institutions like HAL10, ISRO11 and the like are fully owned by the Government of India and regulated by respective Ministries and HAL in this case is fully regulated the Ministry of Defence. Therefore, litigation with Ministry of Finance is not desirable.
8. He also adverted to Section 48 of Reserve Bank of India Act, 1934 and submitted that RBI is exempted from income tax and Super tax. We see force in his contention and we are of the considered view that litigation between the Public Sector Undertakings, which are fully owned by the Government of India and regulated by the Ministries like, HAL, ISRO, etc., is not desirable. It would be in the interest of all the concerned to ensure that there is no litigation at all or as minimum litigation as most essential. We take this opportunity to convey our concern and to ensure that these directions reach the appropriate forum, we direct the learned advocate for the appellant to implead Ministry of Law and Justice and Ministry of Finance as respondents No.2 and 3. Impleadment shall be carried out forthwith. Shri Shanthibhushan, learned ASG is directed to take notice. We direct respondents No.2 and 3 to examine in detail and issue appropriate directions to the concerned Public Sector/Undertakings to avoid or to minimise the inter-departmental litigation. A copy of this order shall be sent to the Secretary, Ministry of Finance and also Ministry of Law and Justice for their consideration. So far as question of law is concerned, this appeal stands dismissed with the observations recorded hereinabove.
9. We place on record our appreciation for the assistance rendered by Shri. Shankar, learned Senior Advocate.
No costs. Notes:
1 Commissioner of Income Tax (Appeals)
2 Income Tax Appellate Tribunal
3 Hindustan Aeronautics Limited Vs. Assistant Commissioner and Another (D.D. 09.12.2020)
4 1992 Supp (2) SCC 432
5 1995 Supp (4) SCC 541
6 (2004) 6 SCC 437
7 (2007) 7 SCC 39
8 (2011) 3 SCC 404
9 Hindustan Machine Tools Ltd.
10 Hindustan Aeronautics Ltd.
11 Indian Space Research Organisation
