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2016 (7) TMI 1631 - AT - Income TaxAddition of notional interest on interest free advances to DCM Employees Trust - assessee had claimed deduction for the liabilities on account of flyover cost and interest payable to MCD on accrual basis in AY 2004-05 - claim of the assessee company was disallowed by the AO by observing that the deduction would be allowable on payment basis - HELD THAT - As decided in own case for AY 2004-05 in the later years the assessee has accepted the stand of the Revenue and has also been following the same practice. For the relevant assessment year it is noticed that the AO has changed his stand just because the assessee has transferred the complete rights in the project as a whole of M/s Purearth Infrastructure Ltd. When a particular method of computation of income of the assessee has been followed and has been accepted and is also followed by the Revenue and the assessee just because the total rights in the project has been transferred such method cannot be changed as by the change of the method the expenses otherwise allowable to the assessee is now being denied which is not a permissible act. In these circumstances we are of the view that the action of the ld. CIT(A) in directing the AO to allow the deduction of the said expenses is on right footing and do not call for any interference. Expenditure in respect of approvals and permissions it is seen that the ITAT in assessee s own case for AY 2006-07 - CIT(A) has rightly looked into the matter and has after considering the expenses which have been incurred subsequent to the claim has granted the proportionate relief to the assessee. In these circumstances we are of the view that the proportionate expenses as allowed to the assessee is on a scientific and an acceptable principle after considering the expenses claimed and the possible future liability and consequently no interference is called for. Notional disallowance made by the AO in respect of loan given to DCM Employees Welfare Trust - Similar disallowance had been made by the AO in earlier years and was subsequently deleted by CIT (A) and ITAT. Accordingly this ground is covered in favour of the assessee. Disallowance u/s 14A - assessee company had received dividend income during the year which was claimed as exempt u/s 10(34) of the Act and it had suo moto made a disallowance - HELD THAT - AO has not examined the calculation as submitted by the assessee company in this regard and has also not recorded any satisfaction to the effect that the disallowance offered was not correct. We find force in the contention of the Ld. AR that the AO has neither recorded his satisfaction nor giving any reason as to how the claim of expenditure in relation to tax free income has not been correctly made by the assessee as envisaged u/s 14A and the AO has proceeded to mechanically invoke Rule 8D. We also find that the AO has not established any nexus between the investment made and the expenditure incurred under interest expenditure and administrative expenses before disregarding the suo moto disallowance made by the assessee vis- -vis the dividend income . Hon ble Delhi High Court in the case of Joint Investment P. Ltd. 2015 (3) TMI 155 - DELHI HIGH COURT has held that disallowance u/s 14A cannot exceed the amount of exempt income. The Hon ble Delhi High Court in the case of Holcim India P. Ltd. 2014 (9) TMI 434 - DELHI HIGH COURT held that in absence of any exempt income there can be no disallowance u/s 14A. We also find that the ITAT in assessee s own case for AY 2009-10 on identical set of facts had restricted the disallowance to the extent of dividend income received during the year. Respectfully following the same we set aside the order of the Ld. CIT(A) on this issue and direct the AO to restrict the disallowance u/s 14A to 70, 088/- .Decided partly in favour of assessee.
Issues Involved:
1. Deduction claims on actual payment basis for flyover cost, flyover interest, and expenditure on approvals and permissions. 2. Disallowance under Section 14A of the Income Tax Act. 3. Addition to book profits under Section 115JB of the Income Tax Act. 4. Deletion of disallowance on notional interest on interest-free loans. 5. Initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act. 6. Validity of the assessment order upheld by CIT (A). Detailed Analysis: 1. Deduction Claims on Actual Payment Basis for Flyover Cost, Flyover Interest, and Expenditure on Approvals and Permissions: The assessee company claimed deductions for the liabilities on account of flyover cost and interest payable to MCD on an accrual basis in AY 2004-05. This claim was disallowed by the AO, observing that the deduction would be allowable on a payment basis. However, the CIT (A) and ITAT allowed the claim on an accrual basis. The Department disputed this allowability before the Hon’ble High Court. Due to the Department's dispute, the assessee raised alternate claims on a payment basis in subsequent years, which were also disallowed by the AO, CIT (A), and ITAT. The ITAT's order in AY 2004-05, which allowed the deduction on an accrual basis, was followed for consistency. Similarly, expenditure for obtaining approvals and permissions was allowed by the CIT (A) in AY 2006-07, and the ITAT upheld this decision. Consequently, the ground was dismissed, adhering to the principle of consistency. 2. Disallowance under Section 14A of the Income Tax Act: The assessee company received dividend income of ?70,088 during the year and made a suo moto disallowance of ?21.87 lacs. The AO made a further disallowance of ?143.39 lacs by applying Rule 8D without examining the assessee's calculation or recording any satisfaction that the disallowance was incorrect. The ITAT found that the AO did not establish any nexus between the investment and the expenditure incurred. The Hon’ble Delhi High Court's decisions in CIT vs. Holcim India P. Limited and Joint Investment P. Ltd. vs. CIT were cited, which held that disallowance under Section 14A cannot exceed the amount of exempt income. Thus, the ITAT directed the AO to restrict the disallowance to ?70,088, the amount of exempt income received during the year. 3. Addition to Book Profits under Section 115JB of the Income Tax Act: Ground no. 3 of the assessee’s appeal and ground no. 3 of the Department’s appeal were identical. The ITAT directed the AO to recompute the book profits under Section 115JB, following the adjudication on the additional ground of the assessee’s appeal and the dismissal of ground no. 2 of the Department’s appeal. 4. Deletion of Disallowance on Notional Interest on Interest-Free Loans: The AO had made a notional disallowance for loans given to DCM Employees Welfare Trust in earlier years, which was subsequently deleted by CIT (A) and ITAT. The ITAT upheld the deletion, citing its decision in the assessee’s own case for AY 2006-07, where it was held that the disallowance of interest on loans to DCM Employees Welfare Trust was not justified. Consequently, this ground of the Department’s appeal was dismissed. 5. Initiation of Penalty Proceedings under Section 271(1)(c) of the Income Tax Act: Ground no. 4 of the assessee’s appeal regarding the initiation of penalty proceedings under Section 271(1)(c) was deemed premature and was dismissed as such. 6. Validity of the Assessment Order Upheld by CIT (A): Ground nos. 5 and 6 of the assessee’s appeal, which questioned the validity of the assessment order upheld by CIT (A), did not require adjudication and were dismissed. Final Result: The appeal of the assessee was partly allowed, while the appeal of the Department was dismissed. The order was pronounced in the open court on 29.07.2016.
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