Punjab-Haryana High Court
The Commissioner Of Income Tax I vs M/S Punjab State Warehousing ... on 3 October, 2013
Bench: Ajay Kumar Mittal, Jaspal Singh
ITA No.848 of 2008 (O&M) 1
IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH
ITA No.848 of 2008 (O&M)
Date of decision: 03.10.2013
The Commissioner of Income Tax I, Chandigarh
...Appellant
Versus
M/s Punjab State Warehousing Corporation Limited,
SCO No.74-75, Sector 17-B, Chandigarh
...Respondent
CORAM: HON'BLE MR.JUSTICE AJAY KUMAR MITTAL
HON'BLE MR. JUSTICE JASPAL SINGH
Present: Ms. Urvashi Dhugga, Advocate for the appellant.
Mr. Ravi Shanker and Mr. B.M.Monga, Advocate
for the respondent.
Ajay Kumar Mittal,J.
1. This order shall dispose of ITA Nos. 845, 847, 848 and 850 of 2008, as learned counsel for the parties are agreed that the facts and the legal issue involved therein are identical. However, the facts are being extracted from ITA No.848 of 2008.
2. ITA No.848 of 2008 has been preferred by the revenue under Section 260A of the Income Tax Act, 1961 (in short, "the Act") against the order dated 24.12.2007, Annexure A.3 passed by the Income Tax Appellate Tribunal, Chandigarh Bench 'B' in ITA No.458/CHANDI/2006, for the assessment year 1995-96, claiming following substantial questions of law:-
i) Whether on the facts and in the circumstances of the case, the Hon'ble ITAT is right in holding that Section 14A of the Income Tax Act, 1961 being operational from Ist April, 2001 is not applicable when it can be seen from the facts of the Singh Gurbax 2013.11.22 15:55 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.848 of 2008 (O&M) 2 case that the application of Section 14A is beneficial to the assessee and if the AO had not resorted to Section 14A, taxable profit would have been determined on the basis of the gross receipts falling in the category of taxable income?
ii) Whether on the facts and in the circumstances of the case, the Hon'ble ITAT is right in upholding the decision of the learned CIT(A) vide which he has erred in directing the AO to calculate the income from procurement/other activities on the basis of turnover/receipts when as per the amended provisions of Section 14A of the Income Tax Act, 1961 vide Finance Act, 2006, the AO was supposed to determine the amount of expenditure incurred in relation to such income which does not form part of the total income in accordance with the methods to be laid down by the CBDT?"
3. Briefly, the facts necessary for adjudication of the controversy involved, as narrated in the appeal, may be noticed. The assessee company is a Warehousing Corporation of the State of Punjab constituted under Section 18(1) of the Warehousing Corporation Act, 1962. It earned income from letting of godowns and warehouses, supervision charges for making procurement of food grains on behalf of the FCI and the State Government, hiring charges of stitching machines and platform scale, profits from Container Freight Station, Ludhiana and interest etc. The assessee maintains a consolidated profit and loss account for income arising from letting of godowns and warehouses as well as income from procurement of food grains. Assessment was completed under Section 143(3) of the Act vide order dated 10.1.2005, Annexure A.1. During the course of assessment proceedings, it was noticed that the assessee had filed two provisional Singh Gurbax accounts i.e. one profit and loss account in which warehousing/other 2013.11.22 15:55 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.848 of 2008 (O&M) 3 receipts including the gross profit from procurement business were declared and the other was a trading account pertaining to procurement business of wheat and paddy in which the assessee had already debited the direct expenses relating to procurement business. However, the indirect expenses relating to both the activities had been booked in the profit and loss account. Since the income from procurement activities was not entitled to exemption under Section 10(29) of the Act, the Assessing Officer following the judgment of Rajasthan High court in CIT v. Rajasthan State Warehousing