Court Upholds Tribunal's Decision on Income Tax Disallowance, Dismisses Revenue's Appeal

To delve deeper, you can read the original judgement of the court order here.

Case Name:

Principal Commissioner of Income Tax Vs Ind Swift Laboratoires Limited (High Court of Punjab and Haryana)

ITA No.180 of 2017

Key Takeaways

1. The High Court upheld the Tribunal's decision to limit the disallowance under Section 14A.

2. The court found no substantial question of law in the revenue's appeal.

3. The case highlights the importance of proper application of Section 14A and Rule 8D in calculating disallowances.

Issue

Was the Income Tax Appellate Tribunal justified in restricting the disallowance made under Section 14A of the Income Tax Act from ₹31,55,004 to ₹2 lakhs?

Facts

Let's break this down in a friendly way:

1. For the 2006-07 assessment year, IND Swift Laboratories filed a tax

return showing a loss.

2. They revised their return multiple times, ultimately declaring a loss of ₹37,43,05,752.

3. The case was selected for scrutiny by the tax department.

4. During assessment, the Assessing Officer noticed the company had invested ₹7,39,85,179 in shares of other companies.

5. The AO applied Section 14A and Rule 8D, calculating a disallowance of ₹31,55,004.

6. The company appealed this decision, first to the CIT(A), then to the Tribunal.

7. The Tribunal allowed the appeal but restricted the disallowance to ₹2 lakhs.

8. The tax department wasn't happy with this, so they appealed to the High Court.

Arguments

The revenue (tax department) argued that:

1. The Tribunal wasn't justified in reducing the disallowance.

2. The method for calculating disallowance under Rule 8D shouldn't have been rejected just because it was inserted later.

3. The Tribunal erred in computing book profits under Section 115JB.

The assessee (IND Swift Laboratories) likely argued against these points, supporting the Tribunal's decision.

Key Legal Precedents

1. M/s Indo Swift Ltd. in ITA No.511/Chd/2009

2. Godrej Boyce Mfg. Company Pvt. Ltd. vs. Deputy CIT and another, 2010 (328) ITR 81 (Bombay High Court)

3. ITA No.212 of 2017 (a similar case decided by the same High Court)

Judgement

The High Court dismissed the revenue's appeal. They found that:

1. Similar questions had already been dismissed in ITA No.212 of 2017.

2. The question about Section 115JB was no longer relevant as it depended on the Section 14A disallowance, which had been set aside.

3. No substantial question of law arose from the case.

FAQs

Q1: What was the main issue in this case?

A1: The main issue was whether the Tribunal was right to reduce the disallowance under Section 14A from ₹31,55,004 to ₹2 lakhs.

Q2: Why did the High Court dismiss the appeal?

A2: The Court found no substantial question of law and noted that similar questions had been dismissed in a previous case.

Q3: What is Section 14A of the Income Tax Act about?

A3: Section 14A deals with the disallowance of expenses incurred in relation to income not includible in total income.

Q4: What is Rule 8D?

A4: Rule 8D provides a method for calculating the amount of expenditure incurred in relation to income not includible in total income.

Q5: What's the significance of this judgment?

A5: It reinforces the importance of proper application of Section 14A and Rule 8D, and shows that courts will uphold Tribunal decisions unless there's a clear error in law.

1. The revenue has filed the present appeal under Section 260A of Income Tax Act, 1961 (for brevity, 'the Act') against the order of Income Tax Appellate Tribunal, Chandigarh (hereinafter referred to as 'Tribunal') passed in ITA No.745/Chd/2012 dated 28.08.2004 for the assessment year 2006-07.

2. Appellant claims following substantial questions of law arise for consideration in the present appeal:-

i) Whether on the facts and circumstances of the case, the Hon'ble ITAT was justified in restricting the disallowance made u/s 14A from 31,55,004/- to For Subsequent orders see ITA-181-2017 Decided by HON'BLE MR. JUSTICE AJAY TEWARI; HON'BLE

MRS. JUSTICE ALKA SARIN 2 lakhs without any sound and valid reason?

ii) Whether on the facts and circumstances of the case, the Hon'ble ITAT was justified in rejecting the method for calculation of disallowance u/s 14A provided in Rule 8D just because the said Rule was inserted from 23.04.2008 even if it was a logical method?

iii) Whether on the facts and circumstances of the case, the Hon'ble ITAT was justified in rejecting the method for calculation of disallowance u/s 14A provided in Rule 8D just because the said Rule was inserted from 23.04.2008, when this was the prescribed method available in the statute when the disallowance was made?

iv) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in computing book profits u/s 115JB of the I.T.Act, 1961 in view of explanation (1) (f) to Section 115JB of the I.T.Act, 1961 ?

3. The brief facts necessary for adjudication of the appeal are that for assessment year 2006-07, the assessee-company filed a return declaring loss of `28,03,95,438/-. The return was revised on 31.10.2007 and the business loss of `37,60,87,896/- was shown. The return was further revised twice and ultimately a loss of `37,43,05,752/- was declared and tax was paid under Section 115 JB of the Act. The return was processed under Section 143 (1) of the Act on 14.11.2007. The case was selected for scrutiny. Notice under Section 143(2) of the Act was issued on 24.10.2007. The assessment was finalised vide order dated 30.12.2008. During the assessment proceedings apart from other issues, the Assessing Officer noticed that For Subsequent orders see ITA-181-2017 Decided by HON'BLE MR. JUSTICE AJAY TEWARI; HON'BLE MRS. JUSTICE ALKA SARIN assessee had invested a sum of `7,39,85,179/- in shares of other companies. The Assessing Officer invoked the provisions of Section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 (in short, 'the Rules'). The AO applied Rule 8D of the Rules and worked out the disallowance of expenses under Section 14A of the Act at `31,55,004/-.

4. Against the said order, the assessee-company filed an appeal before the Commissioner of Income Tax (Appeals), Chandigarh (for brevity, '(CIT(A)'). The Appellate Authority vide order dated 03.04.2012 sustained the disallowance of expenses under Section 14A of the Act. Dissatisfied, the assessee-company preferred further appeal before the Tribunal. The issue of disallowance under Section 14A of the Act was allowed by the tribunal vide order dated 28.08.2014. Tribunal relied upon its decision in the case of M/s Indo Swift Ltd. in ITA No.511/Chd/2009 wherein the Tribunal had followed the decision of the Bombay High Court in the case of Godrej Boyce Mfg. Company Pvt. Ltd. vs. Deputy CIT and another, 2010 (328) ITR 81. However, the Tribunal restricted the disallowance to `2 lakhs. Hence the present appeal.

5. In ITA No.212 of 2017, similar issue came up for consideration before this Court where the appeal of the revenue was dismissed in respect of similar questions No.1 to 3 as in the present appeal.

6. The question No.4 is consequential to the disallowance made under Section 14A of the Act. The assessing Officer while computing the book profit under Section 115JB of the Act added back the disallowance worked under Section 14A of the Act to the net profit shown in the profit and loss amount and computed the profit for the year. Since the disallowance of expenses under Section 14A of the Act has already been set For Subsequent orders see ITA-181-2017 Decided by HON'BLE MR. JUSTICE AJAY TEWARI; HON'BLE MRS. JUSTICE ALKA SARIN aside, the question No.4 claimed in the appeal no longer survives.

7. No interference is called for in the order passed by the Tribunal. No substantial question of law arises.

8. Consequently, the appeal is dismissed.

(AJAY KUMAR MITTAL)

JUDGE

(AVNEESH JHINGAN)

JUDGE

October 29, 2018 anju

Whether speaking/reasoned: Yes

Whether reportable : Yes