Section 14A disallowance cannot be sustained without changed

Section 14A disallowance cannot be sustained without changed facts when Revenue accepted earlier years’ orders.

Issue

Whether the disallowance under Section 14A read with Rule 8D by attributing salary expenses is sustainable when identical issues were decided in favor of the assessee in preceding assessment years and accepted by the Revenue without further appeal.

Facts

Business & Investment: The assessee-company, engaged in manufacturing and trading pharmaceutical products, held tax-free bonds for approximately three months during Assessment Year 2017-18 and claimed exemption under Section 10(15).
Fund Status & Activity: The company possessed sufficient self-owned funds, and there was no major buying or selling activity regarding investments during the year.
Disallowance by AO & CIT(A): The Assessing Officer made a disallowance under Section 14A read with Rule 8D, which the CIT(A) partially sustained by attributing 15% of the salary paid to employees involved in managing government bonds.
Consistency in Past Years: Identical issues had already been covered by the Tribunal’s order for earlier years. Moreover, CIT(A) orders favoring the assessee for AYs 2011-12, 2013-14, and 2014-15 were accepted by the Revenue without filing further appeals.

Decision

Absence of Factual Change: There was no material change in either the factual matrix or the legal position compared to the preceding assessment years.
Rule of Consistency: Since the Revenue had accepted the identical view in earlier years, it could not take a contrary stance for AY 2017-18 without fresh evidence or changed circumstances.
Disallowance Set Aside: The impugned disallowance under Section 14A read with Rule 8D was set aside, deciding the issue in favor of the assessee.

Key Takeaways

Principle of Consistency: While res judicata does not strictly apply to tax proceedings, the Revenue must maintain consistency and cannot arbitrarily reopen settled issues unless there is a material change in facts or law.
Acceptance of Past Precedents: If the Revenue accepts a lower appellate authority’s order in prior assessment years without filing an appeal, it cannot challenge the same position in subsequent years on identical facts.
Nexus for Salary Disallowance: Arbitrary allocation of general employee salary to exempt income under Section 14A is impermissible without establishing a clear and direct nexus.

IN THE ITAT AHMEDABAD BENCH ‘D’

Sun Pharma Laboratories Ltd.

Deputy Commissioner of Income-tax

DR. B.R.R. KUMAR, Vice President
and Siddhartha Nautiyal, Judicial Member

IT Appeal Nos.1734 & 1743 (Ahd.) of 2024
[Assessment years and 2017-18]

JULY 10, 2026

S.N. Soparkar, Sr. Adv. for the Appellant. Sher Singh, CIT-DR and Rameshwar Prasad Meena, Sr. DR for the Respondent.

ORDER

Dr. B.R.R. Kumar, Vice-President.- These cross appeals, one by the assessee and the other by the Revenue, arise out of the order dated 01.08.2024 passed by the Ld. Commissioner of Income-tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [“Ld. CIT(A)” in short] under section 250 of the Income-tax Act, 1961 [“the Act” in short] for Assessment Year 2017-18.

2. Since both the appeals emanate from the same appellate order, involve common facts and interconnected issues, they were heard together and are being disposed of by this consolidated order for the sake of convenience and brevity.

3. The assessee has raised following grounds of appeal:-

“1. On the facts and in the circumstances of the case and in law, the order passed by the Learned Commissioner of Income-tax (Appeals) [the ‘Ld. CIT(A)’) erroneously affirming the findings of the learned Assessing Officer [the ‘Ld. AO’] is unsustainable and ought to be quashed.

1. Ground No. 1: Disallowance under section 14A read with Rule 8D Rs. 62,45,631/

1.1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) grossly erred in sustaining the disallowance of Rs. 62,45,631/- made by the Ld. AO under section 14A of the Income-tax Act, 1961 (‘Act’) read with rule 8D of the Income-tax Rules, 1962 (‘Rules’) in relation to earning of income exempt under section 10 of the Act

1.2. The Ld. CIT(A) grossly erred in mechanically relying on the judgements of the Hon’ble ITAT, Ahmedabad in the case of Sun Pharmaceuticals Industries Limited for AY 2008-09 and AY 2009-10 without appreciating that in the said cases, the expenditure involved was selling and distribution expenditure incurred on behalf of a partnership firm and not the interest expenditure.

