2023 (5) TMI 1417 - AT - Income Tax

Disallowance u/s.14A in book profits u/s.115JB - CIT(A) deleted addition - HELD THAT - Since ITAT has been consistently deleting the adjustment made to the book profits u/s 115JB of the Act on account of disallowance of expenses as per the provision of section 14A of the Act in the case of the assessee itself right from AY 2009-10 TO 2011-12 and even in Asst.Year 2015-16 considering the decision of Alembic Ltd. 2017 (1) TMI 513 - GUJARAT HIGH COURT and Vireet Investment P.Ltd. 2017 (6) TMI 1124 - ITAT DELHI and the fact that the ld.DR being unable to distinguish the decisions cited (supra) to the facts of the present we see no reason to interfere in the order of the CIT(A) deleting the adjustment made to the book profits of the assessee on account of expenses disallowed u/s 14A following the consistent view taken by the ITAT in this regard in the case of the assessee itself - Decided in favour of assessee. TP upward adjustment u/s.92CA(3) - corporate guarantee fees - CIT(A) deleted addition - HELD THAT - This issue was consistently decided in favour of the assessee by the ITAT right from Asst.Year 2008-09 to 2011-12 and even in Asst.Year 2015-16. Copies of all these orders were placed before us. It was also pointed out that the issue was covered by the decision of Micro Ink 2015 (12) TMI 143 - ITAT AHMEDABAD wherein it was held that the issuance of corporate guarantee did not constitute international transactions and no TP adjustment is liable to made. Thus no reason to interfere in the order of the CIT(A) deleting upward adjustment. Disallowing employee s contribution towards PF and ESIC u/s 36(1)(va) r.w.s.2(24)(x) - HELD THAT - Since the issue stands settled and decided against the assessee in view of the decision in the case of Checkmate Services P.Ltd. 2022 (10) TMI 617 - SUPREME COURT wherein it has been held that the provision of section 36(1)(va) of the Act warrants addition to the income of the assessee to the extent of amount so delayed to be deposited in the relevant funds. The ground raised by the assessee are accordingly dismissed. Disallowance of expenditure incurred for the purpose of earning exempt income as per section 14A - Addition restricted by CIT(A) to the extent of exempt income earned by the assessee - HELD THAT - CIT(A) had restricted the disallowance to extent of exempt income earned by following the decision of Corrtech Energy Ld. 2014 (3) TMI 856 - GUJARAT HIGH COURT . Since the ld.DR was unable to distinguish the said case before us nor was he brought to our notice any contrary decisions of Hon ble jurisdictional High Court or of the Apex Court we see no reasons to interfere in the order of the ld.CIT(A) restricting the disallowance of expenditure under section 14A of the Act to the extent of exempt income earned by the assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The judgment from the Appellate Tribunal ITAT Ahmedabad involves several core legal questions:

• Whether the disallowance under section 14A of the Income Tax Act, 1961, should be added to the book profits calculated under section 115JB of the Act.
• Whether the upward adjustment made under section 92CA(3) regarding the arm's length price (ALP) for international transactions was justified.
• Whether the disallowance of employee contributions towards PF and ESIC under section 36(1)(va) was justified.
• Whether the voluntary disallowance made by the assessee under section 14A should be restricted to the extent of exempt income claimed by the assessee.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Disallowance under Section 14A and Book Profits under Section 115JB

• Relevant Legal Framework and Precedents: Section 14A deals with the disallowance of expenditure incurred for earning exempt income. Section 115JB relates to the computation of book profits for the purpose of Minimum Alternate Tax (MAT). The ITAT and the jurisdictional High Court in previous cases, including Alembic Ltd., have held that disallowance under section 14A should not be added back to book profits under section 115JB.
• Court's Interpretation and Reasoning: The Tribunal followed its own previous decisions and the Gujarat High Court's ruling in Alembic Ltd., concluding that section 14A disallowance should not be added to book profits under section 115JB.
• Key Evidence and Findings: The Tribunal noted that the ITAT had consistently ruled in favor of the assessee in previous years, and there was no contrary decision from a higher court.
• Application of Law to Facts: The Tribunal applied the consistent view of the ITAT and the High Court to the current facts, leading to the dismissal of the Revenue's appeal on this ground.
• Treatment of Competing Arguments: The Revenue failed to provide any new arguments or distinguish the current case from previous rulings.
• Conclusions: The Tribunal upheld the CIT(A)'s decision to delete the adjustment to book profits under section 115JB.

