2016 (6) TMI 1391 - AT - Income Tax

Addition u/s 14A r.w.s. 8D - HELD THAT - Disallowance u/s 14A of the Act without examining the facts referred above which were very crucial to reach at the final disallowance u/s 14A of the Act. There are series of judgments of the co-ordinate benches that the disallowance u/s 14A should not exceed the exempt income earned during the year and also decisions wherein the disallowance u/s 14A of the Act on account of interest expenditure are held to be incorrect if the assessee has sufficient equity and general reserve to cover the investments. Applying the decision of the co-ordinate bench in assessee s own case in 2014 (6) TMI 1041 - ITAT AHMEDABAD the matter is set aside to the file of Assessing Officer to examine the facts and figures of the case in the light of our observations made above in order to arrive at a final conclusion as to whether disallowance u/s 14A is to be made and if so, then the amount thereof which in no case should exceed the exempted income earned by assessee during the year under appeal. It is needless to mention that AO shall allow reasonable and sufficient opportunity of hearing to the assessee before adjudicating the same. These grounds of assessee and the Revenue are allowed for statistical purposes. Enhancement of Book Profit computed u/s 115JB - disallowance made under section 14A - HELD THAT - We set aside the matter referred in this ground to the file of Assessing Officer to recomputed book profit u/s 115JB of the Act on the basis of disallowance, if any, to be made by ld. Assessing Officer as referred in ground no.1 above for calculating the disallowance, if any, u/s 14A of the Act. Accordingly, this ground is also allowed for statistical purposes. Disallowance of depreciation on the basis that certain items included under the head computers @ 60% - HELD THAT - We find that during the assessment proceedings assessee has himself submitted the revised computation of depreciation on the computers and has agreed that depreciation has been claimed excess by ₹ 9174986/-. Thereafter the matter which was almost closed due to the submission made by assessee, was revived back by the assessee by raising ground against this addition before CIT(A) and gave various details and documents supporting the ground that depreciation disallowed needs to be re-worked as various types of expenditure which are fully allowable during the year are included in addition of block of assets, computers and similarly there are various machines which are actually eligible for depreciation @ 60% have been subjected to depreciation @ 15% only. We further observe that ld. CIT(A) has looked into this aspect and has open the way for examining the relates facts towards calculation of correct depreciation in the block of assets relating to computers by way of observing the related facts in his decision. Assessing Officer for re-examination and calculation of depreciation on computers in the light of submissions made by assessee before ld. CIT(A) after giving sufficient and reasonable opportunity to the assessee for providing necessary details so as to arrive at the correct amount of depreciation on computers for which the assessee is eligible. Accordingly this ground is allowed for statistical purposes. Claim of guarantee fees paid to Government of Gujarat - expenditure of capital in nature or revenue in nature - HELD THAT - Issue raised in this ground is squarely covered by the decision of co-ordinate bench referred above in the case of Gujarat Energy Transmission Corpn. 2015 (6) TMI 1096 - ITAT AHMEDABAD and respectfully following the same, we find no reason to interfere with the order of ld. CIT(A) and uphold the same. This ground of Revenue is dismissed. Adding the provisions for gratuity to the book profit calculated u/s 115JB - HELD THAT - Provision for gratuity based upon acturial valuation was not an unascertained liability which could be added back while computing the book profit for the purpose of Section 115JB. See GUJARAT URJA VIKAS NIGAM LTD 2014 (6) TMI 1041 - ITAT AHMEDABAD

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Enhancement of Book Profit under Section 115JB due to disallowance under Section 14A.
3. Disallowance of depreciation on certain assets.
4. Disallowance of guarantee fees.
5. Addition of provision for gratuity to book profit under Section 115JB.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:

The primary issue revolves around the disallowance made under Section 14A of the Income Tax Act, which pertains to expenditure incurred in relation to income not includible in total income, specifically exempt dividend income. The Assessing Officer (AO) observed that the assessee had earned exempt income of ?2,48,67,198/- but did not show any expenditure incurred to earn this income. The AO applied Rule 8D of the Income Tax Rules, resulting in a disallowance of ?152.46 crores. The CIT(A) reduced this disallowance to ?61.46 crores. Both the assessee and the Revenue appealed against this decision.

The Tribunal noted that similar disallowances had been made in previous years (2006-07 and 2007-08) and had been remanded back to the AO for fresh adjudication. The Tribunal directed the AO to re-examine the facts and figures, considering the assessee's submissions about the nature of its investments and the sources of funds. The AO was instructed to ensure that the disallowance under Section 14A does not exceed the exempt income earned during the year.

2. Enhancement of Book Profit under Section 115JB due to disallowance under Section 14A:

This issue is incidental to the first. The enhancement of book profit under Section 115JB was due to the disallowance under Section 14A. Since the Tribunal remanded the Section 14A disallowance back to the AO for re-examination, it also directed the AO to recompute the book profit under Section 115JB based on the revised disallowance, if any.

3. Disallowance of depreciation on certain assets:

The AO disallowed depreciation of ?9,17,49,861/- claimed by the assessee on certain items classified under the block of computers. The assessee initially agreed to the disallowance but later contested it before the CIT(A), arguing that some items should qualify for higher depreciation rates. The CIT(A) upheld the AO's decision, noting that the disputed items were not computers or computer software and thus did not qualify for 60% depreciation.

The Tribunal remanded this issue back to the AO for re-examination, allowing the assessee to provide necessary details to determine the correct amount of depreciation on computers.

4. Disallowance of guarantee fees:

The AO treated the guarantee fees of ?4.76 crores paid to the Government of Gujarat as capital expenditure, arguing that it provided an enduring benefit. The CIT(A) reversed this decision, treating the guarantee fees as revenue expenditure based on the Supreme Court's decision in India Cements Ltd. (60 ITR 52). The CIT(A) noted that the guarantee fees were an annual recurring expenditure and did not result in an enduring benefit.

The Tribunal upheld the CIT(A)'s decision, citing a similar case (Gujarat Energy Transmission Corpn. Ltd. vs. ACIT) where the guarantee fees were treated as revenue expenditure.

5. Addition of provision for gratuity to book profit under Section 115JB:

The AO added a provision for gratuity of ?44.36 lakhs to the book profit, considering it an unascertained liability. The CIT(A) deleted this addition, following a precedent in the assessee's own case for previous years, where it was held that provisions for gratuity based on actuarial valuation are not unascertained liabilities.

The Tribunal upheld the CIT(A)'s decision, referencing the same precedent and confirming that the provision for gratuity based on actuarial valuation is not an unascertained liability.

Conclusion:

The Tribunal remanded the disallowance under Section 14A and the related enhancement of book profit under Section 115JB back to the AO for re-examination. It also remanded the issue of depreciation on certain assets back to the AO. The Tribunal upheld the CIT(A)'s decisions on the disallowance of guarantee fees and the addition of provision for gratuity to book profit under Section 115JB. Both the assessee’s and the Revenue’s appeals were partly allowed for statistical purposes.

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