TaxTMI 
TaxTMI 
2025 (12) TMI 581
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....sment years are as follows:- ITA No. 306/JPR/2021 - A.Y. 2016-17 [Revenue's appeal] "1. Whether in the facts and circumstances of the case and in law, the CIT(A) was justified in holding that the computation under clause (f) Explanation 1 to Section 115JB(2) is to be made without resorting to the computation as contemplated u/s 14A read with rule 8D of the Income Tax Rules, 1962 ignoring the provision of explanation 1(f) to section 115JB(2) of the Income Tax Act, 1961. 2. Whether in the facts and circumstances of the case and in law, the CIT(A) was justified in deleting the addition of Rs. 6,24,000/- made u/s 14A of the IT Act, 1961 in view of the provisions of the section 14A and in the light of CBDT's Circular No. 5/2014. 3. Whether in the facts and circumstances of the case and in law, the CIT(A) was justified in deleting the addition of Rs. 22,74,00,000/- ignoring the fact that the assessee has not furnished any scientific documentary evidences which can fix the liability." ITA No. 307/JPR/2021 - A.Y. 2017-18 [Revenue's appeal] "1.Whether in the facts and circumstances of the case and in law, the CIT(A) was justified in dele....
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....sion that as per the provisions of section 43B or the Act, assessee's claim has to be allowed where the contribution is deposited before the due date or filing of return of income. Thus the addition of Rs. 7,84,119/-deserves to be deleted. 1.1 That the Ld. AO has further erred in ignoring the fact that the deduction was claimed on the basis of ruling of jurisdictional High Court prevailing at the time of filing Return of Income. Appellant prays that no liability can be fastened upon the assessee on the basis of subsequent amendment made in statue, therefore consequent disallowance deserves to be deleted. 2. That, the appellant craves the right to add, delete, amend or abandon any of the grounds of appeal either before or at the time of hearing of appeal." 3. Brief facts of the case are that the assessee is a private limited company engaged in the construction, operations and maintenance of highways in terms of Concession Agreement dated 08.05.2002 executed between National Highway Authority of India (for short "NHAI") and the company, the assessee company was given the work of widening of two lane road to six lane road of 90.385 Km. stretch on NH-8 between ....
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.... 1961. The AO also added the same for computing deemed income u/s 115JB by making adjustment as per explanation 1(f) of section 115JB(2), as per the AO. 5. The ld. CIT(A) has considered the issue in detail and after examination of various facts and issues under consideration and by giving detailed reasoning, the ld. CIT(A) has deleted the disallowance made u/s 14A mainly by following the common decision of the Co-ordinate Bench of ITAT dated 22.12.2020 (for A.Y. 2010-11 to 2015-16) in the case of assessee itself for preceding assessment years, as the facts for both the years under consideration are same as that of preceding years. 6. The ld. CIT(A) further held that the said disallowance u/s 14A has been deleted the issue of adding the same for the purpose of calculation of profit u/s 115JB does not arise. The ld. CIT(A) has further observed that interest is disallowable u/s 36(1)(iii). 7. looking to the ground that has been raised by the Revenue, it implies that revenue is agitating the issue of not adding back of the disallowed interest amount for the purpose of computation of income u/s 115JB in view of explanation 1(f) of section 115JB(2). However, CIT-DR requested tha....
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....aring funds in making investments. Accordingly no disallowance could be made u/s 14A on such investments. The funds available in both the years is tabulated as under: Assessment Years Average value of Investment made APB Share Holders fund APB 2016-17 6,24,00,000.00 34,36 4,40,07,39,695.00 24 2017-18 9,62,75,000.00 15 4,91,11,71,113.00 10 At the outset, kind attention of hon'ble bench is invited to the provisions of section 14A, which read as under: Expenditure incurred in relation to income not includible in total income. 14A. [(1)] For the purposes of computing the total income under this Chapter, 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 this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the ....
