Gujarat High Court
Commissioner Of Income Tax Ahmedabad Iv vs Banaskantha Dist.Co.Op. Milk ... on 31 March, 2014
Author: Sonia Gokani
Bench: Akil Kureshi, Sonia Gokani
O/TAXAP/271/2014 ORDER
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
TAX APPEAL NO. 271 of 2014
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COMMISSIONER OF INCOME TAX AHMEDABAD IV....Appellant(s)
Versus
BANASKANTHA DIST.CO.OP. MILK PRODUCERS' UNION LTD.....Opponent(s)
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Appearance:
MR.VARUN K.PATEL, ADVOCATE for the Appellant(s) No. 1
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CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI
and
HONOURABLE MS JUSTICE SONIA GOKANI
Date : 31/03/2014
ORAL ORDER
(PER : HONOURABLE MS JUSTICE SONIA GOKANI)
1. Revenue has preferred this appeal aggrieved by the order of the Income Tax Appellate Tribunal ("the Tribunal" for short) dated 30.8.2013 raising following substantial questions of law for our consideration:-
"(i) Whether in facts and circumstances of the case, the learned ITAT has erred in law in confirming the order of CIT(A) deleting the addition of Rs.87,39,536/- made by the assessing officer u/s 14A of Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules?
(ii) Whether, in the facts and circumstances of the case, the learned ITAT has erred in law in holding to the effect that the provisions of section 14A does not apply to income for which deduction under Chapter VI-A (section 80A to 80U) of the Income Tax Act is available?
(iii) Whether the words 'income which does not form part of total income under this Act' used in section 14A of the Income Tax Act, 1961 include the income which is not chargeable to tax pursuant to provisions of Chapter VIA (section 80A to 80U) of the Income Tax Act?"Page 1 of 12
O/TAXAP/271/2014 ORDER
2. We have heard learned counsel Mr. Varun Patel for the Revenue and with his assistance scrutinized the material on record. Questions proposed though are three in numbers, essentially lead to a single issue as to whether provision of section 14A read with Rule 8D of the I.T. Act and Rules would be applicable to income, not chargeable to tax by virtue of provisions of Chapter VIA (sections 80A to 80U) of the Act? Brief facts necessary for adjudication are as follows:
3. For the the assessment year 2005-06, the assessee filed the return of income. The assessee is a cooperative society engaged in the business of procuring, processing and manufacturing milk and milk products and supply of the same and claimed deduction under section 80IB. In the scrutiny assessment, it was noticed by the assessing officer that the assessee claimed deduction of Rs.2,28,90,110/-under section 80P(2)(d) of the Act on account of interest receipt.
The assessee had also claimed deduction under section 80P(2)(d) of Rs.82,44,575/- on account of dividend received. The assessee had debited interest of Rs.7,64,45,713/-. The assessing officer disallowed the claim of expenses under section 14A of the Act to the Page 2 of 12 O/TAXAP/271/2014 ORDER tune of Rs.18,21,203/- on the ground that sub-clause (3) of section 14A provides that expense which has been incurred in relation to the income which does not form part of total income cannot be allowed.
3. Aggrieved by the order of the assessing officer, assessee carried the matter before CIT(Appeals).
CIT(Appeals) deleted the addition of Rs.18.21 lakhs (rounded off) made by the assessing officer under section 14A read with rule 8D of the Income Tax Rules,1962 giving detailed reasonings.
4. This was carried in appeal before the Tribunal by the dissatisfied Revenue. The Tribunal placed reliance on the decision of ITAT Chennai Bench Tamil Nadu Silk Producers Federation Ltd. reported in 105 ITD 623, wherein it has been held that provisions of section 14A cannot be applied to the provisions of Chapter VIA where the deductions are to be made in computing the total income and the same cannot be compared with the exempted income, which does not form part of the total income as provided in Chapter III. The Tribunal also took into account that the provisions of section 14A when introduced retrospectively for the purpose of computing the total income under chapter IV and no Page 3 of 12 O/TAXAP/271/2014 ORDER deduction could be allowed in respect of the expenditure incurred by the assessee in relation to such exempted income, provisions of section Chapter VI-A does not speak about deduction to be made as per provisions of section 6A even though as a result of such deduction taxable income is reduced wholly or partially.
