2025 (5) TMI 427 - AT - Income Tax

Section 14A disallowance deleted for no exempt dividend income but belated PF contribution addition restored following Supreme Court precedent

Asstt. Commissioner of Income Tax, Circle 16 (1), Hyderabad Versus Lycos Internet Ltd, Hyderabad. And (Vice-Versa)

Asstt. Commissioner of Income Tax, Circle 16 (1), Hyderabad Versus Lycos Internet Ltd, Hyderabad. And (Vice-Versa) - TMI 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Appellate Tribunal (AT) in these appeals for the assessment year 2012-13 are:Whether the learned CIT(A) erred in admitting the assessee's appeal despite non-payment of self-assessment tax as per section 249(4)(a) of the Income Tax Act, 1961.Whether the disallowance made under section 14A of the Act for expenditure incurred in relation to exempt income was rightly deleted by the CIT(A), especially in light of CBDT Circular No. 5 of 2014 and Supreme Court precedent regarding the scope of section 14A.Whether the disallowance under section 36(1)(va) read with section 2(24)(x) of the Act on account of belated payment of employees' contribution to Provident Fund was rightly deleted by the CIT(A), considering the applicability of section 43B.Whether the order passed by the Pr. CIT under section 263 of the Act revising the assessment order was justified, particularly focusing on the alleged lack of inquiry by the Assessing Officer into discrepancies between net profit figures reported in the Annual Report and the Profit & Loss Account filed with the return of income.Whether the Pr. CIT erred in invoking revision jurisdiction without affording reasonable opportunity of hearing and without conclusively establishing that the assessment order was erroneous and prejudicial to the interests of Revenue.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Admission of Assessee's Appeal Despite Non-Payment of Self-Assessment TaxLegal Framework and Precedents: Section 249(4)(a) of the Income Tax Act mandates that an appeal by the assessee shall not be admitted unless the tax due on the returned income has been paid.Court's Reasoning: The Department initially contended that the appeal should not be admitted as the assessee had not paid the tax due. However, at the hearing, the Department accepted that the assessee had already paid the self-assessment tax. Consequently, the Tribunal held that this ground became infructuous and no further finding was necessary.Conclusion: The appeal was rightly admitted since the tax due was paid before admission.Issue 2: Disallowance under Section 14A of the Income Tax ActLegal Framework and Precedents: Section 14A disallows expenditure incurred in relation to income which does not form part of total income (exempt income). CBDT Circular No. 5 of 2014 clarifies that disallowance under section 14A applies if the investment is capable of yielding exempt income, irrespective of actual receipt of exempt income. The Supreme Court in CIT vs Walfort Share and Stock Brokers Pvt Ltd emphasized the apportionment of expenditure between taxable and exempt income.Court's Interpretation and Reasoning: The Assessing Officer made a disallowance under section 14A on the basis that the investments held by the assessee could yield exempt income. The CIT(A) deleted this disallowance noting that no exempt dividend income was actually earned during the year. The Department argued that section 14A applies regardless of actual receipt of exempt income, relying on CBDT Circular and Supreme Court precedent.The assessee contended that since no exempt income was earned, section 14A should not apply, supported by Supreme Court decisions in CIT vs Chettinad Logistics and Pr.CIT vs Oil Industries Development Board, which held that section 14A is triggered only when exempt income is earned and expenditure is claimed against it. The Tribunal noted that the investments were primarily in foreign subsidiaries whose dividend income is taxable in India and not exempt under section 10(34). The only Indian investment did not declare any dividend during the year. The Tribunal relied on several judicial precedents including the Delhi High Court in Cheminvest Ltd and Punjab & Haryana High Court in CIT vs Hero Cycles Ltd to hold that no disallowance under section 14A is warranted where no exempt income is earned.Key Evidence and Findings: The Assessing Officer did not dispute that no dividend income was received. The investments were mostly in foreign subsidiaries. The dividend income, if any, is taxable and not exempt. The Indian company invested in did not declare dividend during the relevant year.Application of Law to Facts: Since no exempt income was earned, and the investments were not capable of yielding exempt income during the year, section 14A disallowance was not applicable.Treatment of Competing Arguments: The Department's reliance on the CBDT Circular and the general principle of apportionment was outweighed by the factual finding of no exempt income earned. The Tribunal distinguished the facts from cases where exempt income was actually earned or capable of being earned.Conclusion: The deletion of the section 14A disallowance by the CIT(A) was upheld.Issue 3: Disallowance under Section 36(1)(va) read with Section 2(24)(x) on Belated Payment of Employees' Provident Fund ContributionLegal Framework and Precedents: Section 43B allows deduction of certain expenses only if actually paid on or before the due date of filing the return. The Supreme Court in Checkmate Services (P) Ltd vs CIT held that employees' contribution to PF & ESI is allowable only if remitted before the due date prescribed under the respective enactments.Court's Interpretation and Reasoning: The Assessing Officer disallowed the belated PF contribution. The CIT(A) deleted the disallowance relying on various High Court decisions allowing deduction if payment was made before the return filing due date. However, the Supreme Court ruling in Checkmate Services overruled this view, holding that the deduction is not allowable if payment is belated beyond the statutory due date.Key Evidence and Findings: The payment was belated beyond the prescribed statutory deadline.Application of Law to Facts: The Supreme Court ruling is binding and overrides the CIT(A)'s order.Conclusion: The Tribunal set aside the CIT(A)'s order and restored the Assessing Officer's disallowance.Issue 4: Revision under Section 263 of the Act by Pr. CIT on Grounds of Lack of Inquiry into Discrepancies in Net Profit FiguresLegal Framework and Precedents: Section 263 permits revision of an