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2017 (2) TMI 1290 - AT - Income TaxDisallowance u/s 14A - Held that - CIT(A) has rightly given a finding that the investment in units of UTR was made in the earlier years and all that it had to do for earning the dividend was to deposit the cheque. This does not require the assessee to incur expenditure, the assessee s contention that Section 14A does not envisage disallowance to any ad-hoc or an estimated expenditure. It is only en expenditure actually incurred for earning an income exempt from tax that would be disallowed u/s 14A. CIT(A) has rightly relied on the order of Hon ble Delhi High Court in case of CIT Vs. Chemical & Metalogical Design Company Ltd 2008 (7) TMI 1005 - DELHI HIGH COURT wherein it is held that making a proportionate disallowance of expenses on estimated basis could not be sustained under Section 14A of the act. Thus, the CIT (A) has rightly deleted the said addition. Long term capital loss on sale of 1140 units of VECAUS-II 1990 - Held that - CIT(A) s finding is correct that the Assessing Officer fail to take into account the indexed cost of acquisition for Assessment Year 1990-91 and also the fact that the same pertaining to 1140 units. This is supported by the notes attached to the return of income and computation of capital gains for the year under appeal. Addition on account of change in method of valuation of closing stock applying provisions of Section 145A - Held that - the assessee has adopted method of valuation of closing stock which is most suitable to the GNF Unit also method has been changed to weighted average cost method in line with other units so that the principle of consistency could be followed among all the units. In-fact, the Assessing Officer s addition on account of change in method of valuation of closing stock applying provisions of Section 145A does not come in consistence with the proper change of method of accounting, without this fact it could not have been possible to implement the ARP Software for accounting, the said reason is not disputed by the Assessing Officer either in the order or in the remand report. The CIT(A) (A) has rightly deleted this addition. Addition of interest paid by the assessee being 10% of the sum advanced by the assessee to its subsidiary company in an earlier year - Held that - This amount was paid by the assessee to its subsidiary company Kelbex International Ltd, which was no longer an operating company being under liquidation, to meet its statutory expenses such as filing fee and audit fee, etc. The assessee had enough funds of its own to advance this money in the year when it was paid. The A.O nowhere suggested that the assessee used any interest bearing loan funds to make this payment. Thus, the CIT(A) rightly agreed with the assessee s contentions and followed the decision of the Delhi High Court in the case of CIT vs. Tin Box Co. 2002 (11) TMI 75 - DELHI High Court by directing deletion of disallowance disallowance of contribution to PF as paid belated - Held that - Though the contribution to PF & ESIC were paid during the previous year, the presented amounts paid beyond the relevant due dates of the respective months. In view of the amendment of the first provision of Section 43 (B) deletion of the second proviso by Finance Act, 2003 any payment on account of PF etc if made before the due date for filing return would not be hit by Section 43(B). The reliance on the judgment of Delhi ITAT in case of ACIT Vs. M/s Vestas RRB India Ltd. 2004 (5) TMI 245 - ITAT DELHI-C is rightly taken into account by CIT(A). This ground is dismissed. Disallowance of provision for Warranty and Optional Service Contract (OSC) - Held that - Assessing Officer observation that the provision on the basis of acturual valuation certificate could not be allowed due to over statement of book loss on account of change in the method of accounting for the year under consideration. The decisions cited provides the proposition that provision for warranty was for a definite and ascertain liability and the same could not be disallowed as contingent liability. In-fact in the immediate preceding year i.e. Assessment Year 2000-01 similar disallowance made by the Assessing Officer was deleted in appeal by the CIT(A) and in A.Y. 1993-94 by the ITAT. There is no interference required in the order of the CIT(A) as related to this ground. Disallowance of lease rentals - Held that - A.O did not take into account the accounting of the sale proceeds in the year ended 31/3/2000 and also the interest factor for the period of 51 months. Lease financing through sale cum lease back transactions have been in practice for quite some time and if it is only when the existence of assets itself is in doubt or when an asset subject matter of transfer actually from a physical part of another larger asset or such sham transaction takes place that the revenue can rightly object to the arrangements. in the present case, there was no doubt about existence of the assets, the sale proceeds and consequent short term capital gains were duly assessed in Assessment Year 2000-01, and the transaction entitled the assessee to the use of the sale proceeds at a cost lower than borrowing through debentures. The CIT(A) has rightly deleted the same. This ground is dismissed.
