Pr. Commissioner Of Income Tax, Jaipur-Ii, Jaipur v. M/S. Spc Infrastructure Pvt. Ltd., C-74, Ambabari, Jaipur

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 69 / 2017 Pr. Commissioner of Income Tax, Jaipur-II, Jaipur. ----Appellant Versus M/s. SPC Infrastructure Pvt. Ltd., C-74, Ambabari, Jaipur. ----Respondent _____________________________________________________ For Appellant(s) : Mr. Prateek Kedawat & Mr. Prabhansh Sharmafor Mr. R. B. Mathur For Respondent(s) : Mr. Sanjay Jhanwar with Ms. Archana _____________________________________________________ HON'BLE MR. JUSTICE K.S.JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYASJUDGMENT 20/02/2018 1.By way of this appeal, the appellant has challenged thejudgment and order of the Tribunal whereby the Tribunal haspartly allowed the appeal of the assessee. 2.This court while admitting the appeal on 18.07.2017 framedthe following question of law:- “(I)Whether in the facts and circumstancesof the case and in law, the ITAT was right indeleting the disallowance made by theAssessing Officer u/s. 14A of Rs. 7,84,190/-without considering Department’s Circular No.5/2014 dated 11.02.2014. (ii)Whether in the facts and circumstancesof the case and in law, in deleting theadditions made u/s. 69B and 69C respectivelyon the basis of documents found during thecourse of survey. (iii) Whether in the facts and circumstancesof the case the ITAT was justified in law andhas not acted perversely in deleting additionsmade u/s. 40A by the Assessing Officer onthe basis of documents found and impoundedduring the course of survey.?” 3.The brief facts of the case are that the assessee was pickedup for scrutiny assessment and the assessment under Section143(3) of the IT Act, 1961 (hereinafter referred to as the Act) wasframed vide order dated 27.03.2015. While framing theassessment, the AO rejected the books of accounts and estimatedthe net profit @ 11.05% thereby made an addition of Rs.3,22,94,264/-. The AO also made disallowance by invokingprovisions of Section 14A of Rs. 7,84,190/-. The AO made furhterdisallowance and made addition of Rs. 29,63,480/- by invokingprovisions of Section 40A(3) of the Act. Further, the AO madeaddition of Rs. 80,00,000/- by invoking provisions of Section 69Band Rs. 1,39,000/- interest accurred thereon. 4.Counsel for the appellant has taken us to the order of theassessing officer wherein it has been observed as under:- “ From the investment of share only income whichcame arise is derivatives which is exempt from tax,therefore, investment will result in exempt incomeand accordingly provisions of Section 14A read withrule 8B are applicable in which it is clearly clarifiedthat if the Assessing Officer, having regard to theaccounts of the assessee, is not satisfied with thecorrectness of the claim of the assessee in respectof such expenditure in relation to income whichdoes not form part of the total income under thisAct. Since the assessee has not disallowed anyexpenses, I am satisfied that the expenditurerelating to exempt income/investment is requiredto be disallowed as per Rule 8D. Then even if, thereis no exempt income from investment during theyear, as per the decision of Hon’ble Supreme Courtin the case of Rajendra Prasad Modi, there is nonecessity of earning income during the year underattributing expenses relatable to such exemptincome.” 5.He relied upon the decision of Karnataka High Court in Pradeep Kar vs. Assistant Commissioner of Income Tax, 2009(319) ITR 416: wherein it has been held as under:- 5.He relied upon the decision of Karnataka High Court in Pradeep Kar vs. Assistant Commissioner of Income Tax, 2009(319) ITR 416: wherein it has been held as under:- “3. Smt Anuradha, learned Counsel for theappellant relied upon the decision reportedin MANU/SC/0211/1978 : [1978]115ITR519(SC)(Commissioner of Income Tax v. Rajendra PrasadMody) wherein, it is held that interest paid onmoney borrowed for investment in shares isdeductible under Section 57(iii) of Income TaxAct, which requires that the expenditure must belaid out or expended wholly and exclusively formaking or earning income. She also relied uponanother decision in the case of The Commissionerof Income Tax-20 v. Smt. Sushila Devi Khadariareported in 2009 TIOL 171 HC MUM-IT andsubmits that the orders passed by the assessingauthority and the Tribunal are erroneous andcontrary to the aforementioned decisions.Therefore, she submits that substantial question(i) and (ii) framed in the appeal memorandumarise for consideration of this Court andrequested to set aside the order passed by theTribunal. The substantial questions of law framedin the appeal are extracted as hereunder: (i) Whether or not the Tribunal was right in notallowing the interest incurred by the assessee asexpenditure in computing income of theassessee? (ii) Whether or not the Tribunal was right inreversing the findings of the CIT(A), which wasbased on a Supreme Court's decision by relyingon the decision of other Tribunals? (iii) Whether or not the Tribunal was justified innot affording an opportunity of hearing to theassessee before deciding the issue on hand byplacing reliance on judgments, which were notcited by either side? (iv) Whether or not the Tribunal was right inrelying on the decisions inapplicable to the factson hand by distinguishing the decision of theHon'ble Supreme Court, which is squarelyapplicable? 