2014 (10) TMI 154 - AT - Income Tax

Addition u/s 14A on indirect expenses for earning exempt income Held that - As decided in assessee s own case for the earlier assessment year, it has been held that the major investment of the assessee is in its group companies - CIT(A) has restricted the disallowance to ₹ 1. 87 lakhs there is no reason to interfere with the findings of the CIT(A) Decided in favour of assessee. Provision made u/s 40(a)(ia) disallowed Held that - The AO had invoked the provisions of section 40(a)(ia), though he has also discussed the principles of contingent liability, while making the disallowance - FAA has passed a non-speaking order and just endorsed the views of the AO but he was also of the opinion that provisions of section 40(a)(ia) were applicable - assessee had specifically mentioned during the assessment proceedings, that it had not received the bills under various heads, that provisions of tax deducting at source were not applicable for the provisions made Relying upon Mahindra & Mahindra Limited, Versus The Deputy Commissioner of Income Tax, 2(2) 2013 (9) TMI 522 - ITAT, MUMBAI - TDS provisions were not applicable for the provisions made at the year-end - the assessee had made provisions but had not received the bills, that in the subsequent year the provisions made by it were offered for taxation Decided in favour of assessee. Provision made for leave salary disallowed u/s 43B(f) Held that - As it has been decided in assessee s own case for the earlier assessment year, following the decision in Srikakollu Subba Rao And Co. And Others Versus Union Of India And Others (and Other Writ Petitions) 1988 (3) TMI 46 - ANDHRA PRADESH High Court - in order to apply the provisions of Sec. 43B not only should be the liability to pay the tax or duty be incurred in the accounting year but also should be statutorily payable in the accounting year - the provision for leave salary is not a statutory liability but only a contractual liability which is payable only if the employees resigns or retired from the services Decided in favour of assessee. Allocation of Head Office expenses Claim of deduction u/s 80IA Held that - As it has been decided in assessee s own case for the earlier assessment year, following the decision in M/s. Procter & Gamble Hygiene and Health Care Limited Versus DCIT/ACIT Cir. 7(1), Mumbai 2013 (3) TMI 195 - ITAT MUMBAI the AO is directed not to reduce the claim of deduction u/s. 80IB of the Act by allocating Head Office expenses to profits derived from eligible units Decided in favour of assessee. Deduction in exemption u/s. 10B - allocation of head office expenses/expense of other division and interest income earned by 100% EOU under normal income and MAT provisions Held that - As it has been decided in assessee s own case for the earlier assessment year, the issue of interest income earned by the 100% EOU and allocation of head office expenses of other division have been decided in favour of the assessee-company Decided in favour of assessee. Depreciation on goodwill on acquisition made ongoing concern basis Held that - As it has been decided in assessee s own case for the earlier assessment year, that the AO be directed to allow the depreciation on goodwill and to reduce the total income accordingly Decided in favour of assessee. Adjustment on carry forward losses not allowed Held that - The assessee had made the claim of carry forward of unabsorbed depreciation of the amalgamated company during the assessment proceedings, that in the return such claim was not made, that the FAA had decided the issue against the assessee as he was of the opinion that all the claims of deductions/exemption/set off should be made in the original return only the matter is remitted back to the AO for fresh adjudication in light of the decisions of Commissioner of Income Tax. Central-I Versus M/s. Pruthvi Brokers & Shareholders Pvt. Ltd. 2012 (7) TMI 158 - BOMBAY HIGH COURT Decided in favour of assessee. Allowabilty of MAT credit Held that - The assessee had failed to follow the directions of the FAA - But, that does not take away his rightful claim of adjustment of tax credit - By not getting credit for so many years it has been sufficiently penalised for disregarding the orders of the FAA - AO, as the representative of the State has a duty towards the tax payers also and that is only due income should be taxed and only due amount of tax should be collected thus, the matter is remitted back to the AO for verification of the claim made by the assessee - Decided partly in favour of assessee. Unutilised Modvat Credit in closing Stock Held that - Following the decision in Commissioner of Income-Tax Versus Indo Nippon Chemicals Co. Ltd. 2003 (1) TMI 8 - SUPREME Court - the Modvat credit could not be added back to the income of the assessee. - that merely because the Modvat credit was an irreversible credit available to manufacturers upon purchase of duty-paid raw material, that would not amount to income which was liable to be taxed under the Act - income was not generated to the extent of the Modvat credit on unconsumed raw material - it was not permissible for the AO to adopt the gross method for valuation of raw materials at the time of purchase and the net method for valuation of stock on hand Decided against revenue.