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....ch income which is exempted under the Act. The language of section 14A is not at all ambiguous and in fact very clear and by virtue of the same, only expenditure actually incurred in relation to income not includible in total income shall be disallowed. In no way, it could be interpreted that it seeks to disallow expenses incurred in relation to future exempt income, as it would be completely against the well recognized "matching concept." The principle that disallowance u/s 14A can be made only when assessee has actually earned exempt income, has been affirmed by catena of judicial pronouncements. In this regard, reliance is placed on: Hon'ble Apex Court in the case of Maxopp Investment Ltd vs. CIT has held that only that expenditure which is "in relation to" earning dividends can be disallowed u/s 14A & Rule 8D and further the AO has to record proper satisfaction on why the claim of the assessee as to the quantum of suo moto disallowance is not correct. Hon'ble Delhi High Court judgement in the case of Cheminvest Ltd. Vs. CIT reported in 378 ITR 33, wherein it is held that, no disallowance u/s 14A can be made in a year in which no exempt income has been....
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....t no dividend income has been claimed as exempt from tax. It is a settled legal position that no disallowance can be made u/s 14A in a year where no exempt income has been earned or received by the assessee. The ld AR has relied on the decision of the Hon'ble Delhi High Court in case of Cheminvest Ltd vs CIT (supra) where similar substantial question of law had arisen for consideration as to "Whether disallowance under Section 14A of the Act can be made in a year in which no exempt income has been earned or received by the Assessee?" And the Hon'ble Delhi High Court, while disposing off the said ground, was pleased to held as under: "23. In the context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression 'does not form part of the total income' in Section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year." ....
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....orities do not give rise to any substantial question of law. Since no substantial question of law arises in this income tax appeal, the income tax appeal is dismissed with no order as to costs." 72. We therefore find that there is a convergence of view among the various Hon'ble High Courts on the matter and following the aforesaid decisions of the Hon'ble High Courts, it is a consistent position taken by the various Benches of the Tribunal as well including Jaipur Benches in case of Deepak Vegpro (P) Ltd vs ACIT (supra) and Mumbai Benches in case of DCIT vs JSW Limited (supra) that no disallowance can be made u/s 14A in a year where no exempt income has been earned or received by the assessee Therefore, respectfully following the decisions referred supra, in the instant case, where the facts are on a stronger footing in the sense that there was no investment by way of shares which were capable of even yielding any dividend income and the amount remain invested as share application money for A.Y 2012-13 to A.Y 2014-15 and even for A.Y 2015-16 where the shares were finally allotted, there was no dividend income which has accrued and claimed exempt, the provisions of....
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.... under consideration, no disallowance of the expense is warranted under Section 115JB of the Act even in terms of clause (f) to Explanation-1 of Sec. 115JB of the Act in respect of all the impugned assessment years. Hon'ble Special Bench of ITAT in the case of ACIT vs. Vireet Investment Pvt Ltd 165 ITD 27 (Delhi) had to consider the following two important questions of law: (i) Whether the expenditure incurred to earn exempt income computed u/s 14A could not be added while computing book profits u/s 115JB of the Act? And (ii) Whether investments which did not yield any exempt income should enter into the computation under Rule 8D while arriving at the average value of investment, income from which does not form part of the total income? HELD by the Special Bench deciding both issues in favour of the assessee: (i) We answer the question referred to us in favour of the assessee by holding that the computation under clause (f) of Explanation 1 to section 115JB(2) is to be made without resorting to the computation as contemplated u/s 14A read with Rule 8D of the Income tax Rules 1962. (ii) Only those investments are to be considered....
