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Commissioner Of Income-Tax v. Corrtech Energy P. Ltd.
Case Summary — Order by Akil Abdul Hamid Kureshi, J.
Factual and Procedural Background
The Revenue challenged the judgment of the Income Tax Appellate Tribunal dated 21.10.2013. The appeal raised two questions concerning disallowances made by the Assessing Officer (AO) and affirmed by the Commissioner of Income Tax (Appeals) (CIT(A)):
- Whether the Tribunal erred in deleting an addition of Rs. 12.33 lakhs made under section 14A of the Income-tax Act, 1961, where the assessee had investments of Rs. 2.75 crores and claimed interest expenses of Rs. 72.08 lakhs and the AO had disallowed proportionate expenses under rule 8D(2)(ii)/(iii).
- Whether the Tribunal erred in deleting a disallowance of interest of Rs. 3.94 lakhs where the assessee claimed interest expenses of Rs. 72.08 lakhs and had given interest-free advances of Rs. 32.91 lakhs to related parties.
Counsel for the Revenue stated that the second question was not pressed because it did not arise from the impugned Tribunal judgment. Consequently, the only live issue before the Court related to the disallowance of Rs. 12.33 lakhs under section 14A.
At the lower levels, the AO applied rule 8D to compute the disallowance; the CIT(A) confirmed the disallowance; on further appeal the Tribunal reversed the disallowance, deleting the addition. The Tribunal relied on the finding that the assessee had not claimed any exempt income in the relevant year and followed the Punjab & Haryana High Court decision in CIT v. Winsome Textile Industries Ltd. (2009) 319 ITR 204.
Legal Issues Presented
- Whether the Appellate Tribunal erred in deleting the addition of Rs. 12.33 lakhs made under section 14A of the Income-tax Act, 1961, despite evidence of investments and interest expenses and the AO's application of rule 8D?
- Whether the Appellate Tribunal erred in deleting the disallowance of interest of Rs. 3.94 lakhs where interest-free advances were given to related parties and interest expenses were claimed? (This question was not pressed by the Revenue in the appeal.)
Arguments of the Parties
Revenue's Arguments
- The Revenue challenged the Tribunal's deletion of the section 14A disallowance (Rs. 12.33 lakhs), contending that the AO and CIT(A) correctly applied rule 8D to make the disallowance in a case arising after assessment year 2009-10.
- Counsel for the Revenue, however, expressly did not press Question No. 2 (the Rs. 3.94 lakhs interest disallowance) because it did not arise from the Tribunal's impugned judgment.
Assessee / Appellant's Arguments (as recorded)
- The assessee's representative (ld. AR) contended that the CIT(A)'s finding was consistent with established law and relied on judicial authorities to argue that where the assessee did not claim exempt income, section 14A would have no application.
- The AR specifically relied on the decision of the Punjab & Haryana High Court in CIT v. Winsome Textile Industries Ltd. (2009) 319 ITR 204 to support deletion of the disallowance.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. Winsome Textile Industries Ltd., [2009] 319 ITR 204 (Punjab & Haryana High Court) | Held that where the assessee did not make any claim for exemption in a year, section 14A would have no application. | The Tribunal followed this decision: it recorded that the assessee had not claimed any exempt income for the year and, respectfully following Winsome, deleted the disallowance under section 14A. The Court noted the Tribunal's reliance on Winsome and accepted that no question of law arose. |
| Abhishek Industries Ltd., [2006] 286 ITR 1 | Decision concerned the allowability of interest paid on loans given to sister concerns without charging interest; it held deduction permissible when loan was taken for business purpose and not for diversion to a sister concern without nexus to business. | The Court (quoting Winsome's treatment of Abhishek Industries) observed that Abhishek was on a different issue and that its observations must be read in context; thus Abhishek did not support applying section 14A in the present fact situation where no exempt income was claimed. |
Court's Reasoning and Analysis
The Court's analysis proceeded from the factual and procedural posture recorded by the Tribunal. Key elements of the reasoning, as set out in the opinion, are:
- The Revenue mounted an appeal against the Tribunal's judgment deleting the addition of Rs. 12.33 lakhs under section 14A. A second question relating to a separate interest disallowance was not pressed by the Revenue.
- The AO and CIT(A) had applied the formula prescribed by rule 8D of the Income-tax Rules to compute the disallowance because the issue arose after assessment year 2009-10; counsel for the Revenue argued that the formula was correctly applied.
- The Tribunal, however, recorded a factual finding that the assessee had not made any claim for exemption of income in the relevant year. On that factual foundation the Tribunal relied on the Punjab & Haryana High Court's decision in Winsome Textile Industries Ltd., which held that section 14A could have no application where no claim for exemption had been made.
- The Tribunal therefore deleted the section 14A disallowance and directed the AO to delete the addition.
- On review, the Court observed the Tribunal's reliance on Winsome and noted the quotation from Winsome which distinguished earlier authority (Abhishek Industries Ltd.) as being on a different issue. The Court found no question of law arising from the appeal and, accordingly, dismissed the Revenue's appeal.
