2017 (2) TMI 1428 - AT - Income Tax

Disallowance u/s 14A r/w rule 8D - HELD THAT - Commissioner (Appeals) while deciding the issue of disallowance under section 14A has directed the Assessing Officer to compute it by applying rule 8D. However, as held in Godrej Boyce Mfg. Co. Ltd. v/s DCIT, 2010 (8) TMI 77 - BOMBAY HIGH COURT the provisions of rule 8D is applicable prospectively from the assessment year 2008 09 onwards. The Hon'ble Jurisdictional High Court in the said decision has also observed that for prior assessment years disallowance under section 14A can be worked out on a reasonable basis. We have noted, identical issue arose in assessee s own case for the assessment year 2004 05 2016 (10) TMI 1271 - ITAT MUMBAI restored the issue back to the file of the Assessing Officer as held the provisions of Rule 8D of the I.T. Rules, 1962 are applicable prospectively for and from A.Y. 2008-09 and would not operate for the assessment years prior thereto. In this view of the matter, the learned CIT(A)‟s directions to the AO to work out/compute the disallowance under section 14A applying Rule 8D of the Rules is erroneous and we therefore delete the same and in the fitness of things, we direct the AO to recompute the disallowance under section 14A of the Act afresh, in accordance with the law prevalent for the year under consideration. Disallowance of non compete fee paid to ex directors - HELD THAT - In the latest order in assessee s own case 2016 (10) TMI 1271 - ITAT MUMBAI for the assessment year 2004 05, the Tribunal while deciding the issue followed its decision in the earlier assessment year and upheld the disallowance. Disallowance of deduction claimed on account of payment made towards employee s contribution to PF/ESIC - sum not paid either within the due date or the grace period provided under the relevant statute - HELD THAT - Undisputedly, the assessee has paid the aforesaid amount within the due date of filing of return of income as provided under section 139(1) of the Act. Therefore, keeping in view the provision under section 43B, the deduction claimed is allowable. In this context, it is necessary to observe, the second proviso to section 43B which was omitted by Finance Act, 2003 w.e.f. 1st January 2004, provided that unless the deduction claimed towards payment to PF/ESIC is actually paid on/or before the due date prescribed under Explanation below section 36(1)(va), no deduction shall be allowed. However, after omission of the said proviso the situation is different. The Hon'ble Jurisdictional High Court in CIT v/s Hindustan Organic Chemicals Ltd. . 2014 (7) TMI 477 - BOMBAY HIGH COURT taking note of the aforesaid amendment made to section 43B, has held that if the employees contribution to PF is paid within the due date of filing of return of income under section 139(1), no disallowance can be made. Disallowance of interest on advances to subsidiary companies - HELD THAT - Assessee was having sufficient self generated / interest free funds available with it to make interest free advance of ₹ 25,67,46,923. In fact, the learned Commissioner (Appeals) has also observed, advances have been made out of common funds available with the assessee which includes both self generated funds and borrowed funds. As held by the Hon'ble Jurisdictional High Court in CIT v/s Reliance Utilities and Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT when mixed funds are available with the assessee, the presumption would be, the interest free advances have been made out of the interest free funds available with the assessee. Therefore, applying the ratio of the Hon'ble Jurisdictional High Court (supra), no notional disallowance / adding back of interest attributable to interest free advances can be made. The addition made is, therefore, deleted. Nature of expenditure - disallowance of expenditure for software by treating it as capital expenditure - HELD THAT - What is the nature of software for which the payments were made have not at all been examined by either of the Departmental Authorities. At least the nature of software purchased is not discernable from the discussion made either in the assessment order or in order of the learned Commissioner (Appeals). Before us also, neither of the parties have produced material to show the exact nature of software. Moreover, out of the total expenditure claimed what is the amount spent towards purchase of software and what is the amount incurred for monitors, printers, etc., have not been placed. It is further worth mentioning, as per depreciation schedule provided under the income rules computer including software is subject to depreciation. This aspect has also not been examined by the Departmental Authorities. In view of the aforesaid, we consider it appropriate to restore the issue to the file of the Assessing Officer for deciding afresh Change of accounting method - assessee has changed the method of valuation of stores and spares from first in first out (FIFO) to weighted average method - HELD THAT - As could be seen from the observations of the learned Commissioner (Appeals) in Para 13.2 of his order, he has not given any reasoning why assessee s claim is not acceptable. He has disposed off the ground raised by the assessee without passing a speaking order. Therefore, we restore this issue back to the file of the Assessing Officer for considering afresh after providing reasonable opportunity of being heard to the assessee. The Assessing Officer while deciding the issue must keep in view the decisions which the assessee may rely upon. Ground allowed for statistical purposes. Addition on account of unutilised MODVAT credit to closing stock - HELD THAT - As decided in own case issue has been rightly decided by the learned CIT(A) and the valuation of closing stock is already in consonance with section 145A. His order is, therefore, confirmed on this issue. Following the aforesaid decision of Coordinate Bench of this Tribunal in the assessee‟s own case for A.Y. 2001-02, we uphold the decision of the learned CIT(A) in directing the AO to delete the addition made in the closing stock towards unutilized Modvat credit Addition made on account of claim of bad debt written off - HELD THAT - In terms of the principles laid down by the Hon'ble Supreme Court in TRF Ltd. v/s CIT, 2010 (2) TMI 211 - SUPREME COURT , deduction claimed is allowable. As per the decision of the Hon'ble Supreme Court it is not necessary for the assessee to establish that the debt have actually become irrecoverable. We have also noted that the learned Commissioner (Appeals) in assessee s own case for subsequent year also has allowed the claim of bad debt. In view of the aforesaid, we do not find any infirmity in the order of the learned Commissioner (Appeals). Accordingly, we uphold the same by dismissing the ground no.2, raised by the Revenue. Adjustment for provisions made while computing book profit under section 115JB - HELD THAT - earned Authorised Representative has fairly submitted before us that by virtue of retrospective amendment to section 115JB, the deduction claimed is not allowable. He also submitted, the issue has been decided against the assessee by the Tribunal while deciding assessee s appeal for assessment year 2003 04 and 2004 05. On a perusal of the Tribunal s order date for the assessment year 2004 05, we have noticed that following its earlier order in assessee s own case for assessment year 2003 04, the Tribunal has decided the issue against the assessee