Corporation, (1994) 210 ITR 906 assessed the said income as taxable income. This was done after bifurcating the common expenses borne for both the activities i.e. Warehousing and procurement. The issue was decided by Commissioner of Income Tax (Appeals) [CIT(A)] in favour of the assessee vide order dated 25.7.2000. However, the appeal filed by the revenue against the order was disposed of by the Tribunal vide order dated 29.9.2004 with the direction to redetermine the taxable income in accordance with law after taking into account the retrospective amendments to Section 14A of the Act. As per direction of the Tribunal, the assessment was completed under Sections 143(3)/254 of the Act and the income of the assessee was computed at `4,06,88,570/-. Aggrieved by the order, the assessee filed an appeal before the CIT(A) who while disposing of the appeal computed the taxable Income from procurement activities by applying three methods of apportioning the common or indirect expenses. The CIT(A) directed that the indirect expenses should be apportioned on the basis of turnover/receipts and Singh Gurbax 2013.11.22 15:55 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.848 of 2008 (O&M) 4 not on the basis of gross profit as had been done by the Assessing Officer; if the apportionment is carried out on the basis of gross profit, then no indirect expenses would be chargeable to a particular activity if the said activity yielded gross loss in the Trading account; and in view of provisions of Sections 10A, 10B, 10C, 80HHC, 80HHE, 80HHF of the Act where the turnover was the basis, the apportionment of the indirect expenses should be on the basis of turnover/receipts. Not satisfied with the order, the revenue filed appeal before the Tribunal. The Tribunal vide order dated 24.12.2007, Annexure A.3 dismissed the appeal. Hence the present appeal by the revenue.
4. Learned counsel for the appellant-revenue submitted that the learned Tribunal was in error in concluding that the provisions of Section 14A of the Act would not be applicable in respect of assessments for the assessment years beginning on or before 1.4.2001, in view of the Proviso to Section 14A of the Act. Reference was made to judgments of the Apex Court in CIT v. Walfort Share and Stock Brokers (P) Limited, (2010) 41 DTR Judgments 233 and judgment of this Court in M/s Muthoot Bankers v. Assistant Commissioner of Income Tax, ITA No.290 of 2009 decided on 19.1.2011. It was argued that sub section (1) of Section 14A was incorporated retrospectively w.e.f 1.4.1962 and therefore, was applicable to the present cases as well. It was only that no proceedings under Section 147 or Section 154 of the Act could be initiated for disallowance of the expenses under Section 14A of the Act after 14.5.2001 when Section 14A was incorporated. It was urged that present were not the cases for re- Singh Gurbax 2013.11.22 15:55 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.848 of 2008 (O&M) 5 assessment under Section 147 of the Act or rectification of an order under Section 154 of the Act and therefore, the Tribunal was not right in not applying the provisions of Section 14A of the Act.
5. Learned counsel for the assessee respondent besides supporting the impugned order relied upon judgments in CIT, Trichur v. Shri Paul Jone, Delicious Cashew Co. (2011) 12 Taxman 131 (Ker.), CIT v. Pnb Finance and Industries Limited, (2012) 340 ITR 50 (Delhi) and Honda Siel Power Products Limited v. Deputy Commissioner of Income Tax, (2012) 340 ITR 53 (Delhi).
6. After hearing learned counsel for the parties, we find force in the submissions made by learned counsel for the appellant.
7. The question that arises for consideration in this appeal is whether the provisions of section 14A of the Act are applicable to the facts and circumstances of the case.
8. Section 14A was inserted in Chapter IV of the Act by Finance Act, 2001 retrospectively from 1.4.1962. The section as inserted reads thus:-
"14A. Expenditure incurred in relation to income not includible in total income - 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."
