2019 (11) TMI 1625 - AT - Income Tax

Disallowance u/s. 14A r.w.s. 8D - case of the assessee that disallowance u/s 14A has been thus rightly restricted to the extent of exempt income - HELD THAT - We find merit in the aforesaid plea of the assessee. Various Courts have held that Section 14A of the Act disallowance cannot be kicked when there was no exempt income earned by the assessee as is the case in the present appeals. Hon ble Delhi High Court in PCIT vs. IL FS Energy Development Company Ltd 2017 (8) TMI 732 - DELHI HIGH COURT and M/S. CHETTINAD LOGISTICS PVT. LTD. 2017 (4) TMI 298 - MADRAS HIGH COURT have expressed a clear disagreement with CBDT Circular and held that where there is no exempt income in relevant year there cannot be a disallowance of expenditure under S. 14A of the Act. Similar proposition has been laid down in the case or Corrtech Energy (P.) Ltd. 2014 (3) TMI 856 - GUJARAT HIGH COURT . Hence in conformity with the judicial precedents we find substantial merit in the conclusion drawn by the CIT(A) for limiting the disallowance to the extent of exempt income. Hence we decline to interfere. Nature of expenditure - professional and legal fees - revenue or capital expenditure - HELD THAT - The expenditure claimed by the assessee bears the revenue character. No error in the order of the CIT(A). Hence the Ground No. 2 of the Revenue is dismissed. Disallowance towards belated employees contribution to PF and ESIC u/s 36(1)(va) - HELD THAT - CIT(A) has rightly concluded the issue against the assessee in the light of the decision in the case of Gujarat State Road Transport Corporation 2014 (1) TMI 502 - GUJARAT HIGH COURT

Summary

Issues:
1. Disallowance of expenses under Section 14A read with Rule 8D of the Income Tax Rules.
2. Treatment of revenue expenditure on account of professional and legal fees.
3. Disallowance of employees' contribution to PF and ESIC under Section 36(1)(va).
4. Disallowance under Section 14A of the Income Tax Act to the extent of exempt income.

Issue 1: Disallowance of expenses under Section 14A read with Rule 8D:
The Revenue challenged the CIT(A)'s decision to grant relief from disallowance of expenses under Section 14A. The ITAT, after considering the arguments, upheld the CIT(A)'s decision. It noted that since the assessee had earned only a minimal exempt income during the relevant year, the disallowance under Section 14A should be restricted to the extent of the exempt income. The ITAT cited various judicial precedents, including decisions by the Delhi High Court, Madras High Court, and Gujarat High Court, to support its conclusion. The ITAT, in line with these precedents, found merit in limiting the disallowance to the amount of exempt income and dismissed Ground No. 1 of the Revenue.

Issue 2: Treatment of revenue expenditure on professional and legal fees:
The Revenue disputed the CIT(A)'s decision to consider the amount of revenue expenditure on professional and legal fees. The CIT(A) had ruled in favor of the assessee, stating that the expenditure was revenue in nature and not capital expenditure. The ITAT agreed with the CIT(A), noting that the expenditure claimed by the assessee had a revenue character and did not result in acquiring any capital asset or enduring benefit. The ITAT referenced a previous order related to the same issue in a different assessment year and found no error in the CIT(A)'s decision. Consequently, the ITAT dismissed Ground No. 2 of the Revenue.

Issue 3: Disallowance of employees' contribution to PF and ESIC under Section 36(1)(va):
The Cross Objection raised by the assessee contested the disallowance of employees' contribution to PF and ESIC under Section 36(1)(va). The CIT(A) had upheld the disallowance, citing a decision of the Gujarat High Court. The ITAT found no merit in the Cross Objection on this issue and dismissed Ground No. 1 of the Cross Objection.

Issue 4: Disallowance under Section 14A to the extent of exempt income:
The Cross Objection also challenged the disallowance under Section 14A to the extent of exempt income. During the hearing, the assessee's counsel decided not to press the issue. As a result, Ground No. 2 of the Cross Objection was dismissed as not pressed.

In conclusion, the ITAT dismissed the appeal filed by the Revenue and the cross objection of the assessee. The ITAT upheld the decisions of the CIT(A) on various issues related to disallowances and expenditures, based on the facts and legal interpretations presented during the proceedings.