1.3. The Ld. CIT(A) failed to appreciate that invocation of rule 8D is not automatic and recording of satisfaction and establishing a direct nexus between the expenditure incurred and the exempt income under section 10 is a sin qua non.

1.4. Without prejudice to the above, the Ld. CIT(A) failed to consider that the provisions of rule 8D were amended vide Notification No. 43/2016 [F.No. 370142/7/2016-TPL] dt. June 2, 2016, with effect from AY 2017-18 which dispensed off the requirement of proportionate disallowance of interest income, and therefore grossly erred in confirming the erroneous computation of the Ld. AO made as per the erstwhile provisions of rule 8D.

1.5. Without prejudice to the above, the Ld. CIT(A) has failed to consider that the Appellant had sufficient interest free funds and that the investment in securities producing exempt income were made out of such non-interest-bearing funds thereby making the interest disallowance under rule 8D(2)(ii) uncalled for.

1.6. Without prejudice to the above, the Ld. CIT(A) ought to have appreciated that the Appellant had in fact earned net interest income and hence, there was no case for disallowance of interest expenditure under section 14A read with rule 8D.

1.7. Without prejudice to the above. the Ld. CIT(A) failed to appreciate that no direct or indirect administrative expenditure was incurred to earn the exempt income, since no active management is required for investments earning such exempt income.

1.8. Without prejudice to the above, the Ld. CIT(A) grossly erred in confirming the computational errors committed by the Ld. AO while ascertaining the disallowance under section 14A read with rule 8D.

1.9. Without prejudice to the above, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) grossly erred in not increasing the corresponding deduction under section 80-IB/80-IE on account of disallowance carried out under the said ground

2. Ground No. 2: Corresponding Adjustment to deduction u/s 80-IB/80-IE

2.1. On the facts and circumstances of the case and in law, the Ld. CIT(A) failed in directing the Ld. AO to consider the plea of the Appellant of increasing deduction under section 80-IB/80-IE correspondingly on account of various disallowances carried out in the assessment order and further affirmed in the CIT(A) order.

3. Re: Initiation of penalty proceedings under section 270A(9) of the Act

3.1. The Ld. CIT(A) failed to appreciate that the initiation of penalty proceedings under section 270A(9) by the Ld. AO was void-ab-initio and hence bad in law. The said penalty was initiated without appreciating the fact that Appellant has made adequate disclosures in its computation of income along with relevant notes and further issues were highly legal and debatable in nature.”

4. The Revenue has raised the following grounds of appeal:-

“1.1) On the facts and circumstances of the case and in law, the learned CIT(A) erred in allowing the claim of the assessee for deduction u/s 801E of the Act of Rs.887,84,51,154/- in respect of Sikkim Unit without appreciating the fact that mere submission of journal entries generated in computer cannot be treated as authentic document for establishing purchase of plant and machinery and that the assessee firm viz. Sun Pharma Sikkim, as held by the Assessing Officer, was constituted by reconstruction of existing business of M/s. Sun Pharma Industries.

1.2) On the facts and circumstances of the case and in law, the learned CIT(A) erred in allowing the claim of the assessee for deduction u/s 801E of the Act of Rs.887,84,51,154/- in respect of Sikkim Unit even though the assessee firm was formed by splitting up and reconstruction of the existing business of M/s. Sun Pharma Industries and the condition of using less than 20% of old/used machinery has not been fulfilled by the assessee.

2) On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in allowing the assessee’s ground on disallowance of depreciation/amortization of intangibles of Rs.15,23,97,50,000/- by virtue of clause (iia) to Explanation 1 to Section 115JB(1) of the Act, without appreciating the fact that the assessee was not the owner of the alleged assets and thus, was not entitled to claim depreciation on those assets and, therefore, depreciation claimed of Rs. 15,23,97,50,000/- was liable to be disallowed for the purpose of working out book profit u/s 115JB of the Act.

