2017 (1) TMI 1397 - AT - Income Tax

Addition made on account of capitalisation in respect of contract awarded to Gremach Infrastructure Equipments and Projects Ltd.(GIEPL) - Held that - Without establishing the basic fact that the assessee had claimed the expenditure, the AO had made the disallowance. The expenditure was incurred by an erstwhile entity namely JSWERL and certain discrepancies were noticed about the transaction. So, if any disallowance was to be made, it should have been in the hands of that assessee or it should have been in the case of successor of JSWERL. The FAA has given a categorical finding of fact that before the amalgamation with JSWERL, the assessee had no connection with that entity, that expenditure was claimed by that company and was disallowed by the AO of that company while completing the assessment for the AY.s 2008-09 and 2009-10,that the AO had wrongly disallowed the expenditure in the hands of the assessee. Thus, there was no justification for making any addition in the case of the assessee - Decided in favour of assessee Disallowance, made u/s.14A - Held that - We find that the assessee had not earned any exempt income for the year under consideration, that it had made the disallowance of ₹ 13.59 lakhs on its own, while filing the return of income, that the AO had made for the disallowance under the heads interest expenditure and administrative expenditure, that the AO had not given any reason for rejecting the claim made by the assessee. It is a settled principle that disallowance u/s.14A could be made, only if the assessee claims expenditure against the exempt income. Therefore, we do not see any infirmity in the order of the FAA. Confirming the same, we decide second ground against the AO.

Summary

Issues:
1. Addition made on account of capitalization of expenditure related to a contract.
2. Disallowance under section 14A of the Income-tax Act.

Analysis:

Issue 1: Addition made on account of capitalization of expenditure related to a contract:
The Assessing Officer (AO) made an addition on account of capitalization of expenditure amounting to ?68.15 lakhs related to a contract awarded to a company. The AO observed that the claimed expenditure could not be allowed as no work had been executed by the company in respect of the contract awarded. The assessee argued that the expenditure was incurred by a subsidiary company that later merged with the assessee, and the expenditure was included in the capital work in progress. The First Appellate Authority (FAA) found that the expenditure was claimed and disallowed in the hands of the subsidiary company, not the assessee. The Tribunal upheld the FAA's decision, stating that the AO failed to establish that the assessee had claimed the expenditure, and the disallowance should have been made in the hands of the subsidiary or its successor. Therefore, the first ground of appeal was decided against the AO.

Issue 2: Disallowance under section 14A of the Income-tax Act:
The AO disallowed an amount under section 14A of the Act, which the assessee had voluntarily disallowed in its return of income. However, the AO enhanced the disallowance without providing reasons for rejecting the assessee's claim. The FAA directed the AO to restrict the disallowance to the amount identified and disallowed by the assessee. The Tribunal noted that the assessee had not earned any exempt income during the year, and the disallowance made by the assessee itself was valid. As per the principle, disallowance under section 14A can only be made if the assessee claims expenditure against exempt income. Therefore, the Tribunal confirmed the FAA's order and decided the second ground against the AO.

In conclusion, the appeal filed by the Assessing Officer was dismissed, and the Tribunal upheld the decisions of the First Appellate Authority in both issues.