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....ey. The shares were finally allotted during the financial year 2014-15 relevant to A.Y 2015- 16 and therefore, till such time the shares were not allotted, the amount so paid continues as share application money pending allotment and it cannot be regarded as an investment in shares or any asset which is capable of yielding any dividend income. Given that the shares were allotted only during the financial year 2014-15 relevant to A.Y 2015-16, there was no question of any dividend been declared/accrued and/or received by the assessee company right through the financial years relevant to A.Y 2012-13 to A.Y 2014-15 and even during the financial year 2014-15 relevant to A.Y 2015-16, no dividend was actually declared/accrued and/or received by the assessee company. Accordingly, in the return of income filed for the respective assessment years, it is an admitted and undisputed position that no dividend income has been claimed as exempt from tax. It is a settled legal position that no disallowance can be made u/s 14A in a year where no exempt income has been earned or received by the assessee. The ld AR has relied on the decision of the Hon'ble Delhi High Court in case of Cheminvest Ltd vs....
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.... Act, 1961 envisages that there should be an actual receipt of the income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. The Income Tax Appellate Tribunal held that the provisions of Section 14A of the Income Tax Act, 1961 would not apply to the facts of this case as no exempt income was received or receivable during the relevant previous year. It is not the case of the Assessing Officer that any actual income was received by the assessee and the same was includible in the total income. In the facts of the case, the Authorities held that since the investments made by the assessee in the sister concerns were not the actual income received by the assessee, they could not have been included in the total income. The findings of facts recorded by both the Authorities do not give rise to any substantial question of law. Since no substantial question of law arises in this income tax appeal, the income tax appeal is dismissed with no order as to costs." 72. We therefore find that there is a convergence of view among the various Hon'ble High Cou....
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.... company itself, the disallowance made by AO u/s 14A is not justified, and thereby action of deriving to delete the addition is in accordance with interpretation of law and we do not find any infirmity in that order. Even otherwise we would like to add that from the facts noticed from the record, the AO has not been able to establish as to how the advance given to M/s Sutara Roads & Infra Ltd. is not the advance but the investment in equity/share. As argued by the ld. AR that looking to the balance sheet read with note No. 12 and 13, it is clear that till 31.03.2015, the impugned loan was invested in preference share of M/s GVK Airport Developers Pvt. Ltd. whereas in the F.Y. 2015-16 same has been shifted and is reflected as advance to subsidiary - M/s Sutara Roads & Infra Ltd. in the balance sheet of assessee company of year ending 31.03.2016. Thus during the year under consideration since this amount has not been utilized for any investment in shares / equity, there will not be any question of earning any dividend income on such advance and consequently no question arises for any disallowance u/s 14A on the interest paid on such loan. This factual aspect as regard were not con....
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.... the assessee by holding that the computation under clause (f) of Explanation 1 to section 115JB(2) is to be made without resorting to the computation as contemplated u/s 14A read with Rule 8D of the Income tax Rules 1962. (ii) Only those investments are to be considered for computing the average value of investment which yielded exempt income during the year. 14. Moreover, in the case of assessee company itself, the Co-ordinate Bench of ITAT Jaipur Bench vide its common order dated 22.12.2020 has upheld the action of ld. CIT(A) of not considering such expenditure for the purpose of computation of deemed income u/s 115JB. The relevant para is reproduced as below: "87. We have heard the rival contentions and perused the material available on record. The Hon'ble Kolkata High Court in case of CIT vs Jayshree Tea Industries Ltd (supra) has held that the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act is required to be determined independently as the same is a complete code in itself and considering the said decision, the Coordinate Ahmedabad Benches of the Tribunal in case of Asian Grantio India Ltd (supra) has held that there is no mec....
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....n submission has broadly submitted that these investments have not been made out of borrowed funds. Moreover, during both the years under consideration, no any exempt income by way of dividend or otherwise has been earned from such investment. Accordingly, in view of the decision of various High Courts namely Cheminvest Ltd. Vs. CIT reported in 378 ITR 33 (Delhi), no disallowance should be made in the year when no exempt income has been earned. The ld. AR has also referred to other decisions more particularly decision of Hon'ble Apex Court in the case of Maxopp Investment Ltd. Vs. CIT. 17. We have considered the issue of disallowance u/s 14A in the earlier ground in relation to amount of loan considered to be utilized for investment in share by the AO. After detailed discussion and after perusing the common order of the Co-ordinate Bench dated 22.12.2020 for A.Y. 2010-11 to 2015-16, we have also held that invoking the provision of section 14A for disallowance is not justified. In respect of the aforesaid investment also, the facts are same and moreover there is no exempt income earned during both the years under consideration by the assessee company from these investments. Accor....