7. The first appellate authority reversed the orderof assessing authority by applying the decision inRajendra Prasad Mody's case, referred to supra,which was rendered prior to introduction ofSection 14A of the Act and which has noapplication to the fact situation. The Tribunal hasrightly set aside the order of first appellateauthority. It cannot be disputed that dividend income is exempted under Section 10(33) of theAct from the tax liability and the same cannot becomputed for income under the head 'othersources'. Exempted income is not allowable fordeduction in view of Section 14A of the Act Inview of these two provisions, the claim of theassessee is wholly untenable and the decisionsrelied upon by the learned Counsel on behalf ofthe appellant are not applicable to the factsituation. “ 6.He further contended that the view taken by the Tribunal is required to be reversed and expenses which are done underSection 14-A of the Income Tax Act and 69-B are required to beviewed very seriously. He also contended that the Tribunal hasseriously committed an error in allowing the appeal of theassessee. 7.On the other hand, counsel for the respondent on questionNo.1 relied on the following decisions of different High Courts: (i)In CIT vs. Shivam Motors (P) Ltd. (2015) Taxmann.com 262(Allahabad), it has been held as under:- 6.He further contended that the view taken by the Tribunal is required to be reversed and expenses which are done underSection 14-A of the Income Tax Act and 69-B are required to beviewed very seriously. He also contended that the Tribunal hasseriously committed an error in allowing the appeal of theassessee. 7.On the other hand, counsel for the respondent on questionNo.1 relied on the following decisions of different High Courts: (i)In CIT vs. Shivam Motors (P) Ltd. (2015) Taxmann.com 262(Allahabad), it has been held as under:- “10. As regards the second question, s. 14A ofthe Act provides that for the purposes ofcomputing the total income under the chapter,no deduction shall be allowed in respect ofexpenditure incurred by the assessee in relationto income which does not form part of the totalincome under the Act. Hence, whats. 14A provides is that if there is any incomewhich does not form part of the income underthe Act, the expenditure which is incurred forearning the income is not an allowablededuction. For the year in question, the findingof fact is that the assessee had not earned anytax-free income. Hence, in the absence of anytax-free income, the corresponding expenditurecould not be worked out for disallowance. Theview of the CIT(A). which has been affirmed bythe Tribunal, hence does not give rise to anysubstantial question of law. Hence, the deletionof the disallowance of Rs. 2,03,752 made by theAO was in order.” (ii)In Redington (India) Ltd. vs. Additional CIT (2017) 392 ITR633 (Madras), it has been held as under:- “15. The exemption extended to dividendincome would relate only to the previous yearwhen the income was earned and none otherand consequently the expenditure incurred inconnection therewith should also be dealt within the same previous year. Thus, by applicationof the matching concept, in a year where thereis no exempt income, there cannot be adisallowance of expenditure in relation to suchassumed income. (Madras Industrial InvestmentCorporationLtd.vs.CIT(MANU/SC/0493/1997 : 225 ITR 802)). Thelanguage of s. 14A (1) should be read in thatcontext and such that it advances the schemeof the Act rather than distort it.” (iii)In Cheminvest Ltd. vs. CIT (2015) 378 ITR 33 (Delhi), it hasbeen held as under:- “22. In the impugned order, the ITAT hasreferred to the decision in Maxopp InvestmentLtd. (supra) and remanded the matter to theAO for reconsideration of the issue afresh. Theissue in Maxopp Investment Ltd. (supra) waswhether the expenditure (including interest onborrowed funds) in respect of investment inshares of operating companies for acquiring andretaining a controlling interest therein wasdisallowable under Section 14A of the Act. Inthe said case admittedly there was dividendearned on such investment. In other words, itwas not a case, as the present, where noexempt income was earned in the year inquestion. Consequently, the said decision wasnot relevant and did not apply in the context ofthe issue projected in the present case. 23. In the context of the facts enumeratedhereinbefore the Court answers the questionframed