2013 (12) TMI 607 - HC - Income Tax

HC upholds Section 263 order disallowing Rs. 1.35 crore adjustment and enforcing Section 14A deductions

The Commissioner of Income Tax (Central-II) Versus Goetze (India) Limited, Federal-Mogul Goetze (India) Limited

HC upheld the validity of the order passed under Section 263, finding the Assessing Officer's order erroneous and prejudicial to Revenue. The Commissioner ... Validity of order u/s 263 - erroneous and prejudicial to the interest of the Revenue - book profits u/s 115JA - Held that:- The Commissioner in her order u/s 263 has recorded specific findings as to why and for what reason she felt that the order passed by the Assessing Officer on two accounts was erroneous and prejudicial to the interest of Revenue - Computation of book profits u/s 115JA - Under proviso to clause (i) of the Explanation to Section 115JA reserve or provision made may relate to any period and not during the period between 1st April, 1997 and 31st March, 2001 - These two dates are relevant as Section 115JA is applicable during this period. Clause (i) operates when an amount is withdrawn from provision made or reserve created but as per the proviso adjustment can be made only when at the time of creation of reserve or the provision, the amount in question was duly accounted for by increasing the book profits by the said reserve or provision - Transfer from revaluation reserve either should have been credited to the profit and loss account or reduced from the depreciation provided in the books - The respondent-assessee had credited the same amount to the depreciation account and also the profit and loss account in the year in question. Disallowance u/s 14A - Held that:- Assessing Officer had failed to disallow expenditure in respect of exempt income as per the mandate of Section 14A of the Act - Section 14A was introduced by Finance Act, 2001, which was tabled in the Parliament on 28th February, 2001. The said provision was introduced with retrospective effect from 1st April, 1962 - The quantum of deduction should be made on reasonable basis - The Commissioner had rightly invoked Section 263 of the Act as the order of the Assessing Officer was erroneous and prejudicial to the interest of the Revenue - adjustment of Rs.1.35 crores should not have been allowed under clause (i) to Explanation to Section 115JA and deduction should have been also made towards expenditure to earn dividend income, which did not form part of taxable income under Section 14A of the Act - Decided in favour of Revenue. Issues Involved:1. Justification of the order passed under Section 263 of the Income Tax Act, 1961.2. Computation of book profits under Section 115JA of the Income Tax Act, 1961.3. Applicability of Section 14A of the Income Tax Act, 1961.4. Disallowance under Section 14A while computing book profit under Section 115JB.5. Deletion of interest under Section 234D of the Income Tax Act, 1961.Detailed Analysis:1. Justification of the order passed under Section 263 of the Income Tax Act, 1961:The primary question was whether the Income Tax Appellate Tribunal (ITAT) was correct in setting aside the order of the Commissioner of Income Tax (CIT) under Section 263. The CIT had observed that the Assessing Officer's (AO) computation under Section 115JA was erroneous and prejudicial to the Revenue's interest. The CIT noted two specific errors: (a) wrongful exclusion of Rs.1.53 crores from book profits, and (b) failure to disallow Rs.183.63 lacs of expenditure related to exempt dividend income under Section 14A. The court cited precedents, including Commissioner of Income Tax vs. Nagesh Knitwears Private Limited and Malabar Industrial Company Limited vs. CIT, emphasizing that an order is erroneous if it deviates from the law or lacks necessary inquiry. The court upheld the CIT's action under Section 263, stating that the AO's order was indeed erroneous and prejudicial to the Revenue.2. Computation of book profits under Section 115JA of the Income Tax Act, 1961:The court examined whether the CIT was correct in adding Rs.1.53 crores to the book profits. The respondent-assessee had initially included this amount in the profit and loss account but later excluded it in the revised return. The court referred to the case of CIT vs. SRF Limited, which dealt with similar issues under Sections 115J and 115JB. It was held that withdrawals from reserves should only be reduced from book profits if the reserves had initially increased the book profits. The court concluded that the CIT was right in adding Rs.1.53 crores to the book profits, as the reserve had not initially increased the book profits.3. Applicability of Section 14A of the Income Tax Act, 1961:The CIT had invoked Section 263, noting that the AO failed to disallow expenditure under Section 14A related to exempt dividend income. The court upheld this, referencing Honda Siel Power Products Limited vs. Deputy Commissioner of Income Tax, which clarified that Section 14A, introduced with retrospective effect from 1st April 1962, should have been applied by the AO. The court held that the AO's failure to apply Section 14A made the order erroneous and prejudicial to the Revenue.4. Disallowance under Section 14A while computing book profit under Section 115JB:For the Assessment Year 2001-02, the court addressed whether disallowance under Section 14A should be made while computing book profits under Section 115JB. The respondent-assessee conceded that the first question should be answered in favor of the Revenue, acknowledging the specific provisions in Explanation 1 below Section 115JB(2) clause (f). Consequently, the court ruled in favor of the Revenue.5. Deletion of interest under Section 234D of the Income Tax Act, 1961:The court examined whether the ITAT was right in deleting interest under Section 234D. The court referred to Explanation 2 to Section 234D, inserted by Finance Act, 2012 with retrospective effect, and ruled in favor of the Revenue. The constitutional validity of the retrospective amendment was not examined in this case.Conclusion:The court held that the CIT rightly invoked Section 263 as the AO's order was erroneous and prejudicial to the Revenue's interest. The adjustments of Rs.1.53 crores and the application of Section 14A were justified. For the Assessment Year 2001-02, the court ruled in favor of the Revenue on both the disallowance under Section 14A while computing book profits under Section 115JB and the deletion of interest under Section 234D. The matter of quantum deduction under Section 14A was remanded to the tribunal for further consideration.