Principal Commissioner Of Income Tax-I, Chandigarh v. M/S Vardhman Chemtech Private Limited, Chandigarh

-1- IN THE HIGH COURT OF PUNJAB & HARYANA AT CHANDIGARH ITA-322-2016 (O&M) Date of Decision: 28.8.2018 Principal Commissioner of Income Tax-I, Chandigarh Versus ....Appellant. M/s Vardhman Chemtech Private Limited, Chandigarh ...Respondent. CORAM:- HON'BLE MR. JUSTICE AJAY KUMAR MITTAL.HON'BLE MR. JUSTICE AVNEESH JHINGAN. PRESENT: Ms. Urvashi Dhugga, Sr. Standing Counsel for the appellant. Mr. Surjeet Bhadu, Advocate with Mr. Raj Kamal, Advocate andMr. Veer Singh, Advocate for the respondent. *** AJAY KUMAR MITTAL, J. 1.This appeal has been preferred by the revenue under Section260A of the Income Tax Act, 1961 (in short “the Act”) against the orderdated 22.4.2016 (Annexure A-3) passed by the Income Tax AppellateTribunal, Division Bench, Chandigarh (hereinafter referred to as “theTribunal”) in ITA No. 488/Chd/2015, claiming the following substantialquestions of law:- 1.Whether in the facts and circumstances of the caseand in law, the Hon'ble ITAT was right in holdingthat the provisions of Section 14A as clarified by -2- CBDT Circular No.5 of 2014, were not attracted asthe assessee has not earned any exempt incomeduring the year despite the fact that the assesseehad invested a huge sum from which no incomewas shown while there was a considerablefinancial outgo on interest/financial charges onborrowed funds? 2.Whether in the facts and circumstances of the caseand in law, the Hon'ble ITAT was right in relyingon the decision in the case of Lakhani Marketingwhen the CBDT Circular No.5 of 2014 was not forconsideration before the Hon'ble Court at thattime?and in law, the Hon'ble ITAT was right in relyingon the decision in the case of Lakhani Marketingwhen the CBDT Circular No.5 of 2014 was not forconsideration before the Hon'ble Court at thattime? 2.A few facts necessary for adjudication of the instant appeal asnarrated therein may be noticed. The assessee filed its return of income on30.9.2011 declaring an income of ` 3,41,50,800/-. The assessment wascompleted under Section 143(3) of the Act by the Assessing Officer videorder dated 3.1.2014 (Annexure A-1) at an income of ` 4,86,08,810/- aftermaking the following additions:- (ii)` 40,28,526/- disallowance under Section 14A of the Act; and (iii)` 64,37,342/- on account of non-deduction of TDSon L/C. on L/C. Feeling aggrieved, the assessee filed an appeal before the ITA-322-2016 -3- Commissioner of Income Tax (Appeals) [for brevity “the CIT(A)”] whovide order dated 27.2.2016 (Annexure A-2) upheld addition at Sr. No. (i),deleted the addition at Sr. No. (ii) and remitted back the addition at Sr. No.(iii) to the file of the Assessing Officer. Against the order, Annexure A-2,the assessee filed appeal against addition at Sr. No. (i) whereas the revenuefiled appeal against deletion of addition at Sr. Nos. (ii) and (iii). TheTribunal vide order dated 22.4.2016 (Annexure A-3) dismissed the appealof the revenue whereas the appeal of the assessee was allowed. Hence, thepresent appeal by the revenue against the deletion of disallowance madeunder Section 14A of the Act. 4.Learned counsel for the revenue has submitted that the Tribunalhas erred in law while upholding the decision of the CIT(A) as it is clarifiedvide CBDT Circular dated 11.2.2014 that Section 14A of the Act providesfor disallowance of expenditure even where taxpayer has not earned anyexempt income. In support of her contention, learned counsel has reliedupon the following judgments: I.Commissioner of Income Tax, West Bengal III,Calcutta v. Rajendra Prasad Moody, Calcutta,AIR 1979 SC 373;Calcutta v. Rajendra Prasad Moody, Calcutta,AIR 1979 SC 373; II.Maxopp Investment Ltd. v. Commissioner ofIncome Tax (2018) 402 ITR 640 (SC);Income Tax (2018) 402 ITR 640 (SC); III.Commissioner of Income Tax v. Walfort Shareand Stock Brokers (2010) 326 ITR 1 (SC); and and Stock Brokers (2010) 326 ITR 1 (SC); and 4.Learned counsel for the revenue has submitted that the Tribunalhas erred in law while upholding the decision of the