by holding that the expression 'does notform part of the total income' in Section 14A ofthe envisages that there should be an actualreceipt of income, which is not includible in thetotal income, during the relevant previous yearfor the purpose of disallowing any expenditure incurred in relation to the said income. In otherwords, Section 14A will not apply if no exemptincome is received or receivable during therelevant previous year.” (iv)In Principal CIT vs. IL & FS Energy Development Company Ltd. (2017) 84 Taxmann.com 186 (Delhi), it has been held as under:- 23. In the context of the facts enumeratedhereinbefore the Court answers the questionframed by holding that the expression 'does notform part of the total income' in Section 14A ofthe envisages that there should be an actualreceipt of income, which is not includible in thetotal income, during the relevant previous yearfor the purpose of disallowing any expenditure incurred in relation to the said income. In otherwords, Section 14A will not apply if no exemptincome is received or receivable during therelevant previous year.” (iv)In Principal CIT vs. IL & FS Energy Development Company Ltd. (2017) 84 Taxmann.com 186 (Delhi), it has been held as under:- “22. It was suggested by Mr. Hossain that, inthe context of section 57(iii), the SupremeCourtinCITv.RajendraPrasadMoody MANU/SC/0211/1978 : [1978] 115 ITR519 (SC) explained that deduction is allowableeven where income was not actually earned inthe assessment year in question. This aspect ofthe matter was dealt with by this court inCheminvest Ltd. (supra) where it reversed thedecision of the Special Bench of the Income-taxAppellate Tribunal by observing as under (page39 of 378 ITR) : "Since the Special Bench has relied upon thedecision of the Supreme Court in RajendraPrasad Moody (supra), it is considerednecessary to discuss the true purport of the saiddecision. It is noticed to begin with that theissue before the Supreme Court in the said casewaswhethertheexpenditureundersection 57(iii) of the Act could be allowed as adeduction against dividend income assessableunder the head 'Income from other sources'.Under section 57(iii) of the Act deduction isallowed in respect of any expenditure laid out orexpended wholly or exclusively for the purposeof making or earning such income. TheSupreme Court explained that the expression'incurred for making or earning such income',did not mean that any income should in facthave been earned as a condition precedent forclaiming the expenditure. The court explained(page 522 of 115 ITR) : 'What section 57(iii) requires is that theexpenditure must be laid out or expendedwholly and exclusively for the purpose ofmaking or earning income. It is the purpose ofthe expenditure that is relevant in determiningthe applicability of section 57(iii) and thatpurpose must be making or earning of income.Section 57(iii) does not require that thispurpose must be fulfilled in order to qualify theexpenditure for deduction. It does not say that the expenditure shall be deductible only if anyincome is made or earned. There is in factnothing in the language of section 57(iii) tosuggest that the purpose for which theexpenditure is made should fructify into anybenefit by way of return in the shape of income.The plain natural construction of the languageof section 57(iii) irresistibly leads to theconclusion that to bring a case within thesection, it is not necessary that any incomeshould in fact have been earned as a result ofthe expenditure.' There is merit in the contention of Mr. Vohrathat the decision of the Supreme Court inRajendra Prasad Moody (supra) was rendered inthe context of allowability of deduction undersection 57(iii) of the Act, where the expressionused Is 'for the purpose of making or earningsuch income'. Section 14A of the Act on theother hand contains the expression 'in relationto income which does not form part of the totalincome'. The decision in Rajendra Prasad Moody(supra) cannot be used in the reverse tocontend that even if no income has beenreceived, the expenditure incurred can bedisallowed under section 14A of the Act." There is merit in the contention of Mr. Vohrathat the decision of the Supreme Court inRajendra Prasad Moody (supra) was rendered inthe context of allowability of deduction undersection 57(iii) of the Act, where the expressionused Is 'for the purpose of making or earningsuch income'. Section 14A of the Act on theother hand contains the expression 'in relationto income which does not form part of the totalincome'. The decision in Rajendra Prasad Moody(supra) cannot be used in the reverse tocontend that even if no income has beenreceived, the expenditure incurred can bedisallowed under section 14A of the Act." 23. The decisions of the Income-tax AppellateTribunal in Asst. CIT v. Ratan HousingDevelopment Ltd. (supra) and Relaxo FootwearsLtd. v. Addl. CIT (supra), to the extent that theyare inconsistent with what has been heldhereinbefore do not merit acceptance. Further,the mere fact that in the audit report for theassessment year in question, the auditors mayhave suggested that there should be adisallowance cannot be determinative of thelegal position. That would not preclude theassessee from taking a stand that nodisallowance under section 14A of the Act wascalled for in the assessment year in questionbecause no exempt income was earned.” 