2017 (3) TMI 1309 - AT - Income Tax

Addition u/s 14A - Held that - We direct the ld. AO to consider disallowance in terms of Rule 8D(2)(iii) of the I.T Rules by considering only those investments, which had yielded dividend income. Hence, the ground raised by the revenue is partly allowed.

Issues Involved:
1. Allowance of relief made on account of provisions for leave encashment.
2. Restriction of disallowance made under Section 14A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Allowance of Relief Made on Account of Provisions for Leave Encashment:

The primary issue revolves around the disallowance of ?26,83,073 under Section 43B of the Income Tax Act by the Assessing Officer (AO). The AO's disallowance was influenced by an ongoing Special Leave Petition (SLP) before the Supreme Court concerning the case of Exide Industries Ltd. The Commissioner of Income Tax (Appeals) [CIT-A] directed the AO to pass an appropriate order considering the Supreme Court's decision in the Exide Industries Ltd. case. The CIT-A noted that the Calcutta High Court had previously struck down Clause (f) of Section 43B as ultra vires, a decision followed by other high courts and ITAT benches. However, the Supreme Court stayed the Calcutta High Court's decision and directed the payment of the tax demand. Consequently, the CIT-A instructed the AO to await the Supreme Court's final decision before confirming or allowing the relief.

During the hearing, the Revenue supported the AO's disallowance, while the Assessee suggested restoring the issue to the AO pending the Supreme Court's decision. The Tribunal acknowledged the similarity with a previous case where the issue was remanded to the AO with instructions to await the Supreme Court's final decision. Consequently, the Tribunal remanded the issue to the AO to decide in accordance with the Supreme Court's judgment in the Exide Industries Ltd. case, allowing Ground No. 1 for statistical purposes.

2. Restriction of Disallowance Made Under Section 14A of the Income Tax Act:

The second issue concerns the disallowance under Section 14A of the Income Tax Act, restricted to ?1,51,764 by the CIT-A. The AO had initially computed a disallowance of ?13,76,000 under Rule 8D(iii) of the Income Tax Rules, which the Assessee contested, arguing that the investments were made from its own funds and did not incur significant expenses for earning the dividend income.

The CIT-A observed that the AO failed to establish a real and proximate nexus between the expenses and the dividend earned. The CIT-A noted that the Assessee's investments were substantial, made from its own funds, and the dividend was credited directly through ECS, requiring minimal expenditure. The CIT-A emphasized that disallowance under Section 14A must have a real, rational, and proximate nexus with the earning of tax-free income, which the AO did not establish. Consequently, the CIT-A deleted the additional disallowance of ?13,76,000.

During the Tribunal hearing, the Revenue relied on the AO's order, while the Assessee cited a Tribunal decision in a similar case, arguing that disallowance should only consider investments yielding dividend income. The Tribunal agreed, directing the AO to consider only those investments that yielded dividend income for disallowance under Rule 8D(2)(iii). Thus, Ground No. 2 raised by the Revenue was partly allowed.

Conclusion:

The Tribunal partly allowed the appeal filed by the Revenue for statistical purposes, remanding the issue of leave encashment provisions to the AO pending the Supreme Court's decision and directing the AO to reconsider the disallowance under Section 14A by focusing on investments yielding dividend income. The order was pronounced in the open court on 22-03-2017.

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