3) On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in allowing the assessee’s ground on reduction of amount of Rs. 104,16,66,667/-transferred to Debenture Redemption Reserve while calculating book profit u/s 115JB of the Act by directing the AO to recompute the book profit by adjusting the disputed amount of debenture redemption reserve, without appreciating the findings of the AO in the assessment order.”

5. The brief facts of the case are that the assessee-company is engaged in the manufacturing and trading of pharmaceuticals products. The assessee has manufacturing units located at Jammu and Kashmir, Sikkim as well as in Guwahati. The assessee filed its return of income for the year under consideration on 30.11.2017 declaring total income as Rs. NIL under the normal provisions and book profit of Rs. 955,71,72,200/- under section 115JB of the Act. The case was selected for scrutiny and subsequently the Assessment Order was passed u/s. 143(3) read with section 144B of the Act on 28.09.2021, after making several additions and disallowances. As a result, the total income has been computed at Rs. 819,33,21,222/-under the normal provisions and book profit of Rs. 24,79,69,22,200/- under section 115JB of the Act.

6. Aggrieved by the assessment order passed by the Assessing Officer, the assessee preferred an appeal before the Ld. CIT(A). The Ld. CIT(A), after considering the submissions of the assessee, granted partial relief by deleting certain additions/disallowances, while sustaining the remaining additions.

7. Being aggrieved by the additions/disallowances sustained by the Ld. CIT(A), the assessee is in appeal before the Tribunal. The Revenue, on the other hand, has also preferred an appeal challenging the relief granted by the Ld. CIT(A) in respect of the additions/disallowances deleted by him.

Assessee’s Appeal (ITA No.1734/Ahd/2024)

8. The only grievance raised by the assessee is against the disallowance made by the Assessing Officer and sustained by the Ld. CIT(A) u/s 14A r.w. Rule 8D amounting to Rs.62,45,631/-.

8.1 We have heard the rival submissions and perused the material available on record. The facts reveal that the assessee held investments in tax-free bonds for a period of three months and claimed exemption u/s 10(15) of the Act, which did not involve any major activity of buying and selling. The assessee had sufficient own funds to meet the investments, hence no disallowance on interest is called for. The Ld. CIT(A) disallowed 15% of the salary paid to the employees involved in investing in the government bonds.

8.2 We find that the issue involved in the present ground stands covered by the ITAT Order for AY 2008-09 to AY 2010-11 and AY 2012-13. Further, the orders of the Ld. CIT(A) for AY 2011-12, AY 2013-14 and AY 2014-15, have been accepted by the Revenue and no further appeal was preferred. The Ld. CIT(A) has followed the consistent view taken in the preceding years and held that no material has been brought before us to justify a different view.

8.3 Respectfully following the earlier orders of the Co-ordinate Bench of the Tribunal in the assessee’s own case, in the absence of any change in the factual matrix and legal proposition, we decline to interfere with the order of the Ld. CIT(A). Accordingly, the ground of appeal raised by the assessee is allowed.

The appeal of the assessee is allowed.

Ground No. 2, being consequential, is treated as infructuous.

Revenue’s appeal (ITA No.1743/Ahd/2024)

9. The ground of appeal No.1

•

Disallowance of deduction under section 80-IE of the Act for Sikkim-I unit amounting to Rs. 88,78,451,154/-.

9.1 We have heard the rival submissions and perused the material available on record. We find that the issue involved in the present ground is squarely covered by the decisions of the ITAT (in the case of erstwhile SPS) for AY 2010-11 and AY 2011-12, by the orders of the Ld. CIT(A) (in the case of erstwhile SPS) for AY 2012-13 and AY 2013-14, by the decisions of the Coordinate Bench of the Tribunal in the assessee’s own case for AY 2013-14 to AY 2015-16, and by the orders of the Ld. CIT(A) in the assessee’s own case for AY 2013-14 and AY 2017-18. The Ld. CIT(A), while granting relief, has merely followed the aforesaid binding decisions and no distinguishing facts or change in law have been brought to our notice by the Revenue. Respectfully following the earlier orders in the assessee’s own case, we find no infirmity in the order of the Ld. CIT(A). Accordingly, the same is upheld and the ground of appeal raised by the Revenue in this regard is dismissed.

