DCIT, Cnetral Circle -III, Ludhiana V. M/s Sel Textiles Ltd., Ludhiana

ITA 560/CHANDI/2022

AI Insights

The case involves an appeal by the Revenue against the order of the Ld. CIT(A)-5, Ludhiana, which pertained to the assessment year 2018-19. The primary contention was regarding the disallowance made under section 14A read with section 8D of the Income Tax Act, which amounted to Rs. 81,03,223. The Assessing Officer (AO) had made this disallowance based on the provisions that allow for disallowance of expenses related to earning exempt income, irrespective of whether any exempt income was actually earned during the year. The Ld. CIT(A) had reversed this decision, leading to the Revenue's appeal. The Tribunal, however, dismissed the appeal based on the low tax effect, without addressing the substantive legal issues raised.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 127760 (ITAT-CHANDIGARH)
• Duration Of Justice: 9 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-05-2023
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 17-05-2023
• Assessment Year: 2018-2019
• Appeal Filed On: 21-07-2022
• Other Referred Cases: ACIT Vs. Williamson Financial Services Limited, PCIT vs Delhi International Airport (P) Ltd, PCIT vs Karnataka State Financial Corporation Ltd, Pr. CIT Vs. ERA Infrastructure (India) Ltd, PCIT vs J L & FS Energy Development Company Ltd, Chem invest Limited vs. Commissioner of Income Tax-VI, CIT vs. Rajender Prasad Moody, CIT vs. Walfori Share and Stock Brokers P Ltd.
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Tax effect; Earning of tax free income; Question of law; Deemed dividend; Assessment record; Tax effect; Rule 8D
• Section: 143(3); 2(22)(e); 14A; 260A; 113

Judgement Text

आयकर अपील य अ धकरण,च डीगढ़ यायपीठ “बी” , च डीगढ़ IN THE INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH BENCH “B”, CHANDIGARH ी आकाश द प जैन, उपा य एवं ी $व%म 'संह यादव, लेखा सद,य BEFORE: SHRI. AAKASH DEEP JAIN, VP & SHRI. VIKRAM SINGH YADAV, AM ITA NO. 560/Chd/ 2022 Assessment Year : 2018-19 DCIT, Central Circle-III SCO 1-6, 3 rd Floor, Opp. B.V.M. School , Kitchlu Nagar, Ludhiana – 141001, Punjab M/s Sel Textiles Ltd. Plot No. 274, Dhandari Kalan, Ludhiana – 141014, Punjab PAN NO: AANCS0401M Appellant Respondent ! " Assessee by : Shri Ashwani Kumar, CA and Shri Aditya Kumar, CA # ! " Revenue by : Shri Akashdeep, JCIT, Sr. DR $ % ! & Date of Hearing : 18/05/2023 '()* ! & Date of Pronouncement : 19/05/2023 आदेश/Order PER VIKRAM SINGH YADAV, A.M. : This is an appeal filed by the Revenue against the order of the Ld. CIT(A)-5, Ludhiana dt. 31/05/2022 pertaining to A.Y. 2018-19 wherein the Revenue has taken the following grounds of appeal: 1. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the disallowance of Rs.81,03,223/- made u/s 14A r.w.s 8D where the assessee has not claimed exempt income? 2. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) erred in ignoring the amendment made by the Finance Act, 2022 thereby inserting an explanation below section 14A which is read as under: Explanation : For the removal of doubts it is hereby clarified that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, has not accrued or arisen or has not been received during the previous year relevant to any assessment year and the expenditure has been incurred during the said previous year in relation to such income not forming part of the total income. 2 3. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) is justified in holding that disallowance u/s 14A of the Act will not exceed the total exempt income earned by the assessee. thereby implicitly holding CBDT Circular No. 05/2014 dated 11.02.2014 to be illegal whereas Circular No.5 of 2014 propounds that section 14A is triggered for disallowance of expenditure incurred which is relatable to tax exempt income even though no tax exempt income under the Act has been earned during a particular year? 4. The appellant craves leave to add. amend, modify, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of appeal. 2. Briefly the facts of the case are that the assessment in case of the assessee was completed u/s 143(3) dated 11/06/2021 wherein the AO has made a disallowance of Rs. 81,03,223/- as per amended Rule 8D(ii) being equal to 1% of the annual average value of the investment and the loss was assessed at Rs 1,46,53,75,758/-. The AO referred to the CBDT Circular No. 05/2014 and stated that disallowance u/s 14A becomes mandatory once any investment relating to earning of exempt income is made by the assessee and it is not material whether the exempt income is earned or not during the year as any income whenever earned from the said investment shall never be includible in the total income. 