2025 (5) TMI 427 - AT - Income Tax

Disallowance u/s 14A - Expenditure incurred on earning exempt income - CIT(A) deleted addition on the ground that no exempt income was earned by the assessee in respect of the investment made in the shares of subsidiary/group entities of the assessee - HELD THAT - AO has not disputed the fact that the assessee has not earned any dividend income from the investment in shares of the subsidiaries companies of the assessee as well as in the shares of M/s. Lanco Net Ltd. Though the AO has not given the details of the investment except the total amount of investment shown in the balance sheet however this fact has been accepted by the AO that the assessee has not received any dividend income during the year under consideration. CIT (A) deleted the addition by considering the fact that the assessee has not received any dividend income during the year under consideration and therefore when no exempt income is earned by the assessee during the year no disallowance can be made u/s 14A. All the investments are in the foreign based subsidiaries and the dividend income if any is taxable and not exempt u/s 10(34) of the I.T. Act 1961. Therefore the disallowance to the extent of these investments in the foreign subsidiaries cannot be made u/s 14A of the I.T. Act 1961. Only investment in the Indian company is made by the assessee in the preceding year and not during the year under consideration and therefore when there is no dividend income for the year under consideration the provisions of section 14A are not applicable. Hence as per case of Cheminvest Ltd 2015 (9) TMI 238 - DELHI HIGH COURT as well as Hero Cycles Ltd 2009 (11) TMI 33 - PUNJAB AND HARYANA HIGH COURT no disallowance u/s 14A is called for when the assessee has not earned any dividend income during the year under consideration. Accordingly in view of the facts as discussed above we do not find any error or illegality in the impugned order of the learned CIT (A) qua on this issue. The same is upheld. Addition on account of belated payment of employees contribution towards PF u/s 36(1)(va) r.w.s. 2(24)(x) - CIT (A) has deleted the said addition as held that if the assessee has made the payment on or before the due date of filing the return of income u/s 139(1) then the same is allowable u/s 43B - HELD THAT - We note that this issue is now covered by the judgment of the Hon ble Supreme Court in the case of Checkmate Services (P) Ltd 2022 (10) TMI 617 - SUPREME COURT . Thus the issue now stands decided against the assessee. Revision u/s 263 - there is a discrepancy in the net profit shown in the P L Account forming part of the Annual Report in comparison to the P L Account schedule to the ITR-6 - HELD THAT - Once the AO has adopted one of the courses permissible and available to him and this has resulted in loss to the Revenue to which the learned Pr. CIT may not agree the said order cannot be treated as an erroneous order prejudice to the interest of the Revenue unless the view taken by the Assessing Officer is unsustainable in law. In setting aside the matter the learned Pr. CIT must give a finding that the view taken by the Assessing Officer is unsustainable in law and therefore the order is erroneous. The setting aside the order for doing fresh exercise on the part of the Assessing Officer reveals that the learned Pr. Cit was not sure about the correctness of the claim of the assessee and therefore the learned Pr. CIT must be not sure about the correctness and erroneousness of the order passed by the Assessing Officer. 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. Hence the impugned order is not sustainable and liable to be quashed. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

(a) 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;

(b) Whether disallowance under section 14A of the Act, relating to expenditure incurred in relation to exempt income, was rightly deleted by the CIT(A), particularly in light of CBDT Circular No. 5 of 2014 and Supreme Court precedents;

(c) Whether disallowance under section 36(1)(va) read with section 2(24)(x) of the Act, concerning belated payment of employees' contribution towards PF, was rightly deleted by the CIT(A);

(d) Whether the revision order passed by the Pr. CIT under section 263 of the Act was justified in setting aside the assessment order on the ground of erroneousness and prejudice to the revenue due to alleged lack of inquiry by the Assessing Officer regarding discrepancies in net profit figures;

(e) Whether the Pr. CIT erred in invoking section 263 without affording reasonable opportunity of hearing and without appreciating the scope and extent of inquiry conducted by the Assessing Officer;

(f) The extent of the Assessing Officer's duty to record detailed reasons and conduct inquiry, and whether the revisionary power under section 263 can be exercised on the basis of difference of opinion without conclusive findings of erroneousness;

(g) The applicability of provisions of Double Taxation Avoidance Agreement (DTAA) between India and USA on the income of the US Branch and the tax credit mechanism;

(h) The legal principles governing the exercise of revisionary jurisdiction under section 263 of the Income Tax Act, 1961.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Admission of Assessee's Appeal Despite Non-Payment of Self-Assessment Tax

Legal Framework and Precedents: Section 249(4)(a) mandates that an appeal by the assessee shall not be admitted unless the self-assessment tax has been paid.