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961 r/w Rule 8D of Income Tax Rules, 1962.
2. Disallowance of non-compete fee paid to ex-directors.
3. Disallowance of deduction claimed on account of payment made towards employee’s contribution to PF/ESIC.
4. Disallowance of interest on advances to subsidiary companies.
5. Disallowance of expenditure for software by treating it as capital expenditure.
6. Change of accounting method.
7. Levy of interest under sections 234B, 234D, and 220(2).
8. Deletion of addition on account of unutilized MODVAT credit to closing stock.
9. Deletion of addition made on account of claim of bad debt written-off.
10. Partial relief granted towards payment of employee’s PF contribution.
11. Adjustment for provisions made while computing book profit under section 115JB.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act, 1961 r/w Rule 8D of Income Tax Rules, 1962:
The Assessing Officer (AO) disallowed ?3,84,19,506 as expenditure incurred for earning exempt income. The Commissioner (Appeals) directed the AO to compute the disallowance by applying Rule 8D. However, it was contended that Rule 8D is applicable from the assessment year 2008-09 onwards. The Tribunal restored the issue back to the AO to recompute the disallowance as per the law prevalent during the relevant assessment year, following the decision in the assessee’s case for the assessment year 2004-05.

2. Disallowance of non-compete fee paid to ex-directors:
The AO disallowed the non-compete fee of ?4,00,327 paid to ex-directors, treating it as capital expenditure. The Commissioner (Appeals) confirmed the disallowance. The Tribunal upheld the disallowance, following its previous decisions in the assessee’s own case for earlier assessment years.

3. Disallowance of deduction claimed on account of payment made towards employee’s contribution to PF/ESIC:
The AO disallowed ?1,68,789 for late payment of employee’s contribution to PF/ESIC. The Commissioner (Appeals) allowed ?75,707, which was paid within the grace period. The Tribunal allowed the entire deduction, citing the jurisdictional High Court’s decision that payments made before the due date of filing the return of income are allowable.

4. Disallowance of interest on advances to subsidiary companies:
The AO disallowed ?85,93,569 as interest attributable to interest-free advances to subsidiaries. The Commissioner (Appeals) confirmed the disallowance, stating the assessee failed to establish commercial expediency. The Tribunal deleted the disallowance, noting the assessee had sufficient interest-free funds and applying the jurisdictional High Court’s decision that interest-free advances are presumed to be made from interest-free funds.

5. Disallowance of expenditure for software by treating it as capital expenditure:
The AO disallowed ?10,90,678 incurred for up-gradation of systems and replacement of monitors/printers, treating it as capital expenditure. The Commissioner (Appeals) sustained the disallowance. The Tribunal restored the issue to the AO for fresh examination, noting the nature of the software and the exact expenditure details were not clear.

6. Change of accounting method:
The AO added ?1,18,505 due to a change in the method of valuation of stores and spares from FIFO to the weighted average method. The Commissioner (Appeals) upheld the addition. The Tribunal restored the issue to the AO for fresh consideration, noting the Commissioner (Appeals) did not provide a reasoned order.

7. Levy of interest under sections 234B, 234D, and 220(2):
Both parties agreed that the levy of interest is consequential. The Tribunal dismissed these grounds as infructuous.

8. Deletion of addition on account of unutilized MODVAT credit to closing stock:
The AO added back ?1,81,33,906 as unutilized MODVAT credit. The Commissioner (Appeals) deleted the addition, following the Tribunal’s decision in the assessee’s case for earlier years. The Tribunal upheld the deletion, following its previous decisions.

9. Deletion of addition made on account of claim of bad debt written-off:
The AO disallowed ?62,41,890 as bad debt written-off, stating the assessee could not prove the debt became bad. The Commissioner (Appeals) deleted the addition, noting the debts were actually written-off in the books. The Tribunal upheld the deletion, citing the Supreme Court’s decision that it is sufficient if the debts are written-off in the books.

10. Partial relief granted towards payment of employee’s PF contribution:
The AO disallowed the deduction for late payment of employee’s PF contribution. The Commissioner (Appeals) allowed part of the deduction, noting some payments were within the grace period. The Tribunal upheld the Commissioner (Appeals)’s decision.

11. Adjustment for provisions made while computing book profit under section 115JB:
The AO added back certain provisions while computing book profit under section 115JB. The Commissioner (Appeals) deleted the addition. The Tribunal reversed the Commissioner (Appeals)’s decision, following its previous decisions and noting the retrospective amendment to section 115JB.

Conclusion:
The Tribunal’s judgment addressed multiple issues, providing relief to the assessee on some grounds while upholding the Revenue’s stance on others. The judgment emphasized adherence to legal precedents and statutory provisions, ensuring a fair and comprehensive resolution of the disputes.