2011 (4) TMI 1283 - AT - Income Tax

Disallowance for provision of leave encashment u/s 043(f) - HELD THAT - the AO observed in assessment order that the assessee has made a provision for leave encashment for a total sum of ₹ 35,10,455/-, which included liability on account of earlier Optical Fiber Goal Ltd., which merged with the company with a scheme of merger as approved by the Court. In appeal, the CIT(A) confirmed the action of the AO. we find that this issue is squarely covered in favour of the assessee by the decision of Hon ble Calcutta High Court in the case of Exide Industries Ltd. Vs. Union of India 2007 (6) TMI 175 - CALCUTTA HIGH COURT . Disallowance u/s 014A by invoking rule 008D of the I. T. Rules, 1962 - In Present case, we find that the assessee earned a sum of ₹ 5,31,095/- as dividend income and claimed that it did not have incurred any expense for earning such dividend income. The lower authorities following the decision of Special Bench, ITAT in the case of Daga Capital Management Pvt. Ltd. 2008 (10) TMI 383 - ITAT MUMBAI disallowed the sum of ₹ 15,01,665/- on estimate basis as inadmissible deduction from business income u/s. 014A of the Act r.w. r 008D of the I. T. Rules. In view of facts of this case and the principle laid down by Hon ble Bombay High Court in the case of Godrej Boycee Mfg. Co. Ltd., 2010 (8) TMI 77 - BOMBAY HIGH COURT that Rule 008D is applicable for and from assessment year 2008-09 and prior to that the Assessing Officer can make estimate in the given facts and circumstances. Hence, we restrict the disallowance to 1% of dividend income and direct the Assessing Officer to calculate the expenditure on that basis. This ground of assessee s appeal is partly allowed. In the result, the appeal of the assessee is partly allowed as indicated above.

Summary

Issues:
1. Disallowance of provision for leave liability under section 43B of the Income Tax Act, 1961.
2. Disallowance of expenses under section 14A by invoking rule 8D of the Income Tax Rules, 1962.

Issue 1: Disallowance of provision for leave liability under section 43B:
The first issue pertains to the disallowance of provision for leave liability under section 43B of the Income Tax Act, 1961. The Assessing Officer disallowed a provision for leave encashment made by the assessee, which the CIT(A) confirmed. However, the ITAT Kolkata found that the issue was covered in favor of the assessee by a decision of the Hon'ble Calcutta High Court in the case of Exide Industries Ltd. vs. Union of India. The High Court held that leave encashment is not a statutory or contingent liability but a provision for an employee's entitlement earned in a financial year. The ITAT allowed the appeal based on this decision, stating that the provision need not be disallowed under section 43B(f) of the Act.

Issue 2: Disallowance of expenses under section 14A by invoking rule 8D:
The second issue concerns the disallowance of expenses under section 14A by invoking rule 8D of the Income Tax Rules, 1962. The Assessing Officer disallowed an amount as inadmissible deduction from business income based on an estimate for earning dividend income. The CIT(A) upheld this disallowance. However, the ITAT Kolkata referred to the principle laid down by the Hon'ble Bombay High Court in the case of Godrej Boycee Mfg. Co. Ltd. vs. DCIT. The High Court emphasized that Rule 8D applies from the assessment year 2008-09, and prior to that, the Assessing Officer must determine expenses incurred in relation to income not forming part of the total income. The ITAT Kolkata restricted the disallowance to 1% of dividend income, directing the Assessing Officer to calculate the expenditure on that basis. Consequently, the ITAT partly allowed the appeal of the assessee on this issue.

In conclusion, the ITAT Kolkata partially allowed the assessee's appeal regarding both issues, citing relevant legal precedents and interpretations of the Income Tax Act and Rules. The judgment provides clarity on the treatment of leave liability provisions and expenses related to dividend income, ensuring compliance with the statutory provisions and judicial decisions.