3. Being aggrieved, the assessee carried the matter in appeal before the Ld. CIT(A). The Ld. CIT(A) referred to the decision of Coordinate Bench in assessee’s own case for A.Y 2010-11 to 2014-15 (ITA no. 150-154/CHD/2018 dated 12/12/2019) and following the same, held that the disallowance under section 14A is required to be restricted to the extent of exempt income and the AO was directed to restrict the disallowance to the extent of exempt income after going through the return/assessment records of the assessee and where it is found that no exempt income has been earned as so claimed by the assessee, no disallowance u/s 14A is warranted and the appeal of the assessee was allowed for statistical purposes. 4. Against the said findings and the directions of the Ld. CIT(A), the Revenue is in appeal before us. During the course of hearing, the Ld. DR submitted that though the tax effect involved in this case is Rs 25,03,895/- which is below the limit prescribed by CBDT Circular No. 17/2019 dt. 08/08/2019 read with CBDT Circular No. 03/2018 dt. 11/07/2018, however the case falls in the exception provided under para10(b) of the said Circular. It was accordingly submitted that the appeal filed by the Revenue 3 therefore deserve to be heard on merits. In this regard, it was submitted that the Ld. CIT(A) was not justified in holding that the disallowance under section 14A will not exceed the total tax exempt income earned by the assessee thereby implicitly holding CBDT Circular No. 5/2014 dt. 11/02/2014 to be illegal. 5. It was further submitted that the Ld. CIT(A) has ignored the amendment brought in by the Finance Act, 2022 wherein an explanation has been inserted to Section 14A wherein it has been clarified that the provisions of this section shall apply and shall be deemed to have always applied in a case where the income not forming part of the total income has not accrued or arisen or has not been received during the previous year and the expenditure has been incurred during the said previous year in relation to such income not forming part of the total income. It was accordingly submitted that the decision of the Ld. CIT(A) is against the law as per the amendment made by the Finance Act, 2022 and also interpreted by the Coordinate Guwahati Bench in case of ACIT Vs. Williamson Financial Services Limited in ITA Nos. 154 to 156/Gau/2019 dt. 06/07/2022. It was further submitted that the SLP against the decision of the Hon’ble Karnataka High Court decision in case of PCIT vs Delhi International Airport (P) Ltd wherein it was held that no disallowance can be made u/s 14A in absence of exempt income has been admitted by the Hon’ble Supreme Court on 11/03/2022 as reported in [2022] 138 taxmann.com 113 and similarly, the SLP in case of PCIT vs Karnataka State Financial Corporation Ltd has been admitted by the Hon’ble Supreme Court on 07/02/2022 as reported in [2022] 137 taxmann.com 195. 6. Per contra, the ld AR submitted that the tax effect involved in the present appeal is below the threshold limit prescribed by the CBDT Circular No. 17/2019 dt. 08/08/2019 and therefore the appeal so filed by the Revenue deserves to be dismissed. Regarding the CBDT Circular No. 5/2014 dt. 11/02/2014, it was submitted that the said Circular is not binding on the appellate authorities and the Courts and it can only be binding on the departmental authorities as held by the Hon’ble Supreme Court in case of Navnit Lal C. Javeri 56 ITR 198 and UCO Bank 237 ITR 887. It was submitted that the Circular cannot over-ride the express provisions of Section 14 r.w.r 8D and it is for this reasons that the Ld. CIT(A) did not deal with the said Circular and merely not dealing with the said circular, it cannot be held that the ld CIT(A) has held the said circular to 4 be illegal and therefore, the present matter doesn’t fall under exception 10(b) and the appeal of the Revenue deserve to be dismissed on account of low tax effect. 7. It was further submitted that the decision of Coordinate Guwahati Benches in case of ACIT Vs. Williamson Financial Services ltd. (supra) is no more good law in view of the latest decision of Hon’ble Delhi High Court in case of Pr. CIT Vs. ERA Infrastructure (India) Ltd. dt. 20/07/2022 in ITA No. 204/2022 wherein the relevant findings reads as under: “8. Consequently, this Court is of the view that the amendment of Section 14A(by the Finance Act 2022), which is ""for removal of doubts" cannot be presumed to be retrospective even where such language is used, if it alters or changes the law as it earlier stood. 