2018 (6) TMI 1522 - AT - Income Tax

Addition as Prior Period Expenses - Held that - Undisputedly, the assessee company has been following mercantile system of accounting, which is allowable only when the liability to pay the same stands crystallized. Moreover, when the assessee has not claimed the expenses in question while computing the total income, the same cannot be disallowed by the AO. So, when the assessee has not claimed deduction on account of prior period expenses, the same cannot be disallowed by the AO, hence, Ld. CIT(A) has rightly deleted the same. - Decided against the Revenue. Addition on account of School Running Expenses - Held that - When we examine school running expenses, in the light of the global concept of business it includes care and concern for the society at large, particularly for the people of the locality where business is located. Moreover, AO has not disputed the genuineness of the expenses nor it is the case of the AO that the expenses used by the assessee are for its personal purposes - expenditure made by the assessee for running the school for the employees of a company as well as residence of vicinity, the same are integrally related to the business activities of the assessee - Decided against the Revenue. Addition on account of Club Membership Fee - Held that - The approach of the assessee in spreading out the membership fee receipts over the period of membership cannot be faulted and as such the Ld. CIT (Appeals) was justified in deleting the addition made by Assessing Officer. - Decided against the Revenue. Addition invoking the provisions u/s 14A read with Rule 8D - Held that - when the assessee has come up with categoric plea that the entire investment have been made out of its own interest free funds available and the incurred expenses have been suo moto disallowed and the AO has not pointed out any defect in the computation made by the assessee company, provision s contained u/s 14A read with Rule 8D are not attracted which can only be invoked if the AO is not satisfied with the claim of the assessee. Sustaining the addition under Rule 8D(2)(iii) by Ld. CIT(A) on account of administrative expenses to earn the exempt income is concerned, again, we are of the considered view that when the AO as well as Ld. CI T(A) have not recorded their dissatisfaction that the computation of expenses disallowed by the assessee are not correct nor has pointed out any specific computation defects, the same cannot be sustained as Rule 8D(2) has only prescribed a formula to determine expenditure incurred to earn the exempt income which does not form part of the total income under the Act, which cannot be invoked unless AO has not come up with specific dissatisfaction with the cl aim of the assessee. So, in these circumstances addition sustained by Ld. CIT(A) under Rule 8D(2)(iii) is not sustainable

Issues Involved:
1. Disallowance of expenses under Section 14A read with Rule 8D(2).
2. Addition of Prior Period Expenses.
3. Addition of School Running Expenses.
4. Addition of Club Membership Fees.
5. Interest disallowance under Section 14A read with Rule 8D(2)(iii).

Detailed Analysis:

1. Disallowance of Expenses under Section 14A read with Rule 8D(2):
The Assessee challenged the disallowance of ?1128.93 lacs out of a total disallowance of ?8066.72 lacs made by the Assessing Officer (AO) under Section 14A read with Rule 8D(2). The AO had made an addition of ?80,66,72,112/- by invoking these provisions, which was restricted to ?69,46,01,000/- by the CIT(A). The Tribunal noted that the AO did not record dissatisfaction with the Assessee’s computation of expenses or provide reasons for the disallowance. The Tribunal cited precedents, including the Supreme Court’s decision in Godrej & Boyce and the Delhi High Court’s decision in HT Media, emphasizing that the AO must record dissatisfaction before invoking Rule 8D. Consequently, the Tribunal ruled in favor of the Assessee, determining that the addition under Rule 8D(2)(iii) was unsustainable.

2. Addition of Prior Period Expenses:
The AO disallowed ?6,19,050/- as prior period expenses, arguing that these expenses pertained to a previous financial year. The Tribunal upheld the CIT(A)’s decision to delete this addition, noting that the Assessee follows the mercantile system of accounting and had not claimed these expenses while computing total income. Therefore, the AO’s disallowance was unwarranted, and the Tribunal determined this issue against the Revenue.

3. Addition of School Running Expenses:
The AO disallowed ?27,00,000/- as school running expenses, classifying them as welfare/charity expenses. The Tribunal found that these expenses were genuine and related to the business activities of the Assessee, as they were incurred for running a school for employees' children and local residents. The Tribunal agreed with the CIT(A) that these expenses were incurred wholly and exclusively for business purposes and determined this issue against the Revenue.

4. Addition of Club Membership Fees:
The AO added ?3,46,46,421/- on account of non-refundable membership fees, following previous assessment years' orders. The CIT(A) deleted this addition, referencing the Tribunal’s decision in the Assessee’s own case for AY 2009-10, which was upheld by the Delhi High Court and the Supreme Court. The Tribunal reiterated that the Assessee’s approach of spreading the membership fee receipts over the membership period was correct and determined this issue against the Revenue.

5. Interest Disallowance under Section 14A read with Rule 8D(2)(iii):
The AO made an addition under Rule 8D(2)(iii) for administrative expenses to earn exempt income. The Tribunal noted that the Assessee had sufficient interest-free funds and had already disallowed expenses of ?8,21,883/- suo moto. The AO failed to record dissatisfaction with the Assessee’s computation or provide specific reasons for the disallowance. Citing precedents, the Tribunal ruled that the provisions of Rule 8D(2) could not be invoked without the AO’s specific dissatisfaction. Thus, the Tribunal determined this issue in favor of the Assessee.

Conclusion:
The Tribunal ruled in favor of the Assessee on all grounds, finding that the AO’s disallowances and additions were not substantiated by recorded dissatisfaction or specific reasons. The Tribunal upheld the CIT(A)’s deletions and adjustments, ensuring that the Assessee’s computations and claims were correctly considered.

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