2012 (8) TMI 555 - AT - Income Tax

Dis-allowance of amount transferred to Statutory Reserve and amount transferred to Reserve Fund while computing normal provisions and also while computing the book profits u/s 115JB - Held that - Tribunal in assessment of earlier year held that the amount involved is only an appropriation out of company s own profits, which have not yet been specified, before declaration of dividend. The amount has very much reached and is in the business of the assessee. No obligation is attached and even if some obligation is subsequently attached for specific appropriation of the fund, it will only be an application of income. It cannot be said that there was any diversion of income by overriding title nor can the amount set apart be claimed as expenditure and it also cannot be stated that it was a loss. Dis-allowance both under regular computation and while computing the book profit u/s 115JB is upheld - Decided against assessee Dis-allowance u/s 14A under the normal provisions as well as while computing book profit u/s 115JB - Held that - It is a condition precedent for the AO while determining amount of expenditure incurred in relation to exempt income to record his dissatisfaction with the correctness of the claim of the assessee in respect of the expenditure incurred in relation to exempt income. See Maxopp Investment Ltd (2011 (11) TMI 267 - DELHI HIGH COURT ). In present case, AO has not given any finding as to how the calculation was made by the assessee and disallowing the same in its computation of income towards expenditure incurred in relation to income, which does not form part of total income is incorrect. Therefore, we delete the dis-allowance made u/s 14A while computing income both under normal provisions as well as under the provisions of section 115JB - Decided in favor of assessee

Issues Involved:
1. Disallowance of amount transferred to Statutory Reserve.
2. Disallowance of amount transferred to Reserve Fund.
3. Application of Rule 8D of Income Tax Rules in computing disallowance under Section 14A of the Income Tax Act.
4. Computation of income under Section 115JB of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Amount Transferred to Statutory Reserve:
The Tribunal addressed the issue of disallowance of amounts transferred to Statutory Reserve in compliance with mandatory provisions of the Reserve Bank of India (RBI). The counsel for the assessee conceded that this issue had been decided against the assessee in prior cases, including Shriram Transport Finance Company Ltd. The Tribunal noted that the amount transferred to the Statutory Reserve is an appropriation of profits and not a diversion of income by overriding charge. Citing previous judgments, the Tribunal upheld the disallowance, reiterating that the transfer to Reserve Fund is not deductible as it is not an expenditure or loss but an appropriation of profits.

2. Disallowance of Amount Transferred to Reserve Fund:
Similar to the Statutory Reserve, the Tribunal dismissed the claim for deduction of amounts transferred to the Reserve Fund. The Tribunal referenced its earlier decisions where it was held that such transfers are appropriations of profits and do not constitute allowable deductions. The Tribunal emphasized that the Reserve Bank of India does not mandate specific utilization of these funds, further supporting the position that these transfers do not qualify as deductible expenses.

3. Application of Rule 8D in Computing Disallowance under Section 14A:
The Tribunal examined the application of Rule 8D for disallowing expenses related to income exempt under the Income Tax Act. The Assessing Officer had disallowed additional amounts by applying Rule 8D, but the Tribunal found that the Assessing Officer did not provide adequate justification or dissatisfaction with the assessee's own disallowance calculations. The Tribunal highlighted the necessity for the Assessing Officer to record dissatisfaction with the correctness of the assessee's claim before invoking Rule 8D, as mandated by Section 14A(2). The Tribunal cited the Delhi High Court's decision in MAXOPP Investment Ltd. and the Tribunal's own decisions in similar cases, which required a clear finding of incurring expenditure related to exempt income before making disallowances.

4. Computation of Income under Section 115JB:
The Tribunal also addressed the computation of book profits under Section 115JB of the Income Tax Act. It was noted that the issues regarding the disallowance of amounts transferred to Statutory Reserve and Reserve Fund, as well as the application of Rule 8D, were relevant under both the regular provisions and the book profit computation under Section 115JB. The Tribunal reiterated that without a clear finding of dissatisfaction by the Assessing Officer, the additional disallowances under Section 14A read with Rule 8D were not justified. Consequently, the Tribunal deleted the disallowances made under Section 14A for computing income under both regular provisions and Section 115JB.

Conclusion:
The Tribunal dismissed the appeals concerning the disallowance of amounts transferred to Statutory Reserve and Reserve Fund, upholding the previous decisions that these transfers are appropriations of profits and not deductible expenses. However, the Tribunal allowed the appeals related to the disallowance under Section 14A read with Rule 8D, emphasizing the necessity for the Assessing Officer to record dissatisfaction with the assessee's claims before making additional disallowances. The Tribunal's decision resulted in partial relief for the assessees by deleting the disallowances made under Section 14A while computing income under both regular provisions and Section 115JB.

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