CIT(A) as it is clarifiedvide CBDT Circular dated 11.2.2014 that Section 14A of the Act providesfor disallowance of expenditure even where taxpayer has not earned anyexempt income. In support of her contention, learned counsel has reliedupon the following judgments: I.Commissioner of Income Tax, West Bengal III,Calcutta v. Rajendra Prasad Moody, Calcutta,AIR 1979 SC 373;Calcutta v. Rajendra Prasad Moody, Calcutta,AIR 1979 SC 373; II.Maxopp Investment Ltd. v. Commissioner ofIncome Tax (2018) 402 ITR 640 (SC);Income Tax (2018) 402 ITR 640 (SC); III.Commissioner of Income Tax v. Walfort Shareand Stock Brokers (2010) 326 ITR 1 (SC); and and Stock Brokers (2010) 326 ITR 1 (SC); and IV.Godrej and Boyce Mfg. Co. Ltd. v. DeputyCommissioner of Income Tax and another(2010) 328 ITR 81 (Bombay).Commissioner of Income Tax and another(2010) 328 ITR 81 (Bombay). ITA-322-2016-4- 5.On the other hand, learned counsel for the assessee hassubmitted that the income earned from the investment of equity shares wasin the nature of dividend which is an exempt income and therefore, theAssessing Officer was rightly directed not to make disallowance underSection 14A of the Act. Further, it was submitted that the Tribunal hadrightly dismissed the appeal of the revenue. Reliance was placed upon thefollowing judgments:- I.CCE, Bolpur v. Ratan Melting and WireIndustries, (2008) 12 STR 416 SC; Industries, (2008) 12 STR 416 SC; II.Commissioner of Income Tax v. LakhaniMarketing Inc. (2014) 111 DTR 149 (P&H);Marketing Inc. (2014) 111 DTR 149 (P&H); III.Commissioner of Income Tax v. Holcim India(P) Ltd. (2014) 272 CIT 282 (Del);(P) Ltd. (2014) 272 CIT 282 (Del); IV.Cheminvest Ltd. v. Commissioner of IncomeTax (2015) 281 CTR 447 (Del);Tax (2015) 281 CTR 447 (Del); V.Redington (India) Ltd. v. AdditionalCommissioner of Income Tax (2017) 392 ITR633 (Mad); and Commissioner of Income Tax (2017) 392 ITR633 (Mad); and VI.Principal Commissioner of Income Tax v. IL&FS Energy Development Company Limited (2017) 399 ITR 482 (Del). 6.After hearing the learned counsel for the parties, we do not findany merit in the appeal. 7.Section 14A of the Act reads as under:- “Section 14A. Expenditure incurred in relation toincome not includible in total income. 14A. (1) For the purposes of computing the total incomeunder this Chapter, no deduction shall be allowed inrespect of expenditure incurred by the assessee inrelation to income which does not form part of the totalincome under this Act. (2) The Assessing Officer shall determine the amountof expenditure incurred in relation to such income whichdoes not form part of the total income under this Act inaccordance with such method as may be prescribed, if theAssessing Officer, having regard to the accounts of theassessee, is not satisfied with the correctness of the claimof the assessee in respect of such expenditure in relationto income which does not form part of the total incomeunder this Act. (3) The provisions of sub-section (2) shall also applyin relation to a case where an assessee claims that noexpenditure has been incurred by him in relation toincome which does not form part of the total incomeunder this Act : Provided that nothing contained in this section shallempower the Assessing Officer either to reassess undersection 147 or pass an order enhancing the assessment orreducing a refund already made or otherwise increasingthe liability of the assessee under section 154, for anyassessment year beginning on or before the 1st day ofApril, 2001.” -6- Section 14A of the Act provides for disallowance ofexpenditure in relation to income not 'includible' in total income. 8.Now, we proceed to examine the judgments relied upon by thelearned counsel for the revenue. In Rajendra Prasad Moody's case(supra), the Supreme Court had held as under:- Provided that nothing contained in this section shallempower the Assessing Officer either to reassess undersection 147 or pass an order enhancing the assessment orreducing a refund already made or otherwise increasingthe liability of the assessee under section 154, for anyassessment year beginning on or before the 1st day ofApril, 2001.” -6- Section 14A of the Act provides for disallowance ofexpenditure in relation to income not 'includible' in total income. 