Court's Reasoning: The Revenue initially contended that the appeal was not maintainable as the assessee had not paid the self-assessment tax. However, at the hearing, the Department accepted that the tax was paid subsequently, rendering the ground infructuous.

Conclusion: No specific finding was required, and the appeal was admitted.

Issue (b): Disallowance under Section 14A of the Income Tax Act

Legal Framework: Section 14A disallows expenditure incurred in relation to income which does not form part of total income (exempt income). Rule 8D prescribes the method for computing such disallowance. CBDT Circular No. 5 of 2014 clarifies applicability of section 14A. The Supreme Court in CIT vs. Walfort Share and Stock Brokers Pvt Ltd held that section 14A aims to prevent claiming expenses against exempt income without apportionment.

Key Precedents: CIT vs. Chettinad Logistics (SC), Pr.CIT vs. Oil Industries Development Board (SLP), Cheminvest Ltd (Delhi HC), Hero Cycles Ltd (P&H HC), Maxopp Investment Ltd (SC).

Facts and Findings: The Assessing Officer disallowed Rs. 3,89,56,740/- under section 14A on the ground that the assessee had investments capable of yielding exempt income (dividends). The CIT(A) deleted the disallowance as the assessee had not earned any exempt dividend income during the year. The investments were mainly in foreign subsidiaries whose dividend income is taxable and not exempt under section 10(34). The only Indian company invested in did not declare any dividend during the year. The Assessing Officer did not dispute the absence of exempt income.

Application of Law to Facts: The Tribunal relied on the principle that section 14A applies only if exempt income is earned or receivable. Mere capability of investment to yield exempt income is insufficient. The Tribunal referred to authoritative judgments holding that no disallowance under section 14A is warranted when no exempt income is earned.

Treatment of Competing Arguments: Revenue argued applicability of section 14A irrespective of actual exempt income, relying on CBDT Circular and Walfort. Assessee relied on Supreme Court and High Court rulings emphasizing actual earning of exempt income as a precondition. The Tribunal upheld the assessee's position.

Conclusion: Disallowance under section 14A was rightly deleted as no exempt income was earned during the year, and investments in foreign subsidiaries did not attract section 14A.

Issue (c): Disallowance under Section 36(1)(va) r.w.s 2(24)(x) for Belated PF Payment

Legal Framework: Section 36(1)(va) disallows deduction for employee contribution to PF if not paid before due date under relevant enactments. Section 43B mandates certain payments to be made before due date of filing return for deduction.

Precedent: Checkmate Services (P) Ltd vs. CIT (Supreme Court, 2022) held that employees' contribution to PF & ESI not remitted before due date prescribed in respective enactments is not allowable as deduction.

Court's Reasoning: CIT(A) deleted the disallowance relying on various High Court decisions. However, the Supreme Court judgment in Checkmate Services overruled this view, holding that timely payment under the enactment is mandatory.

Conclusion: The Tribunal set aside the CIT(A)'s order and restored the Assessing Officer's disallowance, following the Supreme Court ruling.

Issue (d) to (h): Revision Order under Section 263 - Alleged Lack of Inquiry and Discrepancy in Net Profit Figures

Legal Framework: Section 263 empowers the Pr. CIT to revise an assessment order if it is erroneous and prejudicial to the interests of the Revenue. The Supreme Court and High Courts have laid down that revision under section 263 requires (i) the order to be erroneous, and (ii) prejudicial to Revenue, and these conditions are cumulative. The power cannot be exercised merely on a difference of opinion or suspicion of error without conclusive findings.