5. Having noted such decision and discussion of CIT(Appeals), the Tribunal held thus:-
"4. With this brief background, we have heard both the sides. Our attention has been drawn on the balance sheet of the assessee drawn as on 31st of March 2008, wherein it was found that the paid up share capital was to the tune of Rs.37,05,88000/-. Our attention has also been drawn that the assessee had reserves another funds of Rs.20,43,06,246/- as against that the investment in shares, NSC, KVP were at Rs.8,17,57,010. On the basis of these figures, the vehement contention is that the assessee had sufficient own funds and, therefore, there was no reason to invoke the provisions of Section 14A of the IT Act. The other plank of argument before us is that the assessee has not claimed that any part of income was totally exempt from the Income Tax. But the fact was that the profit as per P & L A/c was Rs.7,80,29,871/- against which the assessee has claimed deduction u/s 80IB and u/s.80P(2)
(d) of the IT Act. The total assessable income was computed at Rs.4,00,68,881/-. The assessee has, therefore, argued before us that the provisions of Section 14A cannot be applied to the provisions of Chapter-VIA, i.e., in respect of deductions u/s.80A to Section 80U of the IT Act. The argument of the assessee is that the deduction under the said Chapter is Page 4 of 12 O/TAXAP/271/2014 ORDER to be made out of the computation of the total income. Those deductions are not like exempted income. So the argument in relation to income which does not form part of the total income, i.e. as income exempt under the Act. In this regard, a decision of ITAT Chennai Bench pronounced in the case of Tamil Nadu Silk Producers Federation Ltd.(supra) has been cited. Respectfully following this decision as also considering the totality of the facts and circumstances of the case, we are of the considered opinion that learned CIT(A) has rightly held that the provisions of Section 14A have wrongly been invoked in this case. In the result, we hereby affirmed the finding of learned CIT(A) and dismiss this ground of the Revenue." (emphasis supplied)
6. Section 14A of the Act reads 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 assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.
(3) The provisions of sub-section(2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act:Page 5 of 12
O/TAXAP/271/2014 ORDER Provided that nothing contained in this section shall 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 1st day of April, 2001."
7. Question to be addressed is as to whether section 14A would apply to provision of Chapter VIA. Provision of section 14A when examined, it operates in respect of the income not forming part of the total income. It could be noted that provisions of Chapter VIA (sections 80A to 80U) refer to deductions to be made in computing the total income. Such deductions, in no manner, can be compared with the exempted income, which does not form part of the total income as provided in sections 10 to 13A under Chapter III of the Act. Section 14A was introduced retrospectively with effect from 1.4.1962 by Finance Act, 2001, for the purpose of computing the total income under Chapter IV. And, any expenditure incurred by the assessee in relation to exempted income, for the purpose of computing the total income, while applying section 14A, no deduction shall be allowed. However, there is a clear absence of any reference of deduction to be made in computing the total income as per Page 6 of 12 O/TAXAP/271/2014 ORDER provision of Chapter IVA in section 14A. Undoubtedly, as provided under Chapter VIA while computing the total income of the assessee from his gross total income in accordance with and subject to the provision of this chapter, the deductions specified are permissible. As a resultant effect, the taxable income of the assessee would surely get reduced and yet there is marked difference between the exempted income and the deduction provided under Chapter VIA. We notice that the investment in shares made by the assessee which earned him the dividend was from his own income.
Moreover, from the very provision of section 14A, the same would have no application in respect of the income not being taxable on account of deduction under section 80P(2)(d). Both the authorities have rightly held that there is no application of section 14A as far as the deduction under section 80A to 80U under Chapter VIA of the Act are concerned.
8. We notice that the Delhi High Court in the case of Commissioner of Income-Tax vs. Kribhco reported in [2012]349 ITR 618(Delhi) decided identical question of law by elaborately discussing the law on the subject whereby it has held that section 14A would Page 7 of 12 O/TAXAP/271/2014 ORDER have no applicability in relation to deductions to be made while computing total income under Chapter IV. In the words of the Delhi High Court it was observed as under:-
"31. While dealing with the detailed arguments raised by the Revenue, the Division Bench of this Court observed that broadly speaking the figure of total income is arrived at, as per the Act, in four stages. Firstly, the income of the resident assessee is computed by including all incomes, profits and gains arising in India or outside. Similarly income of resident but not ordinary resident or non- resident, are computed in accordance with Section 5 Chapter II, which forms the basis of Charge. Secondly, Chapter III with the heading "Incomes not included in the total income", comprises of Sections 10 to 13 and these incomes are not included in total income but some exemptions are only partial and not total. Thirdly, even in case of income, profit and gains included for arriving at the total income, the entire income is not liable to tax. Deductions as stipulated in Chapter IV can apply, e.g.. Sections 34, 35A and 35B etc. Even in Chapter VI, deductions for set off or carry forward of loss is allowed. Fourthly and lastly, certain deductions were permissible under Chapter VII and Chapter VIII and which had been substantial or partly replaced and were placed under Chapter VI-A. These were deductions which were reduced from the income computed in accordance with the earlier provisions/Chapters of the Act. These deductions were made in the computation of total income and, therefore, definition of "gross total income", which was/is arrived at without reference to the deduction allowable under Chapter VI-A, was introduced. The deductions available under Chapter VI-A were either wholly or partly reduced from the "gross total income". The contention of the Revenue that once deduction stands allowed, Page 8 of 12 O/TAXAP/271/2014 ORDER the "income" in view of the deduction ceases to be a part of the total income, was rejected by the Division Bench of this Court in Dalmia Cement (Bharat) Ltd. [1980] 126 ITR 736 (Delhi), for the following additional reasons:-
(1) The word "part" used in the Rule was to describe income fulfilling the description i.e. the category or class of the income. In other words it should indicate an identifiable section, category or class of income rather than mere portion or amount of such income. The question raised should be "whether this income was included" and not "whether any deduction was allowed". The use of the word "part"
contemplates a type of income which by its very nature does not form part of the total income. The word "includible" supports that reference to the general nature and class of income rather than factual inclusion.