9. Though the judgment of this Court has been challenged and is pending adjudication before the Supreme Court, yet there is no stay of the said judgment till date. Consequently, in view of the judgments passed by the Supreme Court in Kunhayammed and Others vs. State of Kerala and Another, (2000) 6 SCC 359 and Shree Chamundi Mopeds Ltd. Vs. Church of South India Trust Association CSI Cinod Secretariat, Madras (1992) 3 SCC 1, the present appeal is dismissed being covered by the judgment passed by the learned predecessor Division Bench in PCIT vs. J L & FS Energy Development Company Ltd (supra) and Chem invest Limited vs. Commissioner of Income Tax-VI, (2015) 378ITR 33. 10. Accordingly, the appeal and application are dismissed. However, it is clarified that the order passed in the present appeal shall abide by the final decision of the Supreme Court in the SLP filed in the ease of PCIT vs. IL & FS Energy Development Company Ltd (supra).” 8. Regarding contention of the ld DR that SLP has been admitted by the Hon’ble Supreme Court, it was submitted that mere admittance of an SLP is no bar on applicability of the decision of the Hon’ble High Courts and more so, where there are decisions of the jurisdictional High Court and the Tribunal in assessee’s own case. 9. We have heard the ld DR and perused the material available on the record. On going through the CBDT Circular No. 3 of 2018 (supra) and in particular Para 10 of the said Circular, the contents thereof read as under: “10. Adverse judgments relating to the following issues should be contested on merits notwithstanding that the tax effect entailed is less than the monetary limits specified in para 3 above or there is no tax effect: (a) Where the Constitutional validity of the provisions of an Act or Rule is under challenge, or (b) Where Board's order, Notification, Instruction or Circular has been held to be illegal or ultra vires, or (c) Where Revenue Audit objection in the case has been accepted by the Department, or (d) Where the addition relates to undisclosed foreign assets/ bank accounts.” 5 10. We therefore find that the exception so carved in para 10(b) talks about a situation where the Board's order, Notification, Instruction or Circular has been held to be illegal or ultra vires. In the instant case, the AO has made a disallowance under Section 14A amounting to Rs 81,03,223/- relying on the CBDT Circular no. 5 of 2014 holding that the disallowance under section 14A becomes mandatory once any investment relating to earning of exempt income is made by the assessee and whether there is earning of any exempt income or not is immaterial before invoking the said provisions. The ld CIT(A) has restricted the said disallowance to the extent of exempt income following the decisions of the Coordinate Bench in assessee’s own case for earlier years. We therefore find that the ld CIT(A) has followed the judicial discipline of following the decision of the jurisdictional Tribunal rather than following the CBDT Circular no. 5 of 2014. However, the ld CIT(A) has not recorded any findings holding the CBDT Circular as illegal or ultra vires. In fact, the ld CIT(A) doesn’t have the jurisdiction to challenge the vires of the CBDT Circular. Being the appellate authority, he may not have followed the CBDT Circular and for valid reasons given that there are jurisdictional Tribunal decision and that too, in asssessee’s own case, however, not following the CBDT Circular cannot be held by any stretch of imagination as challenging the vires of the CBDT Circular or for that matter, holding it as illegal. In view of the same, we find that the present case clearly doesn’t fall under the exception 10(b) of the CBDT’s Circular No. 3 of 2018 as so contended by the ld DR before us and we are unable to accede to the said prayer so made on behalf of the Revenue and given that the tax effect involved is Rs. 25,03895/- which is below the prescribed threshold of filing appeal before the Tribunal, we are of the considered view that the appeal so filed by the Revenue deserve to be dismissed on account of low tax effect. 