Ground No.1 of the Revenue’s appeal is thus dismissed.

10. Ground No. 2 raised by the Revenue relates to disallowance of amortization of intangibles under section 115JB amounting to Rs. 1,52,39,750,000/-.

10.1 We have heard the rival submissions and perused the material available on record. We find that the issue involved in the present ground stands covered by the ITAT Order for AY 2013-14 to AY 2015-16 and by the CIT(A) Order for AY 2018-19 to AY 2022-23. The Ld.CIT(A) has followed the consistent view taken in the preceding years and no material has been brought before us to justify a different view. For the sake of completeness, the order of the Co-ordinate Bench of the Tribunal for AY 2015-16 (Dy. CIT v. Sun Pharma Laboratories Ltd. [IT Appeal No.741 (Ahd.) of 2019, dated 9-10-2024] in this regard is reproduced hereunder:-

“……

The relevant finding of the Coordinate Bench for AY 2012-13 reads as under:

“….8. We have heard the rival contention of both the parties and perused the materials available on record. At the outset, we find that issue on hand is covered by the order of the coordinate bench of this tribunal in the own case of the assessee for AY 2010-11 in ITA Nos. 3541/Mum/2017, where the bench vide order dated 16th May 2019 held as under:

……

26. We have duly considered rival contentions and gone through the details. According to the AO, bills having value of Rs.6.88 crores with regard to certain additions to plant & machinery were not furnished. Therefore, he presumed such machinery as second-hand machinery. Against his presumption, the assessee has filed an application for permission to adduce additional evidence. It was contended therein that questionnaire issued on 12.11.2012; bills were lying at factory premises in Sikkim; staff was not well conversant with income tax proceedings; they were lying in boxes; hence in a short span of time, complete details could not be submitted. Thereafter, the assessee produced complete details. The remand report was called for by the ld.CIT(A) on those details. In the remand proceedings, each bill was analysed and objection of the AO were noted. The bills have been discussed by the CIT(A) and the details are available in tabular form extracted (supra). We also have perused such details and are of the view that the defects are not substantive. They have only shown that some of the bills are photocopies, LRs are not available etc. The ld.CIT(A) while considering these defects observed that the AO should have made an inquiry from the original suppliers and when such machineries were supplied. He did not make any inquiry rather presumed certain facts that machineries are old one. In the finding recorded by the first appellate authority extracted (supra) reveals a detailed analysis and a finding of fact that total machinery having value of Rs.14.98 crore considered by the AO as representing old was not sustainable. Therefore, after going through the detailed analysis made by the ld.CIT(A) we are of the view that Revenue failed to demonstrate that machineries exceeding 20% of the total value of the plant & machinery were old machinery. Therefore, considering the facts on this fold of grievance of the Revenue, we do not find any error in the order of the ld.CIT(A). Assessee is entitled for deduction under section 80IE of the Act.

8.1 Before us, no material has been placed on record by the Revenue to demonstrate that the decision of Tribunal as discussed above has been set aside / stayed or overruled by the Higher Judicial Authorities. Before us, the learned DR has not placed any material on record to point out any distinguishing feature in the facts of the case for the year under consideration and that of earlier year nor has placed any contrary binding decision in its support. Thus, respectfully following the order this tribunal in the own case of assessee, we uphold the finding of the learned CIT(A). Thus, the ground of appeal raised by the Revenue is hereby dismissed.’

