Disallowance u/s 14A of Income Tax Act without examining Accounts of Security Printing &Mining Corporation is invalid: Delhi HC [read Order]

The Delhi High Court observed that disallowance under section 14 A of the Income Tax Act, 1961 without examining accounts of Security Printing and Mining Corporation of India Ltd is invalid.                                

The respondent/assessee, a public sector undertaking engaged in the business of designing and printing bank notes, minting of coins, medallion seals and tokens etc., filed its return of income for the Assessment Year 2014-15 on 09.10.2014, declaring its income to be Rs.512,53,01,630/-.  

The Assessing Officer passed Assessment Order dated 19.12.2016 under Section 143(3) of the Act, thereby assessing the concerned income to be Rs.518,41,94,170/- after making additions to the tune of Rs.1,92,91,622/- on account of disallowance made under Section 14A of the Act and a further amount to the tune of Rs.3,96,00,919/- on account of Corporate Social Responsibility (CSR) expenses claimed by the assessee.  

The respondent/assessee challenged the said Assessment Order before the Commissioner Income Tax (Appeals) [CIT (A)], but the said appeal of the respondent/assessee was dismissed vide order dated 05.10.2018, thereby upholding the additions made by the Assessing Officer.   

As regards CSR expenses, in its profit & loss account, the respondent/assessee recorded a sum of Rs. 3,96,00,919/- towards the same and was called upon by the Assessing Officer to explain as to why the said expenditure be not disallowed, being capital in nature.

As regards disallowance under Section 14A of the Act, the Assessing Officer observed that the respondent/assessee had invested substantial money in mutual funds, dividend whereon is exempt from tax; and that the respondent/assessee also held shares of a joint venture company, which shares being assets, can yield exempt income. Therefore, the respondent/assessee was called upon by the Assessing Officer to show cause why the expenditure related to earning the exempt income should not be disallowed given Section 14A of the Act read with Rule 8D of the Income Tax Rules.

The explanation advanced on behalf of the respondent/assessee to the effect that being a cash-rich company, it did not have to incur any expenditure or deploy any person by way of any special efforts which could be treated as directly or indirectly an expenditure incurred to earn the dividend income, was held by the Assessing Officer to be not acceptable. The CIT(A) upheld the view taken by the Assessing Officer on both counts.

A division bench comprising Justice Rajiv Shakdher and Justice Girish Kathpalia observed that the Assessing Officer did not examine even a shred of accounts of the respondent/assessee. Without looking into the accounts of the respondent/assessee, the Assessing Officer held that the respondent/assessee had infused funds by way of equity in the joint venture company and also held that it was not believable that no expenditure had been incurred about the assets, income wherefrom does not form part of total income. 

“Completely ignoring the version of the respondent/assessee that being a cash-rich company, it did not have to deploy any person by way of any special effort which could be treated as expenditure to earn the exempted income, the Assessing Officer recorded a conclusion that the respondent/assessee had infused significant funds by way of equity in the joint venture company.  No cogent reasons, much less supported by data extracted from accounts of the respondent/assessee were advanced by the Assessing Officer to explain why the case set up by the respondent/assessee was not believable.  Even the quantification of the disallowance was carried out under Rule 8D(iii) of the Rules without scrutinizing the accounts of the respondent/assessee and by jumping over the mandate to first proceed under Section 14A of the Act.”, the court viewed.  

 The court upheld the impugned order of the Tribunal and dismissed the appeal.

To Read the full text of the Order CLICK HERE

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