2021 (2) TMI 1397 - AT - Income Tax

Addition u/s 14A r.w.s. 8D - no exempt income was earned by the assessee - HELD THAT - We have heard the respective parties and we have further considered the judgment passed in the case of CIT vs. Corrtech Energy Pvt. Ltd. 2014 (3) TMI 856 - GUJARAT HIGH COURT and in view of the ratio laid down we find no ambiguity in deleting the addition made by the CIT(A) u/s 14A in the absence of any admitted claim for exemption by the appellant so as to warrant interference. Hence the order is passed in the affirmative i.e. in favour of the assessee. Addition made to the book profit u/s. 115JB in respect of the provision of 14A - It is a settled principle of law that amount of disallowance u/s 14A cannot be added to the book profit u/s 115JB. Thus no ambiguity in making such decision by the Ld. CIT(A) in deleting the addition made by the A.O. Upward TP adjustment - determining Arms Length Price on the Corporate Guarantee on the average value of loans provided by the assessee to its assessee enterprises - Case of the assessee is this that issuance of Corporate Guarantee by the assessee on behalf of its subsidiary company is in the nature of quasi-capital or shareholder activity and not in the nature of provision of service and therefore the said transaction is to be excluded from this scope of international transaction u/s 92B - HELD THAT - Applying the rule of consistency the Ld. CIT(A) has allowed the issue in favour of the assessee by deleting the said adjustment. No reason to deviate from such stand taken by the ITAT in deciding the matter in favour of the assessee for A.Y. 2011-12 and respectfully relying upon the same we find no merit in this ground preferred by Revenue and therefore we dismiss the same. Disallowance of Employees Contribution to PF and ESI - assessee failed to deposit such sum within the prescribed due date in terms of the concerned rule - HELD THAT - The issue has been decided against the assessee in view of the judgment passed in the case CIT vs. Gujarat State Road Transport Corporation 2014 (1) TMI 502 - GUJARAT HIGH COURT We therefore find no reason to entertain this particular ground.

Summary

1. ISSUES PRESENTED and CONSIDERED

The judgment involves several core legal questions:

• Whether the addition of Rs. 14,62,72,303/- under Section 14A of the Income Tax Act, 1961, is justified in the absence of exempt income earned by the assessee.
• Whether the disallowance under Section 14A can be added to the book profit under Section 115JB of the Act.
• Whether the upward adjustment of Rs. 1,71,75,000/- made by the Transfer Pricing Officer under Section 92CA(i) concerning a 'Corporate Guarantee' is valid.
• Whether the disallowance of Rs. 6,94,23,796/- related to Employees' Contribution to PF and ESI is justified due to late deposit beyond the prescribed due date.

2. ISSUE-WISE DETAILED ANALYSIS

First Issue: Addition under Section 14A

• Relevant Legal Framework and Precedents: Section 14A pertains to disallowance of expenditure incurred in relation to income not includible in total income. The judgment referenced the case of CIT vs. Corrtech Energy Pvt. Ltd., where it was held that in the absence of exempt income, disallowance under Section 14A is unwarranted.
• Court's Interpretation and Reasoning: The court found that since no exempt income was earned, the addition under Section 14A was not justified.
• Key Evidence and Findings: The court considered the Income Tax Return and computation details, confirming no exempt income was claimed.
• Application of Law to Facts: The court applied the precedent from the jurisdictional High Court, concluding the addition was unwarranted.
• Treatment of Competing Arguments: The Revenue's arguments were not sufficiently substantiated to counter the assessee's position.
• Conclusions: The court dismissed the Revenue's appeal on this ground.

Second Issue: Section 14A and Book Profit under Section 115JB

• Relevant Legal Framework and Precedents: The court noted that disallowance under Section 14A cannot be added to book profit under Section 115JB, as established in previous decisions, including the assessee's own case for earlier years.
• Court's Interpretation and Reasoning: The court upheld the CIT(A)'s decision, referencing consistent past rulings.
• Key Evidence and Findings: The court relied on prior tribunal and High Court decisions supporting the assessee's position.
• Application of Law to Facts: The court applied established legal principles, confirming no adjustment to book profit was warranted.
• Treatment of Competing Arguments: The Revenue's arguments were not persuasive enough to overturn the precedent.
• Conclusions: The court dismissed the Revenue's appeal on this ground.

Third Issue: Transfer Pricing Adjustment for Corporate Guarantee

• Relevant Legal Framework and Precedents: Section 92CA(i) deals with adjustments for determining the Arm's Length Price in international transactions. The court referenced the assessee's previous case where similar adjustments were deleted.
• Court's Interpretation and Reasoning: The court found that the corporate guarantee was a shareholder activity, not a service, thus not constituting an international transaction.
• Key Evidence and Findings: The court considered past tribunal decisions favoring the assessee, which were not effectively countered by the Revenue.
• Application of Law to Facts: The court applied the rule of consistency, affirming the deletion of the adjustment.
• Treatment of Competing Arguments: The Revenue's position was not supported by any new or distinguishing legal precedents.
• Conclusions: The court dismissed the Revenue's appeal on this ground.

Fourth Issue: Disallowance of Employees' Contribution to PF and ESI

• Relevant Legal Framework and Precedents: The issue relates to the timely deposit of contributions under relevant Provident Fund and ESI regulations. The court referenced the jurisdictional High Court decision in CIT vs. Gujarat State Road Transport Corporation.
• Court's Interpretation and Reasoning: The court upheld the disallowance, aligning with the High Court's ruling that contributions must be deposited within the prescribed timeframe.
• Key Evidence and Findings: The court acknowledged the late deposit, which was not contested by the assessee.
• Application of Law to Facts: The court applied the High Court's precedent, confirming the disallowance.
• Treatment of Competing Arguments: The assessee conceded the issue, acknowledging the binding precedent.
• Conclusions: The court dismissed the assessee's cross-objection.

3. SIGNIFICANT HOLDINGS

• Core Principles Established:
  • Disallowance under Section 14A is not applicable in the absence of exempt income.
  • Section 14A disallowance cannot be added to book profit under Section 115JB.
  • Corporate guarantees as shareholder activities do not constitute international transactions subject to transfer pricing adjustments.
  • Timeliness in depositing employee contributions to PF and ESI is mandatory.
• Final Determinations on Each Issue:
  • The Revenue's appeal regarding Section 14A addition was dismissed.
  • The Revenue's appeal concerning Section 115JB adjustment was dismissed.
  • The Revenue's appeal on transfer pricing adjustment was dismissed.
  • The assessee's cross-objection on PF and ESI disallowance was dismissed.
• Verbatim Quotes of Crucial Legal Reasoning:
  • "In the absence of exempt income disallowance under Section 14A is unwarranted."
  • "Amount of disallowance under Section 14A cannot be added to the book profit under Section 115JB of the Act."
  • "Corporate guarantee by the assessee...is in the nature of quashi-capital or shareholder activity and not in the nature of 'provision of service'...to be excluded from the scope of 'international transaction'."

In conclusion, the court consistently applied established legal principles and precedents to dismiss the Revenue's appeals and the assessee's cross-objection, maintaining the decisions made by the lower appellate authority.