Issues Involved:
1. Disallowance of expenditure incurred in earning dividend income. 2. Computation of capital gain on sale of units. 3. Valuation of closing stock. 4. Disallowance of interest paid. 5. Disallowance of ESI & PF contributions. 6. Disallowance of provision for warranty and optional service contracts. 7. Disallowance of lease rentals. Issue-wise Detailed Analysis: 1. Disallowance of Expenditure Incurred in Earning Dividend Income: The CIT(A) deleted the disallowance of ?1,00,000/- made by the Assessing Officer (A.O) under Section 14A of the Act. The CIT(A) relied on the ITAT and Delhi High Court rulings, which held that making a proportionate disallowance of expenses on an estimated basis could not be sustained under Section 14A. The Tribunal upheld this view, stating that the investment in units of UTI was made in earlier years and did not require substantial expenditure to earn the dividend. Therefore, the disallowance was deemed arbitrary and deleted. 2. Computation of Capital Gain on Sale of Units: The CIT(A) directed the A.O to grant relief to the assessee after verifying the computation of capital gain of ?2,08,210/- in respect of the sale of units of VECAUS-II (1990). The Tribunal upheld this direction, noting that the A.O failed to consider the indexed cost of acquisition and the correct number of units sold. Consequently, the addition of ?48,35,989/- on account of valuation of closing stock was also deleted. 3. Valuation of Closing Stock: The CIT(A) deleted the addition of ?48,35,989/- made by the A.O on account of change in the method of valuation of closing stock. The assessee had switched to the weighted average cost method for consistency across all units. The Tribunal upheld this deletion, stating that the change in method was justified and necessary for implementing the ARP Software for accounting. The addition under Section 145A was not consistent with the proper change of method of accounting. 4. Disallowance of Interest Paid: The CIT(A) deleted the disallowance of ?53,500/- out of interest paid by the assessee. The A.O had disallowed this amount, assuming it was paid out of interest-bearing funds. However, the CIT(A) found no evidence that the assessee used interest-bearing loan funds for this payment. The Tribunal upheld this deletion, agreeing that the payment to the subsidiary was for statutory expenses and was not made from borrowed funds. 5. Disallowance of ESI & PF Contributions: The CIT(A) directed the A.O to delete the disallowance of ?20,13,907/- made on account of late payment of PF and ESI contributions. The Tribunal upheld this direction, noting that any payment made before the due date for filing the return would not be hit by Section 43(B) as per the amended provisions. The reliance on the Delhi ITAT judgment in ACIT Vs. M/s Vestas RRB India Ltd. was deemed appropriate. 6. Disallowance of Provision for Warranty and Optional Service Contracts: The CIT(A) deleted the disallowance of ?3,72,03,000/- made by the A.O for provision for warranty and optional service contracts. The Tribunal upheld this deletion, stating that the provision was for a definite and ascertainable liability and could not be disallowed as a contingent liability. This was consistent with the decisions in the assessee's own case for previous years. 7. Disallowance of Lease Rentals: The CIT(A) deleted the disallowance of ?1,42,53,143/- out of lease rentals. The assessee had sold computers to L&T Finance Ltd. and entered into a lease agreement. The A.O disallowed part of the lease rentals, considering the transaction a colorable device. The Tribunal upheld the CIT(A)'s deletion, noting that the transaction was genuine and the sale proceeds were duly assessed in the previous year. The lease agreement was a means of arranging finance at a lower cost. Conclusion: Both appeals of the Revenue were dismissed. The Tribunal upheld the CIT(A)'s decisions on all grounds, providing relief to the assessee on issues related to disallowances and valuation of stock. The judgments were pronounced in the Open Court on 20th February 2017.
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