22.1. Since the eligibility of deduction was upheld in the first year of claim being AY 2010-11, the same cannot be disputed in the subsequent year of claim on the same ground of ineligibility. More particularly when the AO himself has observed that there is no change in facts and circumstances of the case during the year under consideration. Before us, no material has been brought on record by the Revenue to demonstrate the above decision of the Co-ordinate bench in earlier year has been reversed or set aside by the higher Judicial Forums. Thus, respectfully following the Coordinate Bench decision, we find no infirmity in the findings of Ld. CIT(A).”

10.2 Respectfully following the earlier orders in the assessee’s own case, we uphold the order of the Ld. CIT(A). Accordingly, the Ground of Appeal raised by the Revenue is dismissed.

Ground No.2 of the Revenue’s appeal is dismissed.

11. Ground No.3 of appeal raised by the Revenue relates to deletion of the addition of Rs. 104,16,66,667/- made by the Assessing Officer on account of amount transferred to Debenture Redemption Reserve (DRR) while computing book profit under section 115JB of the Act.

11.1. During the course of assessment proceedings, the assessee sought deduction of Rs. 104,16,66,667/- being the amount transferred to Debenture Redemption Reserve while computing book profit under section 115JB of the Act by way of Notes forming part of the computation of income filed before the Assessing Officer. However, since no such claim had been made in the original return of income, the Assessing Officer did not adjudicate the said claim and proceeded to compute the book profit as per the return of income without allowing the deduction.

11.2 In appeal, the Ld. CIT(A), after examining the audited financial statements, accounting treatment adopted by the assessee, the provisions of section 71(4) of the Companies Act, 2013 and the judicial precedents relied upon by the assessee, held that the Debenture Redemption Reserve represented a provision created towards an ascertained statutory liability and not a reserve in the true sense.

11.3 The Ld. CIT(A) further observed that although the Assessing Officer had not entertained the claim since it had not been made in the return of income, such restriction applied only to the Assessing Officer in view of the decision of the Hon’ble Supreme Court in Goetze (India) Ltd. v. CIT 284 ITR 323 (SC) and did not curtail the powers of the appellate authorities to entertain a legally admissible claim. Reliance in this regard was also placed upon the decision of the Hon’ble Bombay High Court in CIT v. Pruthvi Brokers & Shareholders 349 ITR 336 (Bombay).

11.4 The Ld. CIT(A) further recorded a categorical finding that the amount had in fact been appropriated out of the profits of the relevant year by way of debit to the Profit & Loss Account and that the disallowance had arisen primarily because of the manner in which the computation was reflected in the ITR utility. Relying, inter alia, upon the decisions of the Hon’ble Supreme Court in National Rayon Corpn. Ltd. v. CIT /227 ITR 764 (SC) and the Hon’ble Bombay High Court in CIT v. Raymond Ltd. [2012] (Bombay), as well as the decision of the Coordinate Bench of Ahmedabad Tribunal in Genus Electrotech Ltd. [2016] 161 ITD 644 (Ahmedabad – Trib.), the Ld. CIT(A) held that the Debenture Redemption Reserve represented an ascertained liability and was therefore eligible for deduction while computing book profit under section 115JB. He accordingly directed the Assessing Officer to delete the addition.

12. Aggrieved by the aforesaid findings, the Revenue is in appeal before us.

13. The Ld. CIT-DR relied upon the assessment order and submitted that since the assessee had admittedly not claimed the deduction in the original return of income and had merely raised the claim by way of notes during the assessment proceedings, the Assessing Officer was justified in not entertaining the claim.

14. The Ld. Sr. Advocate, appearing for the assessee, on the other hand strongly supported the order of the Ld. CIT(A). He submitted that although the claim could not be entertained by the Assessing Officer in view of the decision of the Hon’ble Supreme Court in Goetze (India) Ltd. (supra), there was no embargo on the powers of the appellate authorities to admit and allow a legally sustainable claim, as held by the Hon’ble Bombay High Court in Pruthvi Brokers & Shareholders (supra).