Relevant Precedents: Spectra Share & Scrips (P) Ltd vs. CIT (AP HC), CIT vs. Development Credit Bank (Bombay HC), Income Tax Officer vs. DG Housing Projects Ltd (Delhi HC), Malabar Industrial Co. Ltd. vs. CIT (SC), and Shree Manjunathesware Packing & Products Camphor Works (SC).

Facts and Findings: The Pr. CIT invoked section 263 on the ground that the Assessing Officer failed to examine discrepancies between net profit as per the P&L Account in the Annual Report (Rs. 59.84 crores) and that in the return of income (Rs. 32.82 crores). The Pr. CIT noted the presence of assets in the US Branch and the possibility that the lower profit figure excluded US Branch profits, which are taxable in India under DTAA provisions. The Pr. CIT observed no evidence of tax paid in the US or claim of credit by the assessee, and held the assessment order erroneous and prejudicial for lack of inquiry.

The assessee contended that the Assessing Officer had conducted thorough inquiry, issued detailed notices under section 142(1), raised numerous queries including on income and expenses, and had accepted the book profit figure in the return after applying mind. The assessee argued that the US subsidiaries are separate tax entities and their income is not taxable in India, and that the income reported in consolidated financials does not necessarily translate into taxable income in India. The assessee also challenged the Pr. CIT's jurisdiction and the absence of conclusive findings of erroneousness.

Court's Interpretation and Reasoning: The Tribunal noted that the Assessing Officer had issued detailed notices, sought extensive information, and received comprehensive replies, including on the US Branch and foreign subsidiaries. The Tribunal emphasized that the presence of foreign subsidiaries does not ipso facto make their income taxable in India, especially where transfer pricing proceedings were completed and found at arm's length.

The Tribunal referred to the principle that mere absence of elaborate reasoning by the Assessing Officer does not imply lack of inquiry or erroneous order. It cited authoritative rulings that the Assessing Officer need not record every detail or give elaborate reasons, provided there is application of mind.

The Tribunal further observed that the Pr. CIT did not give any conclusive findings on how the discrepancy resulted in loss of revenue or prejudiced the revenue. The Pr. CIT merely remanded the matter for fresh inquiry without holding that the Assessing Officer's order was unsustainable in law. This amounted to a change of opinion, which is impermissible under section 263.

The Tribunal also noted that the income was assessed under section 115JB (MAT), and the Pr. CIT did not clarify whether the discrepancy affected book profit computation.

Treatment of Competing Arguments: The Revenue relied on the Pr. CIT's order and the alleged discrepancy to justify revision. The assessee relied on detailed procedural compliance by the Assessing Officer, judicial precedents limiting revisionary powers, and the nature of foreign subsidiaries' income. The Tribunal sided with the assessee, emphasizing settled legal principles restricting section 263's scope.

Conclusion: The Tribunal held that the Assessing Officer had conducted adequate inquiry, and the Pr. CIT's order was based on mere suspicion without conclusive findings. Therefore, the revision order was not sustainable and was quashed.

3. SIGNIFICANT HOLDINGS

"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."

"Once the Assessing Officer has conducted an inquiry and accepted the claim of the assessee, he need not record each and every aspect of the assessment proceedings. The mere absence of elaborate reasoning does not render the order erroneous."

"The jurisdictional precondition for exercise of power under section 263 is that the Commissioner must come to the conclusion that the order is erroneous and prejudicial to the interest of Revenue. An order cannot be set aside merely on the ground of difference of opinion."

"Employees' contribution to PF & ESI, if not remitted before the due date prescribed in the respective enactments, cannot be allowed as a deduction."

"The income of foreign subsidiaries, being separate tax entities under foreign jurisdiction, is not includible in the income of the Indian assessee for income tax purposes, unless specific provisions apply."

"The Pr. CIT cannot remit the matter to the Assessing Officer for fresh inquiry without holding that the original order was erroneous and prejudicial to the Revenue."

Final determinations:

- The Department's appeal challenging deletion of section 14A disallowance was dismissed.

- The Department's appeal challenging deletion of section 36(1)(va) disallowance was allowed, restoring the disallowance.

- The assessee's appeal against revision order under section 263 was allowed, quashing the revision.