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....st appeal ld. CIT(A) appreciated the fact that as per the concession agreement between the assessee and NHAI, expenditure for keeping the roughness of the expressway at 2500mm/Km is mandatory and the appellant company has to relay the surface every 5 years thus it is an ascertained liability and not contingent liability and also by following the decision of the hon'ble bench in preceding year has deleted the disallowance made in both the years. In this regard it is submitted that as the traffic passes on the pavement, the riding quality of the pavement deteriorates. With rapidity it deteriorates, to what extent and periodicity it requires resurfacing in order to give smooth riding quality to the toll paying road users, is a function of the volume of traffic, the loads carried by the traffic and the damage caused by climatic conditions (extreme temperatures, heavy rains / floods, accidents resulting in spillover of chemical materials etc.). In order to ensure smooth riding quality, the Concession Agreement prescribes certain standards to be maintained by the Company in terms of 'Surface Roughness'. The prescribed standards require the Company to undertake Surface Renewal Co....
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....t cannot be said that it is a simple provision made but rather it is an expenditure which has to be incurred and accordingly assessee company has obtained a report of independent consultant towards the expenses to be incurred on such overlay. Assessee in order to charge the amount pertaining to the year under consideration from the profits has made provision out of the total expenditure proposed to be incurred on third periodic overlay and debited to Profit & Loss Account in order to disclose true and correct profits for the year under consideration. Since it is an ascertained liability, therefore, the same could not be disallowed nor adjustment for the same could be made in the book profits for MAT purposes. It is further submitted that provision towards cost of overlay expenses is related to the business activity of operating and maintaining of the highway and any addition made towards such provision would enhance the taxable profit which is eligible for deduction u/s 80IA(4)(i) of the Act and would thus be a revenue neutral exercise. The Central Board of Direct Taxes issued a Circular No. 37/2016 way back in November 2016 (APB 325-326) wherein CBDT has issued directions....
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.... with such estimation, he is required to specify the reasons as to why he is not so satisfied and may have referred the matter to another expert for seeking his opinion. Merely stating that he is not satisfied with such report will not satisfy the requirements of law as once the assessee has made a claim supported by report of an Independent Consultant, the onus shifts on the Revenue to disprove the same which in the present case has not been satisfied by the Revenue. During the course of hearing, the ld CIT D/R has stated that the entire length of the highway has been considered for estimating the cost which is not correct interpretation of clause (ii) as some stretches may require renewal coat in the interim period and not towards the end of fifth year. We find that the estimation has been made on the basis that the whole length of the highway shall be required to be maintained with prescribed roughness standard and it is likely that such renewal cost will be done towards the end of year 2015 and accordingly, the estimate has been made and we don't find any infirmity therein. In case of Rotork Controls India (P) Ltd vs CIT (Supra), the Hon'ble Supreme Court was pleased to held as....
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....m the past settled position wherein the assessee has been held eligible for such claim all these years and such reasons have to be spelt out clearly by the Assessing officer. It has been contended by the ld A/R that during the year under consideration, there is no change in the nature of provision so made by the assessee company which is flowing out of the requirements of the concessionaire agreement executed with NHAI and determined based on an independent consultant report who has been appointed in consultation with NHAI except for the fact that the quantum of provision was revised in the fifth year. Even on perusal of the assessment orders and the findings of the Assessing officer, we note that there is no finding recorded by the Assessing officer that the nature of provision so made by the assesse company is different from the past years or not flowing from the requirements of the concessionaire agreement executed with NHAI. Even the report of the independent Consultant was obtained in the first year where it had estimated the total cost of Rs 56.64 crores which has therefore formed the basis for spreading the total cost equally across five years. We therefore failed to underst....
