Deletion of Addition u/s 14A of Income Tax Act: Allahabad HC dismisses Revenue Dept’s Appeal [Read Order]

The Allahabad High Court has upheld the decision of the Income Tax Appellate Tribunal ( ITAT ) to delete additions made under Section 14A of the Income Tax Act. The court dismissed the appeal filed by the Commissioner of Income Tax-II, Kanpur, against the U.P. State Industrial Development Corporation Ltd. The appeal was based on three questions of law.

The appeal, admitted on 18.01.2017, challenged the ITAT’s order dated 24.07.2014 for the assessment year 2006-07. The key issues in the appeal were whether the ITAT erred in deleting the addition under Section 14A without considering the substantive law and clarificatory provisions, whether the deletion of the interest income addition was justified under the mercantile system of accounting, and whether the ITAT correctly allowed the assessee’s claim under Section 80IA despite the “other income” not having a direct nexus with the eligible business.

The bench of Justices Saumitra Dayal Singh and Donadi Ramesh concurred with the ITAT’s findings. The court specifically referred to the decision of the Supreme Court in Commissioner of Income Tax, Mumbai vs. Essar Teleholdings Ltd., to answer the first question in the negative.

The Supreme Court in the case held that “applying the principles of statutory interpretation for interpreting retrospectivity of a fiscal statute and looking into the nature and purpose of sub­section (2) and sub­section (3) of Section 14A as well as the purpose and intent of Rule 8D, coupled with the explanatory notes in the Finance Bill, 2006, and the departmental understanding as reflected by Circular dated 28.12.2006, we are of the considered opinion that Rule 8D was intended to operate prospectively.”

The bench held that the Tribunal has not committed any error in taking the view that the underwriting commission earned by the assessee in respect of the shares that were not subscribed by the public and were purchased by the assessee could not be treated as a part of its taxable income. The second question was resolved based on the findings recorded by the tribunal, and the third question was deemed irrelevant to the facts of the case.

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