11. Our view is fortified by the decision of Hon’ble Punjab & Haryana High Court in case of Pr. CIT-1 Vs. Sukhwant Singh (in ITA No. 283 of 2019 dt. 20/02/2020) wherein an identical matter relating to the appeal filed by the Revenue as to whether it falls under exception carved out under para 10(b) of CBDT Circular No. 3 of 2018 was under consideration and the Hon’ble High Court has dismissed the appeal filed by the Revenue holding that even the Tribunal has no jurisdiction to declare a CBDT circular 6 ultra vires and therefore, the case does not fall in the exception clause and the contents of the decision read as under: “The revenue is in appeal under Section 260A of the Income Tax Act, 1961 (for short, 'the Act') against the order dated 29.10.2018 passed by the Income Tax Appellate Tribunal, Chandigarh (for short, 'the Tribunal'). Following substantial questions of law have been claimed: "1. Whether on the facts and in the circumstances of the case the Ld. Income Tax Appellate Tribunal is right in law in holding that even if a Company advances loans to its Member(s)/Share-holder(s)/Director(s) holding more than 10% of shares therein, and where admittedly such lending is 1 of 7 ITA No. 283 of 2019 [2] not in the usual course of its business, even then, the amounts so advanced, would not be covered under the definition of "dividends" as stated in section 2(22)(e) of the Income Tax Act, 1961 which is clearly contrary to the unambiguous language of the provision? ii) Whether on the facts and in the circumstances of the case, the Ld. Income Tax Appellate Tribunal is right in law in rejecting the finding of the Commissioner of Income Tax (Appeals)-2, Chandigarh that even though the amounts so received by the Assessee from the company, a major/considerable part thereof being utilized for meeting Miscellaneous Expenses of the Assessee, still such transaction would take the colour of and/or relate to the usual course of business of the company which had transferred the amount? (iii) Whether on the facts and in the circumstances of the case, the Ld. Income Tax Appellate Tribunal is right in law in upsetting the well-reasoned and cogent findings as contained in the order passed by the Commissioner of Income Tax (Appeals)-2, Chandigarh even though no reasons in respect thereof have been rendered by it? (iv) Whether on the facts and in the circumstances of the case and in law, the order of Hon'ble ITAT is perverse stating that there is no exempt income during the year whereas in the return of income, the assessee has claimed total exempt income of Rs. 24,45,132/-, hence the ratio of case of M/s Lakhani Marketing INC is not applicable to the case of the assessee? (v) Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT has erred in not upholding disallowance of Rs. 11,82,978/- u/s 14A of the Income Tax Act on the ground that disallowance made cannot exceed exempt income without appreciating the fact that there is no such restriction stipulated either in Section 14A of the Income Tax Act or Rule 8D of the Income Tax Rule? (vi) Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT has erred in not upholding disallowance of Rs. 11,82,978/- u/s 14A of the Income Tax Act on the ground that disallowance made cannot exceed exempt income without appreciating the fact that applicability of Section 14A or Rule 8D does not depend on earning of income as held by Supreme Court in the case of CIT vs. Rajender Prasad Moody (1978), 115 ITR 519? (vii) Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT has erred in not upholding disallowance of Rs. 11,82,978/- u/s 14A of the Income Tax Act on the ground that disallowance made cannot exceed exempt income without appreciating the fact that there is no such restriction in Section 14A or in rule 8D and further clarified by CBDT Circular No. 5 of 2014? (viii) Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT has erred in ignoring the 3 of 7 ITA No. 283 of 2019 [4] legislative intent expressed in CBDT's Circular No. 5/2014 dated 11.2.2014, which explicitly states that expenses relatable 7 to earning of exempt income have to be considered for disallowance irrespective of the fact whether any such income has been earned during the F.Y. or not as confirmed by Apex Court in Maxopp Investment Ltd. v. CIT, 91 Taxman.com 154 (SC)? (ix) Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT has erred in holding that disallowance u/s 14A cannot be made where there is no exempt income, when Supreme Court has upheld the principles of apportionment and department is in SLP on the same issue