8.Now, we proceed to examine the judgments relied upon by thelearned counsel for the revenue. In Rajendra Prasad Moody's case(supra), the Supreme Court had held as under:- “The plain and natural construction of the language ofSec. 57(iii) of the Income Tax Act 1961 irresistiblyleads to the conclusion that to bring a case within thesection, it is not necessary that any income should infact have been earned as a result of the expenditure.What Sec. 57(iii) requires is that the expendituremust be laid out or expended wholly andexclusively for the purpose of making or earningincome. It is the purpose of the expenditure that isrelevant in determining the applicability of Sec. 57(iii)and that purpose must be making or earning of income.Sec. 57(iii) does not require that this purpose must befulfilled in order to qualify the expenditure fordeduction. It does not say that the expenditure shall bedeductible only if any income is made or earned. Thereis in fact nothing in the language of Sec. 57(iii) tosuggest that the purpose for which expenditure is madeshould fructify into any benefit.” 9. It was laid down in Maxopp Investment Ltd's case (supra) that the provisions of Section 14A of the Act can be applied to the case of aperson who was a dealer in shares. It was concluded by the Apex Court in Walfort Share and Stock Brokers' case (supra) that the basic principle oftaxation was to tax the net income, i.e. gross income minus the expenditureand on the same analogy the exemption was also in respect of net incomeand where the gross income would not form part of total income, itsassociated or related expenditure would also not be permitted to be debitedagainst other taxable income. Further, it was observed that for the purposeof computing the total income under this Chapter, no deduction shall beallowed in respect of expenditure incurred by the assessee with the mainobject of earning income which does not form part of the total income underthe Act. It was also held that permissible deductions enumerated in Sections15 to 59 were now to be allowed only with reference to income which wasbrought under one of the heads of income and was chargeable to tax and ifan income like dividend income was not part of the total income, theexpenditure/deduction related to such income, though of the naturespecified in Sections 15 to 59 could not be allowed against another incomewhich was includible in the total income for the purpose of chargeability totax. Further, it was pronounced by the Supreme Court in Godrej and BoyceMfg. Co. Ltd's case (supra) that computation of income, disallowance ofexpenditure incurred in earning income not forming part of total income,Section 14A of the Act was applicable to dividend income and income frommutual funds exempt under Section 10(33) of the Act. None of the aforesaidpronouncements relied upon by learned counsel for the revenue advancesthe case as set up by it. 10.We now advert to the judicial decisions relied upon by thelearned counsel for the assessee. In Ratan Melting and Wire Industries'case (supra), it was held by the Supreme Court that 'circulars and ITA-322-2016 -8- 10.We now advert to the judicial decisions relied upon by thelearned counsel for the assessee. In Ratan Melting and Wire Industries'case (supra), it was held by the Supreme Court that 'circulars and ITA-322-2016 -8- instructions issued by the Board are no doubt binding in law on theauthorities under the respective statutes, but when the Supreme Court or theHigh Court declares the law on the question arising for consideration, itwould not be appropriate for the court to direct that the circular should begiven effect to and not the view expressed in a decision of this court or theHigh Court. So far as the clarifications/circulars issued by the CentralGovernment and of the State Government are concerned they representmerely their understanding of the statutory