2011 (8) TMI 763 - AT - Income Tax

Disallowance u/s 14A - Rule 8D of the I. T. Rules - assessee was engaged in the business of Civil Engineering construction, deployment of personnel and transportation work and filed the return of income on 30/11/2006 declaring net income of Rs. 9,45,72,136 - it would be clear that the mandate of Section 14A is to prevent claims for deduction of expenditure in relation to income which does not form part of the total income of the assessee - Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (2010 (8) TMI 77 - BOMBAY HIGH COURT), the provisions of Rule 8D are applicable prospectively and not retrospectively - since the AO applied the provisions contained in Rule 8D, which are applicable with effect from A.Y. 2008-09, while the assessment year involved in this case is 2006-07 - Decided in favor of the assessee by way of remand Regarding disallowance u/s 40(a)(ia) - TDS u/s 194C - assessee is a limited company engaged in the business of Civil Engineering construction, limestone mines and real estate etc - Hire charges - in the present case, the lender neither had any work obligation nor any command, control and possession of the machines after they were temporarily handed over to the assessee on hire basis - it is clear that the said provisions are applicable when the contract is entered into (i) for carrying out any work and (ii) supply of labour to carry out any work - Held that assessee took the machinery and equipment on hire for carrying out the specific work so the hiring of machinery and equipment did not amount to contract for carrying out any work as contemplated in section 194C of the Act as per the ratio laid down by the Hon ble Madras High Court in the aforesaid referred to case - Circular No. 681 dated 08/03/94 - the provisions of section 194-I of the Act are also not applicable to the facts of the present case. - Decided in favor of the assessee Regarding prior period expenses - the vendor asked for the payment against the said bill during the year under consideration - the liability was ascertained and crystallised during the year under consideration - Held that it was allowable for deduction in the year relevant to the assessment year under consideration - Appeal is allowed for statistical purpose

Issues Involved:
1. Confirmation of disallowance under Section 14A read with Rule 8D.
2. Deletion of disallowance under Section 40(a)(ia) read with Section 194C.
3. Deletion of disallowance of prior year expenses.

Issue-Wise Detailed Analysis:

1. Confirmation of Disallowance under Section 14A read with Rule 8D:

The primary issue raised by the assessee was the confirmation of disallowance of Rs. 28,09,104 made by the Assessing Officer (AO) under Section 14A of the Income Tax Act, 1961, read with Rule 8D of the Income Tax Rules, 1962. The assessee argued that Rule 8D was not applicable for the assessment year 2006-07 and contended that the AO did not provide valid reasons for not being satisfied with the correctness of the assessee's claim regarding the expenditure related to dividend income. The assessee further argued that the investments were mostly in group concerns, and no significant expenses were incurred in relation to dividend income.

The CIT(A) upheld the AO's decision, stating that the AO had correctly applied Rule 8D, as the AO was not satisfied with the assessee's claim. The Tribunal, however, noted that Rule 8D was applicable prospectively from the assessment year 2008-09, as per the Bombay High Court's judgment in the case of Godrej & Boyce Mfg. Co. Ltd. Consequently, the Tribunal remanded the issue back to the AO for fresh adjudication, directing the AO to compute the disallowance by applying a reasonable method considering the facts and circumstances of the case.

2. Deletion of Disallowance under Section 40(a)(ia) read with Section 194C:

The Department contested the CIT(A)'s decision to delete the disallowance of Rs. 13,32,39,725 made by the AO under Section 40(a)(ia) for non-deduction of tax at source under Section 194C. The AO had disallowed the amount, arguing that the payments made by the assessee to M/s Jai Prakash Associates Ltd. for hiring machinery and equipment were subject to TDS under Section 194C, as the contract involved the supply of labour and maintenance services.

The CIT(A) disagreed, stating that the contract was purely for hiring machinery and equipment, and the provision of drivers, operators, and maintenance was incidental and subservient to the hiring of machinery. The CIT(A) concluded that the provisions of Section 194C were not applicable, as there was no contract for carrying out any work or supply of labour. The Tribunal upheld the CIT(A)'s decision, noting that the contract was for hiring machinery and not for carrying out any work as defined under Section 194C. The Tribunal also pointed out that the provisions of Section 194-I, which were invoked by the AO, were not applicable for the relevant assessment year as the definition of "rent" to include machinery or equipment was effective from 13th July 2006, after the end of the relevant financial year.

3. Deletion of Disallowance of Prior Year Expenses:

The Department also challenged the deletion of the disallowance of Rs. 10,42,895 made by the AO for prior year expenses. The AO had disallowed the amount, arguing that the expense pertained to the financial year 2002-2003 and should not be allowed in the current year. The assessee explained that the bill from M/s Punjab Distributor was lost in transit and was only received and accepted in the current financial year, thus crystallizing the liability in the current year.

The CIT(A) accepted the assessee's explanation, stating that in the mercantile system of accounting, expenses are booked when they accrue, which happens when the liability crystallizes. The CIT(A) cited relevant case laws to support this view and deleted the disallowance. The Tribunal upheld the CIT(A)'s decision, noting that the liability was ascertained and crystallized in the current financial year, making it allowable for deduction in the year relevant to the assessment year under consideration.

Conclusion:

The Tribunal allowed the appeal of the assessee for statistical purposes, remanding the issue of disallowance under Section 14A back to the AO for fresh adjudication. The Tribunal dismissed the Department's appeal, upholding the CIT(A)'s decisions on the deletion of disallowances under Section 40(a)(ia) and for prior year expenses.

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