2019 (9) TMI 1501 - AT - Income Tax

Recognition of income - addition being interest on mobilization advance - assessee is following mercantile system of accounting and, therefore, the amount should have been recognized by the assessee as income for the impugned assessment year on accrual basis - HELD THAT - As decided in own case for A.Y 2008-09 2016 (1) TMI 1456 - ITAT DELHI has deleted the addition held as that the entire matter is contentious in the sense that the third party - RPCL - which was awarded the contract claimed that it had performed it in accordance with the agreement with the parties. The assessee, however, felt otherwise and terminated the contract. There could be several likely outcomes in these proceedings - many of them possibility impinging upon the rights of the assessee to receive advance amount itself along with interest either in whole or in part. In these circumstances, the ITAT s conclusions that there was no crystallized right to receive any particular amount or amounts, cannot be faulted. Addition u/s 14A r.w.r. 8D - expenditure incurred for earning the tax free income - HELD THAT - We find the Tribunal vide ITA 2017 (4) TMI 1528 - ITAT DELHI 24.04.2017 while deleting the disallowance stating According to the provisions of section 14A(2), the Ld. assessing officer before invoking the applicability of Rule 8D should have explained as to why the voluntary disallowances or no disallowances made by the assessee was unreasonable and unsatisfactory. We failed to find any such satisfaction recorded by the Ld. assessing officer. The satisfaction is mandatory in view of the judicial precedents of the jurisdictional High Court laid down before us by the Ld. authorized representative. Therefore, we delete the disallowance under section 14A of the income tax act applying the provisions of Rule 8D. Appeal filed by the assessee is allowed.

Summary

Issues Involved:
1. Addition of deemed income on mobilization advance for A.Y. 2010-11.
2. Disallowance u/s. 14A read with rule 8D for tax-free dividend income.

Analysis:

Issue 1: Addition of Deemed Income on Mobilization Advance
The case involved the appeal filed by the assessee against the order of the CIT(A) confirming the addition of ?201.66 crores as deemed income on mobilization advance for A.Y. 2010-11. The Assessing Officer noted that interest on mobilization advance due from the executing agency was not recognized as income by the assessee. The Assessing Officer contended that as per the mercantile system of accounting followed by the assessee, the amount should have been recognized as income. The assessee explained the situation, citing fraud by the agency and uncertainty about realization due to arbitration. The CIT(A) upheld the addition, relying on the precedent set for the previous assessment years. The Tribunal, however, in previous years' cases, had deleted similar additions. The Tribunal observed that there was no crystallized right to receive the amount, considering the contentious nature of the matter. Consequently, the Tribunal directed the Assessing Officer to delete the addition, citing the previous favorable decisions for the assessee.

Issue 2: Disallowance u/s. 14A read with Rule 8D
The second issue revolved around the disallowance u/s. 14A read with Rule 8D for tax-free dividend income. The Assessing Officer disallowed an amount of ?17,80,998 under section 14A r.w. Rule 8D, as he was not satisfied with the explanation provided by the assessee regarding incurring any expenditure to earn the exempt income. The CIT(A) upheld the disallowance made by the Assessing Officer. The assessee contended that the Assessing Officer did not record satisfaction for the disallowance, citing a previous Tribunal decision in the assessee's favor for A.Y. 2009-10. The Tribunal, following the precedent, directed the Assessing Officer to delete the disallowance, emphasizing the mandatory requirement of recording satisfaction before invoking Rule 8D for disallowance under section 14A.

In conclusion, the Tribunal allowed the appeal filed by the assessee, directing the deletion of both the addition of deemed income on mobilization advance and the disallowance under section 14A read with Rule 8D, based on previous favorable decisions and the lack of recorded satisfaction by the Assessing Officer in the current case.