(2) It is not the actual quantification of the income which matters but whether or not income was excluded from the total income. It is the class of income rather than the amount which would determine whether or not the said class of income forms part of the total income. Incomes of the categories referred to in Chapter VI-A were to be taken into account as a part of total income and they do form part of the gross total income which was the first step in the process. Accordingly, even after the deduction allowable under Chapter VI-A, they form a part of the total income and do not get excluded merely because deduction is allowed.
(3) The Legislature had enacted sections 80C to 80U in Chapter VI-A, as a measure of relief from taxable liability. It incorporates and allows deductions. The income from these "sources" was included in the income, but subjected to deduction. Qualification would vary from section to section. Further in some cases the deduction was full and in some cases it was partial but this was not material and it did not mean that if an amount was deducted it did not form part of the total income.
Page 9 of 12O/TAXAP/271/2014 ORDER
32. Thus, the income on which the deduction is allowed forms a part of the total income, though not included in the amount or quantum on which tax is paid.
33. It can be urged (though it was not specifically argued by the Revenue) that in case of complete or entire deduction of the gross amount, Section 14A will be applicable, and Section 14A will not apply in case only the net amount (as stipulated in several Sections in Chapter VIA of the Act) is allowable as a deduction. There will be a fallacy in this argument. Even were partial or net amount is to be allowed as a deduction, the figure can be minus or in a loss.
Logically, as a squiter, it will follow that in case the assessee has a negative/minus figure as per the computation made any of the provisions of Chapter VIA, the expenditure incurred cannot allowable under Section 37 of the Act, in view of Section 14A. The said position cannot be accepted. Income will include negative income or a loss. The corollary is that the entire income is included under the provisions of the Act by firstly including the entire receipts or incomes as stipulated in the charging section but after excluding the income stipulated in Chapter III. Thereafter, total income is computed under the Act by applying provisions of Chapter IV, V and VI. From this income, deductions are permitted and allowed in terms of Chapter VIA. Deductions do not mean that deduction allowed has the effect that the income, on which deduction is allowed, ceases to be part of the total income. This is not the scheme, effect and purport of the Act. The expression "income which does not form part of the total income" refers to the nature, character or type of income and not the quantum.
34. Section 14A states that for the purpose of computing total income under Chapter IV, no deduction shall be allowed in respect of Page 10 of 12 O/TAXAP/271/2014 ORDER expenditure incurred in relation to the income which does not form part of the total income under this Act. It does not state that income which is entitled to deduction under Chapter VIA has to be excluded for the purpose of the said Section. The words "do not form part of the total income under this Act" is significant and important. As noticed above, before allowing deduction under Chapter VIA we have to compute the income and include the same in the total income. In this manner, the income which qualifies for deductions under Sections 80C to 80U has to be first included in the total income of the assessee. It, therefore, becomes part of the income, which is subjected to tax. Thereafter, deduction is to be allowed in accordance with and subject to the fulfillment of the conditions of the respective provisions. This is also subject to Section 80AB and 80A(1) and (2). Chapter VIA does not postulate or state that the incomes which qualify for the said deduction will be excluded and not form part of the total income. They form part of the total income but are allowed as a deduction and reduced.
35. It is clear from the aforesaid reasoning that the decisions in the case of Distributors (Baroda) Private Limited and Cambay Electric Supply Industrial Co. Ltd (supra) have proceeded on the specific language of the said Sections, whereas in the other decisions Stumpp Schuele and Somappa Private Limited and South Indian Bank (supra) and those of the High Courts mentioned above have gone on the general principle relating to deductions allowed and whether a deduction once allowed has the effect that the income on which deduction ceases to be part of the total income. It has been uniformly and consistently held that in the absence of express language to the contrary, deduction if allowed does not mean that the said income ceases to be part of the total income.
36. In view of the aforesaid position, we answer the questions of law mentioned above in Page 11 of 12 O/TAXAP/271/2014 ORDER affirmative, i.e., against the appellant- Revenue and in favour of the respondent-
assessee. In the facts of the present case,
there will be no order as to costs."
9. We choose to follow ratio laid down in the said decision of Delhi High Court and see any reason to interfere with the findings/conclusions rendered by both the Revenue authorities, namely, CIT(Appeals) and the Tribunal and answer the question in favour of assessee and against the Revenue. Tax Appeal is accordingly disposed of.
(AKIL KURESHI, J.) (MS SONIA GOKANI, J.) SUDHIR Page 12 of 12