2017 (8) TMI 1624 - AT - Income Tax

Addition of royalty payable to the State Government being unascertained liability as the same were debited on estimate basis - CIT (A) confirmed the decision of AO by recording similar reasons by holding that no contingent expenditure are allowable even u/s 36(1)(xii) - HELD THAT - AO has not disputed the genuineness of these expenses and has also not taken care of the fact that the exercise of allowing these expenses is revenue neutral, the addition thereof on account of disallowance is not sustainable in the eyes of law. In these circumstances, we find it necessary to restore the case back to the AO to allow the expenses incurred by the Assessee Board on account of payment of royalty to the State of Arunachal Pradesh and state of Gujarat debited in its profit loss account after due verification of the letter relied upon by the Assessee Board as well as ld. CIT (A). Disallowance u/s 14A - rejecting the contentions raised by the assessee that no expenses have been incurred by the assessee to earn the exempt income during the year under assessment - CIT (A) observed that it cannot be ruled out that there is a proximate relationship between office establishment expenditure and interest expenditure to the investment resulting income not chargeable to tax - HELD THAT - When the assessee has not earned any exempt income during the year under assessment, no disallowance is permissible u/s 14A of the Act. So, in these circumstances, this issue is also set aside to the AO to decide accordingly in view of the decision rendered by Hon ble Delhi High Court in case titled as Cheminvest Limited 2015 (9) TMI 238 - DELHI HIGH COURT in favour of the assessee. Disallowance of expenditure u/s 36(1)(xii) - As argued when the Assessee Board has placed on record documents under Rule 46A to prove the justification of the expenses made in normal course of business, the disallowance is not sustainable - HELD THAT - When the assessee has brought on record documentation to prove the justification of debit of expenses disallowed by the AO as well as by CIT (A), the AO is required to examine and verify these documents before deciding the issue in controversy. So, we remand this issue also to AO to decide after entertaining the documents relied upon by the Assessee Board under Rule 46A of the Rules after providing an opportunity of being heard to the assessee. Consequently, grounds allowed for statistical purposes.

Summary

Issues involved:
1. Admitting additional evidence without providing opportunity to AO.
2. Disallowance of royalty payment by AO.
3. Disallowance of contingent liability by CIT (A).
4. Disallowance under section 14A.
5. Disallowance under section 36(1)(xii).

Detailed Analysis:
1. Admitting additional evidence without providing opportunity to AO:
In the case for AY 2009-10, the Revenue challenged the admission of additional evidence by the CIT (A) in the form of a letter from DGH without giving the AO a chance to respond. The Tribunal found that the AO did not dispute the genuineness of the expenses and that the allowance of these expenses was revenue neutral. Therefore, the disallowance of the expenses was deemed unsustainable, and the case was remanded back to the AO for verification, setting aside the grounds raised by the Revenue.

2. Disallowance of royalty payment by AO:
Regarding the disallowance of royalty payment made by the AO, the Tribunal noted that the CIT (A) had deleted the disallowance based on letters from DGH responsible for ascertaining royalty payments to the State Governments. The Tribunal found it necessary to restore the case to the AO for verification of the expenses incurred by the Assessee Board on royalty payments, setting aside the grounds raised by both the Revenue and the Assessee.

3. Disallowance of contingent liability by CIT (A):
The Assessee challenged the disallowance of a contingent liability and other expenses under various sections. The Tribunal observed that the AO and CIT (A) disallowed certain amounts without proper justification. The Tribunal referred to relevant case law and decided to set aside the issues to the AO for proper examination and verification of the expenses claimed by the Assessee, allowing the grounds raised by the Assessee for statistical purposes.

4. Disallowance under section 14A:
The Tribunal addressed the disallowance under section 14A, noting that the Assessee had not earned any exempt income during the assessment year. Citing a decision by the Hon'ble Delhi High Court, the Tribunal ruled in favor of the Assessee, setting aside the issue to the AO for further consideration in line with the court's decision.

5. Disallowance under section 36(1)(xii):
Regarding the disallowance under section 36(1)(xii), the Tribunal found that the Assessee had provided documentation to justify the expenses incurred. The Tribunal remanded the issue back to the AO for proper examination and verification of the expenses, allowing the grounds raised by the Assessee for statistical purposes.

In conclusion, the Tribunal allowed both the appeals filed by the Revenue and the Assessee for statistical purposes, setting aside various issues to the AO for further examination and verification in line with the Tribunal's findings and relevant legal principles.