Summary

Issues Involved:
1. Rule 8D and Section 14A disallowance
2. Disallowance under Section 40(a)(ia)
3. CENVAT credit and opening stock adjustment
4. Disallowance under Section 43B(f) for leave salary
5. Deduction under Section 80IA and allocation of Head Office expenses
6. Depreciation on goodwill
7. Deduction under Section 36(1)(ii) for interest on loans
8. Adjustment of carry forward loss of Birla Global Finance Limited
9. Interest charged under Section 234C
10. Interest charged under Section 234D
11. MAT credit set off
12. Penalty proceedings under Section 271(1)(C)

Issue-wise Detailed Analysis:

1. Rule 8D and Section 14A Disallowance:
The first ground of appeal concerns the addition of Rs. 85.47 Lakhs made under Section 14A of the Act towards indirect expenses incurred for earning exempt income. The AO invoked Section 14A r.w. Rule 8D, making a disallowance of Rs. 5.9386 Crores. The FAA restricted the disallowance to Rs. 85.47 Lakhs based on previous years' decisions. The Tribunal, following its earlier orders, decided in favor of the assessee, noting that similar issues had been resolved in the assessee's favor in previous assessment years.

2. Disallowance under Section 40(a)(ia):
The second issue pertains to the disallowance of Rs. 3.42 Crores under Section 40(a)(ia) for provisions made at the year-end. The AO found that the assessee had not deducted TDS on estimated expenses. The FAA upheld the AO's order without providing detailed reasoning. The Tribunal, referencing previous cases (Industrial Development Banking Company and Mahindra & Mahindra Ltd.), held that TDS provisions were not applicable for year-end provisions and decided in favor of the assessee.

3. CENVAT Credit and Opening Stock Adjustment:
The AO's appeal focused on the deletion of unutilized Modvat Credit in closing stock amounting to Rs. 6.57 Crores. The Tribunal, referencing its earlier decisions and the Supreme Court's ruling in Indo Nippon Chemicals Co. Ltd., decided against the AO, stating that the Modvat credit should not be added back to the income of the assessee.

4. Disallowance under Section 43B(f) for Leave Salary:
The fourth ground deals with the disallowance of Rs. 1.73 Crores under Section 43B(f) for leave salary provisions. The Tribunal, following its decisions in earlier years and the Supreme Court's ruling in Bharat Earth Movers, decided in favor of the assessee, stating that the provision for leave salary is not a statutory liability but a contractual one.

5. Deduction under Section 80IA and Allocation of Head Office Expenses:
The fifth issue concerns the reduction of deduction amounting to Rs. 31.32 Lakhs on account of allocation of Head Office expenses. The AO apportioned HO expenses to the eligible units, reducing the deduction under Section 80IA. The FAA upheld this decision. The Tribunal, referencing its earlier decisions, decided in favor of the assessee, stating that HO expenses should not be allocated to the eligible units for deduction purposes.

6. Depreciation on Goodwill:
The sixth ground involves the disallowance of depreciation on goodwill acquired from Madura Garments Division. The Tribunal, following its earlier decisions, directed the AO to allow the claim of depreciation on goodwill, deciding in favor of the assessee.

7. Deduction under Section 36(1)(ii) for Interest on Loans:
This issue was dismissed as infructuous by the Tribunal during the course of the hearing.

8. Adjustment of Carry Forward Loss of Birla Global Finance Limited:
The eighth ground pertains to the non-adjustment of carry forward loss of Rs. 1.39 Crores of erstwhile Birla Global Finance Limited. The FAA rejected the claim as it was not made in the original return. The Tribunal, referencing the Bombay High Court's decision in Pruthvi Brokers and Shareholders P. Ltd., remitted the matter back to the FAA for reconsideration, allowing the assessee to make the claim during assessment proceedings.

9. Interest Charged under Section 234C:
This issue was dismissed as infructuous by the Tribunal during the course of the hearing.

10. Interest Charged under Section 234D:
This issue was dismissed as infructuous by the Tribunal during the course of the hearing.

11. MAT Credit Set Off:
The eleventh ground concerns the non-adjudication of MAT credit set off. The FAA directed the assessee to file an application under Section 154, which was not done. The Tribunal remitted the issue back to the AO for verification and adjustment of MAT credit, if allowable by law.

12. Penalty Proceedings under Section 271(1)(C):
This issue was dismissed as premature by the Tribunal during the course of the hearing.

Conclusion:
The Tribunal partly allowed the appeal filed by the assessee and dismissed the appeal of the AO. The significant rulings included decisions in favor of the assessee for disallowances under Sections 14A, 40(a)(ia), 43B(f), and 80IA, as well as depreciation on goodwill and adjustment of carry forward losses. The Tribunal also remitted the MAT credit set off issue back to the AO for verification.