in the cases of Moderate Leasing and Capital Services Pvt. Ltd. In ITA No. 102 of 2018, A. Y. 2009-10 and Matrix Cellullar Service (P) Ltd. In ITA No. 484 of 2017 and Nilgiri Infrastructure Development Ltd. In ITA No. 135 of 2016 and Instant Holding Ltd. in ITA No. 2168 of 2011 and SLP has also been approved against the decision of Hon'ble Jurisdictional High Court in the case of M/s Vardhman Chemtech Private Ltd. in ITA No. 322/2016? (x) Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT has erred in law and fact in following the decision of Hon'ble High Courts whose facts were distinguishable from the assessee, ignoring the principal of apportionment regardless of exempt income laid down by Hon'ble Supreme Court decision in CIT v. Walfori Share and 4 of 7 ITA No. 283 of 2019 [5] Stock Brokers P Ltd., 326 ITR 1 (SC) and upheld by the Hon'ble Supreme Court in 91 Taxman.com 154 (SC)? (xi) Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT has erred in deleting the addition of Rs. 11,82,978/- u/s 14A determined by the AO under rule 8D r.w.s. 14A to apportion interest expenditure incurred to invest in shares and equity instrument in view of the fact that no separate accounts are maintained by the assessee in relation to investments whose income is exempt from tax, and has large borrowed funds ignoring Apex Court decision in 91 Taxman.com 154 (SC)? (xii) Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT has erred in law and fact in following the decision of Hon'ble High Court in Lakhani Marketing decided following decisions in the case of Hero Cycles Ltd., 323 ITR 204 and CIT v. Winsome Textile Industries Ltd., 319 ITR 204 whose facts are distinguishable from the assessee, ignoring the principal of apportionment laid down by Hon'ble Supreme Court decision in CIT v. Walfori Share and Stock Brothers P. Ltd., 326 ITR 1(SC), which has been confirmed in 91 Taxman.com 154 (SC) and thus legislation relying on Winsome Textiles Industries Ltd. stands superceded?" The brief facts are that the assessment year involved is 2013- 14. The income tax return was filed claiming deduction under Chapter VI-A of the Act. The case was selected for scrutiny. The Assessing Officer treated the loan received from M/s Acme Builders Private Limited as deemed dividends and made additions under the head "income from other sources". Further disallowance under Section 14A of the Act was also made vide order dated 29.1.2016. The first appeal filed was dismissed on 14.12.2016. The Tribunal allowed the appeal vide order dated 29.10.2018, hence the present appeal of the revenue. In the appeal, it is pleaded that the tax effect is `46,91,541/-, however it is argued that the case falls under the exception carved out in para 10(b) of CBDT Circular No.3 of 2018 dated 11.7.2018. The same is reproduced below: "10. Adverse judgments relating to the following issues should be contested on merits notwithstanding that the tax effect entailed is less than the monetary limits specified in para 3 above or there is no tax effect: xx xx xx 8 (b) Where Board's order, Notification, Instruction or Circular has been held to be illegal or ultra vires, or xx xx xx From the perusal of the order of the Tribunal, it is not forth coming that any notification, order, instruction or circular was dealt with/ relied upon by the Tribunal what to talk about the same being held illegal or ultra vires. Even otherwise, the Tribunal has no jurisdiction to declare a circular ultra vires. In our considered view, the case does not fall in the exception clause. The appeal is dismissed. However, the substantial question of law left open.” 12. In light of aforesaid discussions, we are of the considered view that the present case doesn’t fall under exception 10(b) of the CBDT Circular and the appeal so filed by the Revenue is hereby dismissed at the threshold on account of low tax effect. 13. In view of the above, the contentions on merits of the case need not be gone into and are not dealt with and thus left open. 14. In the result, the appeal of the Revenue is dismissed. Order pronounced in the open Court on 19/05/2023 Sd/- Sd/- आकाश द प जैन $व%म 'संह यादव (AAKASH DEEP JAIN) ( VIKRAM SINGH YADAV) उपा य / VICE PRESIDENT लेखा सद,य/ ACCOUNTANT MEMBER AG Date: 19/05/2023 ( + ! , - . - Copy of the order forwarded to : 1. The Appellant 2. The Respondent 3. $ / CIT 4. $ / 0 1 The CIT(A) 5. - 2 ग 4 5 & 4 5 678 ग9 DR, ITAT, CHANDIGARH 6. ग 8 : % Guard File ( + $ By order, ; # Assistant Registrar