assessment order if it is erroneous and prejudicial to the interests of the Revenue. The revision jurisdiction requires that the order be shown to be erroneous and that the error causes prejudice. The Supreme Court and various High Courts have held that mere difference of opinion or incomplete reasoning does not justify revision. The Pr. CIT must record a clear, unambiguous finding that the order is erroneous and prejudicial. The Assessing Officer is not required to record detailed reasons on every issue if he has applied his mind and made inquiries.Court's Interpretation and Reasoning: The Pr. CIT invoked section 263 because the net profit as per Annual Report was significantly higher than the net profit shown in the Profit & Loss Account filed with the return. The Pr. CIT observed that the Assessing Officer did not inquire into this discrepancy or verify tax paid in the US Branch, which could have impacted the taxable income. The Pr. CIT set aside the assessment order directing the Assessing Officer to re-examine the issue.The assessee argued that the Assessing Officer had issued detailed notices under section 142(1), seeking extensive information including Annual Report, audit reports, branch details, and had examined the matter before passing the assessment. The assessee contended that the Pr. CIT's order was based on presumption and did not conclusively establish the order was erroneous or prejudicial. The assessee relied on decisions of High Courts which held that revision cannot be based on mere difference of opinion or incomplete reasoning, and that the Assessing Officer's inquiry was sufficient.Key Evidence and Findings: The Assessing Officer issued multiple notices with detailed questionnaires and received replies including reconciliations and explanations about the foreign branches and subsidiaries. The income of foreign subsidiaries was not taxable in India as they are separate tax entities. Transfer pricing proceedings had been conducted and found arm's length. The Pr. CIT did not provide conclusive findings on how the discrepancy caused loss of revenue or prejudice.Application of Law to Facts: Since the Assessing Officer conducted inquiry and applied mind, mere absence of elaborate reasoning or detailed reconciliation in the assessment order does not render it erroneous. The Pr. CIT's order lacked a clear finding that the order was erroneous and prejudicial. The discrepancy related to foreign branch profits, which are taxable in the US and eligible for tax credit in India, and the Pr. CIT did not examine whether this discrepancy affected book profit computation under section 115JB.Treatment of Competing Arguments: The Pr. CIT's reliance on presumed lack of inquiry was rejected as the Assessing Officer had conducted detailed inquiry. The Tribunal emphasized settled legal principles that revision jurisdiction under section 263 cannot be exercised merely because the Pr. CIT disagrees with the Assessing Officer's view or because the order lacks detailed findings.Conclusion: The revision order under section 263 was quashed and the appeal by the assessee was allowed.3. SIGNIFICANT HOLDINGS'Having regard to the rival contentions and the material on record, we find that section 14A clearly stipulates that the expenditure incurred for earning of any income which does not form part of the total income alone can be disallowed. In the case before us, when the assessee has not earned any exempt income, there can be no disallowance under section 14A of the Act.''The Hon'ble Supreme Court in the case of Checkmate Services (P) Ltd vs CIT (2022) 448 ITR 518 has held that the employees' contribution to PF & ESI, if not remitted before the due date prescribed in the respective enactments, cannot be allowed as a deduction.''It is a settled proposition of law that when the Assessing Officer has conducted an inquiry and accepted the claim of the assessee, then it is not mandatory for the Assessing Officer to give a finding on each and every issue he has undertaken during the scrutiny proceedings.''In cases of wrong opinion or finding on merits, the CIT has to come to the conclusion and himself decide that the order is erroneous, by conducting necessary enquiry, if required and necessary, before the order under Section 263 is passed... The jurisdictional precondition stipulated is that the CIT must come to the conclusion that the order is erroneous and is unsustainable in law.''Every loss of Revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interest of Revenue. Thus, when the Assessing Officer had adopted one of the courses permissible and available to him, and this has resulted in loss to Revenue; or two views were possible and the Assessing Officer has taken one view with which the CIT may not agree; the said orders cannot be treated as an erroneous order prejudicial to the interest of Revenue unless the view taken by the Assessing Officer is unsustainable in law.''Once the Assessing Officer has conducted an inquiry and the case of the assessee does not fall in the category of complete lack of inquiry, the learned Pr. CIT while passing the revision impugned order u/s 263 ought to have given a conclusive findings about the taxability of the income in India as well as the loss of revenue for not including the said income as part of the P&L declared in the ITR.'Core principles established include:Section 14A disallowance is not applicable if no exempt income is earned during the relevant year.Employees' contribution to PF & ESI is deductible only if paid by the statutory due date.Revision under section 263 requires a clear, unambiguous finding that the assessment order is erroneous and prejudicial to Revenue.The Assessing Officer's order is not erroneous merely because it lacks detailed reasoning or because the Pr. CIT holds a different view.Complete lack of inquiry by the Assessing Officer renders the order erroneous; mere difference of opinion or incomplete inquiry does not.The burden is on the revising authority to demonstrate error and prejudice, not merely to remit for further inquiry.Final determinations:The Department's appeal on section 14A disallowance and admission of appeal was dismissed.The CIT(A)'s deletion of section 14A disallowance was upheld.The CIT(A)'s deletion of disallowance under section 36(1)(va) was set aside and the Assessing Officer's order restored following Supreme Court precedent.The assessee's appeal against the revision order under section 263 was allowed, quashing the revision order for lack of conclusive findings and proper basis.