Holding and Implications
Core Ruling: APPEAL DISMISSED.
The direct effect of the decision is that the Tribunal's deletion of the addition of Rs. 12.33 lakhs made under section 14A stands, and the AO is directed to delete that addition. The Court accepted the Tribunal's factual finding that the assessee had not claimed any exempt income for the year and, following the Punjab & Haryana High Court in Winsome Textile Industries Ltd., held that section 14A did not apply in those circumstances.
The opinion does not identify any broader legal principle newly established by this order; it resolves the appeal on the basis of the Tribunal's factual finding and existing authority (Winsome), and states that no question of law arises.
ORDER
Akil Abdul Hamid Kureshi, J.
1. Revenue has challenged the judgment of the Income Tax Appellate Tribunal dated 21.10.2013 raising following questions for our consideration :
(A) Whether the Appellate Tribunal has substantially erred in deleting the addition of Rs. 12.33 lakhs made u/s. 14A despite the fact that the assessee had made investment of Rs. 2.75 crores and had also claimed interest expenses of Rs. 72.08 lakhs. The AO had only disallowed proportionate expenses under rule 8D(2)(ii)(iii)?
(B) Whether the Appellate Tribunal has substantially erred in deleting the disallowance of interest of Rs. 3.94 lakhs despite the fact that the assessee had claimed interest expenses of Rs. 72.08 lakhs and had given interest free advances of Rs. 32.91 lakhs to related parties. Interest expenses to that extent were therefore not deductible u/s. 36(1)(iii)?
Counsel for the Revenue submitted that question No. 2 is not pressed in this appeal since it does not arise out of the impugned judgment of the tribunal.
2. That leaves us only with one question which pertain to disallowance of expenditure of Rs. 12.33 lakhs made by the Assessing Officer under section 14A of the Income-tax Act, 1961 ("the Act" for short). Such disallowance was confirmed by CIT(Appeals). The tribunal in further appeal by the assessee however, reversed the same making the following observations:
13. We have heard the rival contentions, perused the material on record and gone through the orders of the authorities below. We find that the ld. CIT(A) has decided this issue as under :
3.2 As regards interest, appellant had borrowed funds on which interest was paid. While making investments, both borrowed funds as well as own funds were used hence one cannot say that borrowed funds were used only for business purpose and owned capital was only used for investment. Admittedly no separate accounts are maintained for business and investment activities therefore appellant's claim is not justified that borrowed funds were not used in making investment. In view of this, I do not agree with my predecessor that since appellant had sufficient interest free funds, no part of borrowed funds can be attributed to investments. Further, appellant's argument that it did not earn any exempt income during the year and therefore no disallowance of section 14A can be made is without any basis. Since appellant made investment in shares which will result only in dividends which are exempt from tax, not receiving any exempt income during the year will not entitle appellant to claim expenses relating to investments which will result only in exempt income. Therefore in the absence of clear cut details of utilisation of funds, the formula given in rule 8D which is mandatory this year is to be applied. Since assessing officer worked out interest disallowance as per rule 8D, the interest disallowance is confirmed.
The ld. AR submitted that this finding of ld. CIT(A) is containing to the law settled by various judicial pronouncements. We have given our thoughtful consideration to the facts and the decision relied upon by the ld. AR. The Hon'ble Punjab & Haryana High Court in the case of CIT v. Winsome Textile Industries Ltd. : [2009] 319 ITR 204 has held that in the present case, admittedly, the assessee did not make any claim for exemption. In such a situation, section 14A could have no application. In this case also, the assessee has not claimed any exempt income in this year. Therefore, respectfully following the judgment of Hon'ble High Court of Punjab & Haryana in the case of Winsome Textile Industries Ltd. (supra), we hereby allow this ground and direct the AO to delete the addition. Therefore, ground Nos. 1 to 1.2 raised by the assessee in its cross-objection are allowed.
3. Counsel for the Revenue submitted that the Assessing Officer as well as CIT(Appeals) had applied formula of rule 8D of the Income-tax Rules, since this case arose after the assessment year 2009-10. Since in the present case, we are concerned with the assessment year 2009-10, such formula was correctly applied by the Revenue. We however, notice that sub-section (1) of section 14a provides that for the purpose of computing total income under Chapter IV of the Act, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. In the present case, the tribunal has recorded the finding of fact that the assessee did not make any claim for exemption of any income from payment of tax. It was on this basis that the tribunal held that disallowance under section 14A of the Act could not be made. In the process tribunal relied on the decision of Division Bench of Punjab and Haryana High Court in case of CIT v. Winsome Textile Industries Ltd. : [2009] 319 ITR 204 in which also the Court had observed as under :
7. We do not find any merit in this submission. The judgment of this court in Abhishek Industries Ltd. : [2006] 286 ITR 1 was on the issue of allowability of interest paid on loans given to sister concerns, without interest. It was held that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. The observations made therein have to be read in that context. In the present case, admittedly the assessee did not make any claim for exemption. In such a situation section 14A could have no application.
We do not find any question of law arising, Tax Appeal is therefore dismissed.
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