Issue 2: Upward Adjustment under Section 92CA(3)

• Relevant Legal Framework and Precedents: Section 92CA(3) pertains to the determination of the ALP for international transactions. The Tribunal referenced its own past rulings and the case of Micro Ink Ltd., which held that corporate guarantees do not constitute international transactions requiring TP adjustments.
• Court's Interpretation and Reasoning: The Tribunal followed its previous decisions, noting that corporate guarantees do not necessitate an ALP adjustment.
• Key Evidence and Findings: The Tribunal observed that the issue had been consistently decided in favor of the assessee in prior years.
• Application of Law to Facts: Based on past decisions and the lack of new distinguishing facts, the Tribunal dismissed the Revenue's appeal on this ground.
• Treatment of Competing Arguments: The Revenue did not present any new arguments or evidence to challenge the established precedent.
• Conclusions: The Tribunal upheld the CIT(A)'s decision to delete the upward adjustment under section 92CA(3).

Issue 3: Disallowance of Employee Contributions under Section 36(1)(va)

• Relevant Legal Framework and Precedents: Section 36(1)(va) requires timely payment of employee contributions to PF and ESIC. The Supreme Court in Checkmate Services P. Ltd. v. CIT held that delayed payments warrant disallowance.
• Court's Interpretation and Reasoning: The Tribunal relied on the Supreme Court's decision, affirming the disallowance due to delayed payments.
• Key Evidence and Findings: The Tribunal found that the contributions were paid beyond the due dates prescribed by relevant laws.
• Application of Law to Facts: The Tribunal applied the Supreme Court's ruling to the facts, leading to the dismissal of the assessee's cross-objection.
• Treatment of Competing Arguments: The assessee failed to provide any contrary legal authority or evidence to support its position.
• Conclusions: The Tribunal upheld the disallowance of employee contributions under section 36(1)(va).

Issue 4: Voluntary Disallowance under Section 14A

• Relevant Legal Framework and Precedents: Section 14A disallows expenses related to exempt income. The Gujarat High Court in Corrtech Energy Ltd. ruled that disallowance should not exceed exempt income.
• Court's Interpretation and Reasoning: The Tribunal followed the High Court's ruling, restricting disallowance to the amount of exempt income.
• Key Evidence and Findings: The Tribunal noted that the assessee's disallowance exceeded the exempt income earned.
• Application of Law to Facts: The Tribunal applied the High Court's precedent to the facts, leading to the dismissal of the Revenue's appeal on this ground.
• Treatment of Competing Arguments: The Revenue did not present any new legal authority or evidence to challenge the High Court's ruling.
• Conclusions: The Tribunal upheld the CIT(A)'s decision to restrict the disallowance to the exempt income amount.

3. SIGNIFICANT HOLDINGS

• Disallowance under Section 14A and Book Profits under Section 115JB: "The disallowance u/s 14A of the Act cannot be added to book profits calculated u/s 115JB of the Act."
• Upward Adjustment under Section 92CA(3): "The issuance of corporate guarantee did not constitute international transactions and no TP adjustment is liable to be made."
• Disallowance of Employee Contributions under Section 36(1)(va): "The provision of section 36(1)(va) of the Act warrants addition to the income of the assessee to the extent of amount so delayed to be deposited in the relevant funds."
• Voluntary Disallowance under Section 14A: "Disallowance u/s.14A r.w.r. 8D cannot exceed the exempt income."

The Tribunal dismissed both the Revenue's appeals and the assessee's cross-objection, affirming the CIT(A)'s decisions on all issues.