2019 (1) TMI 1796 - AT - Income Tax

Disallowance u/s 14A - computing the average value of investment for the purpose of disallowance u/s 14A which are incapable of yielding tax free income - HELD THAT - AO cannot adopt the average value of the total investment instead of the average value of investment of which income is not part of a total income i.e. value of tax exempt investment. In view of this binding precedent, we find that the AO had to consider only those investments which have actually yielded the tax exempt income during the relevant year and not the total investment. On the aspect of the contention of the assessee that the disallowance should be restricted to some reasonable proportion of actual dividend received and such disallowance cannot in any case, exceed exempt dividend income earned during the relevant year , this proposition is based on the decision Joint Investments P. Ltd. vs CIT 2015 (3) TMI 155 - DELHI HIGH COURT as holds the field and while respectfully following the same, we find that the disallowance shall not exceed the exempt income. Set aside the issue and remand the matter to the file of the learned AO to work out the disallowance by calculating the average investment under Rule 8D(2)(ii)/(iii) by taking only those investments which have actually yielded the dividend income during the relevant year and if it exceeds the exempt income, then restrict the same to the extent of exempt income only. Ground Nos. 1 and Additional Grounds are allowed for statistical purposes. Disallowance of prior period expense - according to the assessee, this payment was audit fee payable to statutory auditor, namely Price Waterhouse Cooper and the expenses are pertaining to the year under consideration only on which the assessee had duly deducted the tax at source - CIT(A) found that there is inherent contradiction in the stand taken by the assessee inasmuch as according to him, there was payment of TDS on the payments made to the auditor and disallowance u/s 40( a) (ia) while computing the taxable income - HELD THAT - No reason to interfere with the findings of learned CIT(A) and it is not substantiated before us as to how the findings of the learned CIT(A) are incorrect. We, therefore, uphold the findings of the learned CIT(A). Short credit of TDS - CIT(A) recorded that the assessee submitted an application for rectification and it was still pending - HELD THAT - Learned CIT(A) directed the AO to allow the claim after proper verification. Claim of the brought forward loss and depreciation - CIT(A) directed the learned AO to allow the same after proper verification - HELD THAT - We do not find anything illegal or irregular in these directions of the learned CIT(A).

Summary

Issues Involved:
1. Disallowance under section 14A of the Income Tax Act
2. Disallowance of audit fee and adjustment of brought forward losses and unabsorbed depreciation
3. Credit for tax deducted at source

Issue 1: Disallowance under section 14A of the Income Tax Act:
The case involved an appeal challenging the disallowance made by the Assessing Officer (AO) under section 14A of the Income Tax Act. The assessee contested that the disallowance should only apply to investments capable of yielding tax-free income. The AO computed the disallowance under Rule 8D, resulting in a higher figure. The Tribunal referred to the decision in Maxopp Investments Ltd. vs CIT and held that the disallowance could include strategic and business investments. However, following the decision in ACB India Ltd. vs ACIT, the Tribunal ruled that only investments yielding exempt income should be considered for disallowance. The disallowance was restricted to the extent of exempt income earned during the relevant year.

Issue 2: Disallowance of audit fee and adjustment of brought forward losses and unabsorbed depreciation:
The appeal also contested the disallowance of audit fee and the denial of adjustment of brought forward losses and unabsorbed depreciation. The Tribunal upheld the findings of the Commissioner of Income Tax (Appeals) regarding the audit fee disallowance, stating that the payment was treated as a prior period expense by the AO. The Tribunal found no reason to interfere with this decision. Regarding the adjustment of brought forward losses and unabsorbed depreciation, the Tribunal agreed with the CIT(A) to allow the claim after proper verification, finding no irregularities in the directions given.

Issue 3: Credit for tax deducted at source:
The appeal raised concerns about the short credit of Tax Deducted at Source (TDS) amount. The CIT(A) had directed the AO to verify the claim for rectification, which was still pending. The Tribunal upheld this direction, emphasizing the need for proper verification before allowing the claim. Similarly, in the case of brought forward losses and depreciation, the Tribunal supported the CIT(A)'s decision to allow the claim after verification, finding no legal basis for interference.

In conclusion, the Tribunal partially allowed the appeal, setting aside the disallowance under section 14A and directing the AO to recalculate the disallowance based on investments yielding exempt income. The Tribunal upheld the decisions regarding the audit fee disallowance and the adjustment of brought forward losses and unabsorbed depreciation, emphasizing the importance of proper verification before allowing claims. The Tribunal also supported the CIT(A)'s directions regarding the short credit of TDS amount and the claim for brought forward losses and depreciation.