8.Regarding question No.2 he relied on the following decisions: (i)In CIT, Patiala vs. Dulla Ram,Labour Contractor (2014) 42Taxmann.com 349 (P & H), it has been held as under:- “10. An Assessing Officer may, while consideringa return of income, inspect the account books and, if satisfied, that account books do not reflectthe true income of an assessee, reject the same.Account books once rejected, are ruled out ofconsideration and cannot be pressed into servicewhether by the assessee or the revenue. Thus,when account books are rejected, it would follow,as a necessary corrolary, that entries in theaccount books whether suspicious or not cannotbe relied by the revenue or the assessee. To holdotherwise, would, in essence, render accountbooks valid for certain purposes and invalid forothers, a course impermissible in law. TheAssessing Officer rejected the account books intheir entirety and thereafter proceeded to assessincome by applying a flat rate of profit of 10%.After applying a flat rate of profit of 10%, theAssessing Officer added Rs.1,98,298/- to theincome of the assessee on the basis of certain‘entries’ deemed to be suspicious. TheCommissioner of Income Tax (Appeals) as well asthe Tribunal have rightly held that as books ofaccount were rejected in their entirety theAssessing Officer could not rely upon any entry inthe books of account for making an addition ofRs.1,98,298/-. A bare reading of Section 68 ofthe Act would reveal that it would not apply to asituation where account books have not (sic)been rejected.” (ii)In CIT vs. Hindustan Equipment (P) Ltd. (2013) 30taxmann.com 295 (Madhya Pradesh), it has been held as under:- “9. Having regard to the law laid down in thecase of Purshottamlal Tamrakar (supra) and thefact that in the present case also net profit ratewas applied we are of the view that when netprofit rate was applied by the Assessing Officerthere was no scope for further disallowance ofany expenditure.” 9.For question No.3 he placed reliance on the decision in the case ofIn CIT vs. Kulwant Rai (2007) 291 ITR 36, it has been heldas under:- “13. It is an admitted fact that the presentassessed had not signed the agreement inquestion and since the assessed had not signed (ii)In CIT vs. Hindustan Equipment (P) Ltd. (2013) 30taxmann.com 295 (Madhya Pradesh), it has been held as under:- “9. Having regard to the law laid down in thecase of Purshottamlal Tamrakar (supra) and thefact that in the present case also net profit ratewas applied we are of the view that when netprofit rate was applied by the Assessing Officerthere was no scope for further disallowance ofany expenditure.” 9.For question No.3 he placed reliance on the decision in the case ofIn CIT vs. Kulwant Rai (2007) 291 ITR 36, it has been heldas under:- “13. It is an admitted fact that the presentassessed had not signed the agreement inquestion and since the assessed had not signed the agreement, no liability can be attributedqua that agreement towards the assessed sincehe is not party to the agreement till he hadsigned the same. The mere fact that thisagreement was found in the possession of theassessed does not lead us anywhere. We find nohesitation in holding that this addition of Rs.17,00,892/- made by Assessing Officer is basedon surmises and guess work and on this pointcase of Dhakeswari Cotton Mills Ltd v.CommissionerofIncomeTax MANU/SC/0073/1954 : (1954) 26 ITR 775,may be referred to, in which held: InmakinganassessmentunderSection 23(3) of the Indian Income tax Act, theIncome Tax Officer is not fettered by technicalrules of evidence and pleadings, and he isentitled to act on material which may not beaccepted as evidence in a court of law, but theIncome Tax Officer is not entitled to make apure guess and make an assessment withoutreference to any evidence or any material at all.There must be something more than baresuspicion to support the assessment underSection 23(3). The rule of law on this subjecthas been fairly and rightly stated by the LahoreHigh Court in the case of Seth Gurmukh Singhv. Commissioner of Income Tax, PunjabMANU/LA/0007/1944.” 10.We have heard the learned counsel for the parties. 11.Taking into consideration the view taken by different HighCourts as relied by counsel for the respondent, the issues arerequired to be answered in favour of assessee and against theDepartment. 12.The appeal stands dismissed. (VIJAY KUMAR VYAS)J. (K.S.JHAVERI)J. B.M.G/Gourav/45