According to this section, any expenditure incurred in relation to income which does not form part of the total income of the assessee shall be disallowed. The Apex Court in Walfort Share and Stock Singh Gurbax Brokers's case (supra), defining the scope of Section 14A of the Act, 2013.11.22 15:55 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.848 of 2008 (O&M) 6 incorporated retrospectively from 1.4.1962, had laid down as under:
"The insertion of Section 14A with retrospective effect is the serious attempt on the part of the Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income (see Circular No.14 of 2001 dated 22.11.2001). In other words, Section 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of Section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of Section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of Section 14A is that certain incomes are not includible while computing total income as these are exempt under certain provisions of the Act. In the past, there have been cases in which deduction has been sought in respect of such incomes which in effect would mean that tax incentives to certain incomes was being used to reduce the tax payable on the non-exempt income by debiting the expenses, incurred to earn the exempt income, against taxable income. The basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure. On the same analogy the exemption is also in respect of net income. Expenses allowed can only be in respect of earning of taxable income. This is the purport of Section 14A. In Singh Gurbax 2013.11.22 15:55 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.848 of 2008 (O&M) 7 Section 14A, the first phrase is "for the purposes of computing the total income under this Chapter" which makes it clear that various heads of income as prescribed under Chapter IV would fall within Section 14A. The next phrase is, "in relation to income which does not form part of total income under the Act". It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of Section 14A. Further, Section 14 specifies five heads of income which are chargeable to tax. In order to be chargeable,an income has to be brought under one of the five heads. Sections 15 to 59 lay down the rules for computing income for the purpose of chargeability to tax under those heads. Sections 15 to 59 quantify the total income chargeable to tax. The permissible deductions enumerated in Sections 15 to 59 are now to be allowed only with reference to income which is brought under one of the above heads and is chargeable to tax. If an income like dividend income is not a part of the total income, the expenditure/deduction though of the nature specified in Sections 15 to 59 but related to the income not forming part of total income could not be allowed against other income includible in the total income for the purpose of chargeability to tax. The theory of apportionment of expenditures between taxable and non- taxable has, in principle, been now widened under Section 14A. Reading Section 14 in juxtaposition with Sections 15 to 59, it is clear that the words "expenditure incurred" in Section 14A refers to expenditure on rent, taxes, salaries, interest, etc. in respect of which allowances are provided for (see Sections 30 to 37)."
9. Finance Act, 2002 with effect from 11.5.2001 added Proviso to the Section in the following terms:-
Singh Gurbax
"Provided that nothing contained in this section shall 2013.11.22 15:55 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.848 of 2008 (O&M) 8 empower the Assessing Officer either to reassess under Section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under Section 154, for any assessment year beginning on or before the Ist day of April, 2001."
It provides that the Assessing Officer cannot reopen the assessment under section 147 of the Act for any assessment year prior to assessment year 2001-02 for this purpose or pass any order under Section 154 of the Act rectifying any assessment order for prior years to disallow such expenditure. The object and purpose of the proviso is to ensure that the retrospective amendment is not made as a weapon to reopen past settled cases which have attained finality.
10. Adverting to the judgments relied upon by learned counsel for the assessee, suffice it to notice that they being based on individual facts involved therein, do not advance the case of the assessee.
11. Having noted the above legal position, we delve into factual matrix involved herein. It was not disputed by learned counsel for the assessee that the assessment was not framed in pursuance to proceedings under Section 147/154 of the Act. It was accepted that the assessment orders were passed under Section 143(3) of the Act. In other words, Proviso to Section 14A was not attracted in the present cases and the provisions of Section 14A having its applicability retrospectively w.e.f 1.4.1962 would thus be applicable to the assessment years in question. The Tribunal having failed to do so, it is considered appropriate that after setting aside the order of the Tribunal Singh Gurbax in all the appeals, the matter is remanded to it to decide it afresh in 2013.11.22 15:55 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.848 of 2008 (O&M) 9 accordance with law after hearing the parties. Ordered accordingly.
12. The appeals stand disposed of.
(Ajay Kumar Mittal)
Judge
October 03, 2013 (Jaspal Singh)
'gs' Judge
Singh Gurbax
2013.11.22 15:55
I attest to the accuracy and
integrity of this document
High Court Chandigarh