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.... cost of overlay expenses is not done on a scientific basis and is thus in a nature of contingent liability. On appeal, the ld CIT(A) has returned a finding that expenditure related to keeping the roughness of the highway at 2500 mm/Km is a mandatory clause and the assessee company has to relay the surface every five years and it is therefore an ascertained liability and the estimation has been done basis an expert report and the relevant findings of the ld CIT(A) read as under: "11.4.2 After consideration of the concession agreement signed between the appellant company and the NHAI, it is my considered view that the expenditure related to keeping the roughness of the expressway at 2500mm/km is a mandatory clause and the appellant company has to relay the surface every 5 years which is an ascertained liability. The estimation of the liability was made by the expert committee at Rs. 56.64 crores and the provision has rightly been created at Rs. 11.33 crores per annum and has rightly been allowed till A.Y 2013-14. Accordingly, the appellant company is liable to get the benefit of ascertained contingent liability at Rs. 11.33 crores as claimed. Accordingly the addition of Rs.....
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....ent of the Project Highway shall be assessed every year by taking Benkelman Beam Deflections and working out characteristic deflections of homogeneous sections of the Project Highway as per IRC-81- 1997. Wherever the characteristic deflection exceeds 0.8 mm a bituminous overlay shall be provided appropriately designed according to IRC-81-1997 or its latest versions or amendments to it. ii) In the case of cement concrete pavement, joints shall be thoroughly inspected every year and the loss of sealing compounds made good." 48. On reading of the above clauses, we find that the assesse company is required to follow the operational and performance criteria from IRC/MOST standards and specification for each of the performance indicators covered under pavement condition survey, roughness and BBD reflections and where such criteria is not specified, the assesse company is required to adhere to international standards or sound pavement maintenance practices in consultation with Independent consultant. In respect of riding quality of pavement, it has been specifically provided that the assessee company is required to maintain Surface roughness which shall not exceed 3500 m....
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.... 89.512 2,193,044.00 2. Length of Service Road (LHS) 15.144 106,008.00 3 Length of Service Road (RHS) 16.081 112,567.00 4. Area of Junctions 32,173.14 5. Area of Tapering at SR Start/End Location 2,450,817.29 Cost of 25mm Thick Bituminous Concrete at Current rates S.No. Description Unit Qty Rate Amount (Rs) 1 Bituminous Concrete Cum 61270.43 7003 429,076,837 2 Tack Coat Sqm 2450817.29 8.0 19,606,538 Total Rs. 448,683,375 Estimated Cost of 25mm Thick Bituminous Concrete in 2015 S.No. Description Unit Qty Rate Amount (Rs) 1 Bituminous Concrete Cum 61270.43 8841 541,691,891 2. Tack Coat Sqm 2450817.29 10.1 24,753,255 Rs. Total Rs. 566,445,146 49. We therefore find that the Independent consultant has taking into considerations the standards so set in the concessionaire agreement and the length of the highway has estimated ....
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.... the obligation. If these conditions are not met, no provision can be recognized. 11. Liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. 12. A past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognized as provision. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation." 50. In the instant case, the assessee company has a present obligation arising out of the concessionaire agreement executed with NHAI to maintain the highway in traffic worthy condition through regular and preventive maintenance of the highway and which mandatorily requires it to maintain the pavement riding quality by way of roughness meeting the minimum standards through....