provisions. They are not bindingupon the court. It is for the Court to declare what the particular provision ofstatute says and it is not for the Executive. Looking at from another angle, acircular which is contrary to the statutory provisions has really no existencein law. In Lakhani Marketing Inc's case (supra), this Court whiledismissing the appeal of the revenue had observed that unless and untilthere is receipt of exempted income for the concerned assessment years,Section 14A of the Act cannot be invoked. Similarly, in Holcim India (P)Ltd's case (supra), the Delhi High Court had laid down that Section 14A ofthe Act cannot be invoked when no exempt income was earned. Identicalview was expressed by Madras High Court in Redington (India) Ltd's case(supra), where it was enunciated that no disallowance under Section 14Aread with Rule 8(d) of the Income Tax Rules, 1962 (in short “1962 Rules”)can be made in respect of an assessment year in which no exempt income isearned. In IL&FS Energy Development Company Limited's case(supra), the Delhi High Court had expressed that the CBDT Circular dated11.2.2014 cannot override the express provisions of Section 14A read withRule 8 D of the 1962 Rules. In Cheminvest Ltd's case (supra), it wasGURBACHAN SINGHreiterated that Section 14A of the Act envisages that there should be an2018.09.19 16:47I attest to the accuracy andintegrity of this document ITA-322-2016 actual receipt of income, which is not includable in the total income duringthe relevant previous year for purpose of disallowing any expenditure underSection 14A of the Act in relation to said income. 11.Examining the factual matrix, it may be noticed that theTribunal while relying upon the judgment of this Court in Commissioner ofIncome Tax v. Lakhani Marketing Inc. (2014) 111 DTR 149 (P&H) hadheld that Section 14A of the Act cannot be resorted to in the year in whichno exempt income had been earned. However, the revenue relied upon theCBDT Circular dated 11.2.2014 to contend that Section 14A of the Act canbe invoked even in the year in which no exempt income had been earned.Accordingly, the Tribunal had dismissed the appeal of the revenue holdingthat unless and until there is receipt of exempted income for the concernedassessment year, Section 14A of the Act is not attracted. 12.The Tribunal vide order dated 22.4.2016 regarding the groundof deletion of disallowance amounting to ` 40,28,526/- under Section 14Aof the Act had recorded as under:- “We do not find any infirmity in the order of the Ld. CIT(A), who deleted the disallowance made following thedecision of the jurisdictional High Court in the case ofLakhani Marketing (supra). The argument of the Ld. DRthat the CBDT Circular No.5/2014 dt. 11.02.2014 statingthat even in the absence of any exempt incomedisallowance under Section 14A has to be made, isbinding on the Revenue authority, we find has no merit. 13.No illegality or perversity could be demonstrated by learnedcounsel for the revenue in the aforesaid findings recorded by the Tribunal. ITA-322-2016 14.No other point was urged by learned counsel for the parties. 15.Thus, substantial questions of law as claimed are answeredaccordingly and the appeal is dismissed. “We do not find any infirmity in the order of the Ld. CIT(A), who deleted the disallowance made following thedecision of the jurisdictional High Court in the case ofLakhani Marketing (supra). The argument of the Ld. DRthat the CBDT Circular No.5/2014 dt. 11.02.2014 statingthat even in the absence of any exempt incomedisallowance under Section 14A has to be made, isbinding on the Revenue authority, we find has no merit. 13.No illegality or perversity could be demonstrated by learnedcounsel for the revenue in the aforesaid findings recorded by the Tribunal. ITA-322-2016 14.No other point was urged by learned counsel for the parties. 15.Thus, substantial questions of law as claimed are answeredaccordingly and the appeal is dismissed. (AJAY KUMAR MITTAL) JUDGE August 28, 2018(AVNEESH JHINGAN)gbsJUDGE Whether Speaking/ReasonedYesWhether ReportableYes