14.1 He further submitted that the Debenture Redemption Reserve was created pursuant to the statutory mandate contained in section 71(4) of the Companies Act, 2013 and represented an amount set apart for meeting a known and existing liability towards redemption of debentures. It was contended that merely because the Companies Act uses the expression “reserve”, the true character of the amount cannot be altered, as the liability to redeem debentures is an existing and ascertained liability. He further submitted that the amount was appropriated out of the profits of the relevant previous year by debiting the Profit & Loss Account and the accounting treatment was duly reflected in the audited financial statements. The learned Senior Counsel also explained that the manner in which the claim was reflected in the return of income was only on account of the inherent limitation of the ITR-6 utility, which compulsorily adopts the profit before appropriation as the starting point for computation under section 115JB, whereas the statutory scheme contemplates computation based on profit after appropriations. It was therefore submitted that a mere procedural or presentation issue cannot defeat a substantive claim otherwise allowable in law.

15. We have heard the rival submissions and perused the material available on record. We find no infirmity in the order passed by the Ld. CIT(A). We also find no error in the approach adopted by the Ld. CIT(A) in entertaining the assessee’s claim in appellate proceedings. The Assessing Officer merely declined to examine the claim since it had not been made in the return of income. However, it is now well settled that while such restriction may operate upon the Assessing Officer in view of the decision of the Hon’ble Supreme Court in Goetze (India) Ltd. (supra), the appellate authorities are fully empowered to entertain and adjudicate a legally sustainable claim, as explained by the Hon’ble Bombay High Court in Pruthvi Brokers & Shareholders (supra).

15.1 The undisputed factual position emerging from the record is that the amount of Rs. 104,16,66,667/- was transferred to the Debenture Redemption Reserve pursuant to the statutory requirement contained in section 71(4) of the Companies Act, 2013 for the purpose of redemption of debentures. Such amount was appropriated out of the profits of the relevant previous year and was reflected in the audited financial statements of the assessee. The Ld. CIT(A), after examining the books of account and financial statements, has recorded a categorical finding that the provision was created by debit to the Profit & Loss Account while appropriating the profits of the year. The Revenue has not brought any material before us to controvert this factual finding.

15.2 We further find that the controversy is no longer res integra. The Hon’ble Supreme Court in National Rayon Corpn. Ltd. (supra) has authoritatively held that the liability towards redemption of debentures is a known and existing liability and that any amount set apart for meeting such liability cannot be regarded as a reserve. Following the aforesaid decision, the Hon’ble Bombay High Court in Raymond Ltd. (supra), while dealing with the provisions of section 115JA, held that a Debenture Redemption Reserve is not a reserve within the meaning of the Explanation to the MAT provisions since it merely represents an amount retained for meeting a known liability. The same principle has thereafter been followed by the Coordinate Bench of the Ahmedabad Tribunal in ACIT v. Genus Electrotech Ltd. (supra) while interpreting section 115JB of the Act. Respectfully following the aforesaid binding precedents, we are of the considered view that the amount transferred to Debenture Redemption Reserve represents a provision for an ascertained liability and cannot be treated as a reserve for the purpose of computation of book profit under section 115JB.

15.3 We also find merit in the finding recorded by the Ld. CIT(A) that the Assessing Officer proceeded on an erroneous factual premise that no debit had been made to the Profit & Loss Account. The material on record clearly demonstrates that the amount stood appropriated out of the profits of the relevant year and the manner in which the claim came to be reflected in the return of income was merely on account of the structural limitations of the prescribed ITR utility. It is well settled that a substantive claim otherwise allowable under the Act cannot be denied merely because of an inadvertent or procedural manner in which it has been presented in the return of income, particularly when all the relevant facts are available on record and the claim is otherwise in accordance with law.

15.4 In view of the foregoing discussion, we find ourselves in complete agreement with the well-reasoned findings recorded by the Ld. CIT(A). We accordingly uphold the order of the Ld. CIT(A) directing re-computation of the book profit under section 115JB of the Act.

Ground No.3 raised by the Revenue is accordingly dismissed.

16. In the result, the appeal of the assessee is allowed, while the appeal of the Revenue is dismissed with above directions.