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....hose pits and liability does accrue on the date when the pits are digged. Therefore, in our view, the Tribunal has committed error in disallowing the claim of the assessee in the year in hand i.e. 1991-92. We agree with the view taken by CIT(A) that the moment assessee digs the pits, liability does arise and he is entitled for deduction of the expenses which he is supposed to incur for filling those pits, as assessee is following the Mercantile System of Accounting. It can claim the expenses incurred as soon as it digs the pits. 8. In the result, we restore the view taken by CIT(A). The appeal stands allowed." 51. In light of aforesaid discussions and in the entirety of facts and circumstances of the case, the matter is decided in favour of the assessee and against the Revenue. In the result, ground of Revenue's appeal for A.Y 2013-14 and A.Y 2014-15 are dismissed and ground of assessee's appeal for A.Y 2015-16 is allowed." 23. We have seen that facts and circumstances for both the years under consideration are same as that of preceding years. It is also seen by us that concession agreement dated 08.05.2002 is quite a detailed one and as part of the maintenance....
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....iture required to be incurred on such re-laying of road. Accordingly it cannot be said that estimation of expenditure is not based on rational and scientific basis. 26. Considering the overall facts and in the circumstances of the case and the legal position of the issue under consideration and also considering the main fact that this issue has already been decided in favour of assessee in the earlier years by the Co-ordinate Bench of ITAT and facts for both the years under consideration being same as that of earlier years, we see no reason to differ from the decision taken by the Bench in earlier years in favour of assessee. In light of these facts, ground No. 3 of the revenue for both the years [i.e A.Y.2016-17 & 2017-18] are dismissed. Assessee's Cross Objection No. 1 & 1.1 for A.Y. 2016-17 & 2017-18 27. In these cross objections, the assessee has challenged the confirmation of disallowance made by ld. CIT(A) u/s 43B r.w.s. 36(1)(va) for the payment of contribution on account of PF made after the due dates in both the assessment years, so made by AO. 28. The AR of the assessee has furnished submission as below: "Assessee Cross Objections Nos. 1 & 1.1: ....
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....efore the due date of filing of the return under section 139(1) of the Act, then in such a scenario, the amount cannot be disallowed under section 36(1)(va) of the Act as the due date referred to in section 36(1)(va) of the Act need to be read in conjunction with section 43B(b) of the Act. In case of Rajasthan State Beverages Corporation Ltd (supra), the Hon'ble Rajasthan High Court was pleased to held as under: "5. So far as the question relating to privilege fees amounting to Rs.26.00 Crores in the instant year as well as the deduction of claim of Rs.17,80,765/- on account of Provident Fund (PF) and ESI is concerned, this Court has extensively considered the aforesaid two questions in assessee's own case vide judgment and order dt.26.05.2016 referred to (supra) and has held that the privilege fees being a revenue expenditure, is required to be allowed as a revenue expenditure. This court in the aforesaid case has also allowed the claim of the assessee, in so far as payment of PF & ESI etc. is concerned, on the finding of fact that the amounts in question were deposited on or before the due date of furnishing of the return of income and taking in consideration judgmen....
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....following cases has expressed the same view: 265 CTR (Raj.) 59 CIT Vs. Udaipur Dugdh Utpadak Sahakari Sangh Ltd. 265 CTR (Raj.) 62 CIT Vs. Jaipur Vidyut Vitran Nigam Ltd. However ld. CIT(A) has not appreciated these facts and confirmed the disallowance by placing reliance on the recent amendment made in the Act. In this regard it is submitted that the hon'ble bench is consistently taking the view that the amendment made is prospective and not applicable retrospectively and deleted the disallowance made in various cases. In the circumstances it is humbly prayed that the case of the assessee is fully covered by the said decisions of the Hon'ble bench thus the disallowance so confirmed by ld. CIT(A) in both the assessment years deserves to be deleted." 29. We have heard the rival contentions and perused the material placed on record. At the outset we noticed that it is a case of employee's contribution of PF which has been deducted from the salary and not deposited within the due date as prescribed under the relevant Act / Rule. Clearly the provision of section 2(24)(x)are applicable where this contribution is treated as deemed income of the assessee. Now....