2021 (10) TMI 1330 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - HELD THAT - Onus lies upon the assessee to justify the expenses incurred in relation to exempt income. If the assessee failed to discharge the onus, the only option available to Revenue is to make the disallowance by resorting the provisions of Rule 8D of Income Tax Rules. However, in the interest of justice, fair play and keeping in view to the fact that assessee has made suo moto disallowance we are inclined to extend one more opportunity to the assessee to provide the basis of such disallowance by furnishing the necessary details. Accordingly, the issue with respect to administrative expenses is set aside to the file of AO for fresh adjudication as per the provision of law. Hence, the ground of appeal of the assessee is partly allowed for statistical purposes. Addition on account of sale of assets under securitization - HELD THAT - Amortization merely represents a timing difference and since the bank is consistently making profits and paying tax at the highest rate without claiming any tax holiday benefit, it can be safely concluded that the method followed Is revenue neutral. We draw support from the decision of the Hon'ble High Court of Bombay in the cose of Nagri Mills Co. Ltd. 1957 (9) TMI 30 - BOMBAY HIGH COURT Addition on account of commission income from the bank guarantee furnished to the customers - Whether the commission income has accrued to the assessee on furnishing the bank guarantee to the parties? - change in accounting policy - HELD THAT - It is the management of the company to choose specific accounting policies that are advantageous to the financial reporting of the company. Once a policy has been adopted by the company but on a later date the management decides to change the same then, the onus of justifying the change in accounting policy is on the assessee. In other words, the assessee has to justify the change in the accounting policy on the parameters that it is more logical and transpires sound commercial basis. Furthermore such change in the accounting policy should not defeat or postpone the charge on the income of the assessee which has been earned by it. The mere receipt of commission does not mean that such amount represents the income of the assessee. It is for the reason that the assessee is exposed to the risk in different financial years, therefore in our considered view the same should relate to the periods where the assessee has undertaken the risk. As per the accounting standard 9 issued by the ICAI, the fees earned by the bank on furnishing the bank guarantee which is carrying continuing obligations over the guarantee period should be recognised over the period of bank guarantee. In the given facts, we find that the assessee has issued a refund to the Reliance Power Ltd on account of cancellation of bank guarantee furnished by it. The details of the same is placed. Likewise it is also seen that the assessee has issued a bank guarantee to a company known as Farsight securities Ltd dated 24 January 2011 for a period of 12 months. The period of 12 months is falling in two different financial years. Accordingly, the exposure of the assessee to the risk on such guarantee is relating to different financial years i.e. Financial Year 2011-12 and 2012-13. It is also important to note that the assessee is paying the taxes at the maximum marginal rate and there is no allegation by the Revenue that the income of the assessee by changing the accounting policy has not been offered to tax. In other words the income of 1 year has been postponed to the another year in the manner and for the reasons as discussed above. In view of the above and after considering the facts in totatlity, we et aside the finding of the ld. CIT-A and directo the AO to delete the addition made by the AO. Hence, the ground of appeal of the assessee is allowed. No addition to the total income of the assessee by way of interest with respect to the loans and advances which were overdue for 3 months. Disallowance of lease operating expenses - whether the lease rent expenses claimed by the assessee on SLM basis is allowable deduction under the provisions of the Act? - HELD THAT - As the liability for the tax under the Act of the initial periods shall be deferred to the later years. But in our considered view this will distort the pictures of the principles of income recognition under the income tax Act. The assessee in the initial year will claim higher amount of lease rent whereas the recipient will claim lesser amount of lease income. Likewise, the assessee will deduct the TDS on the higher amount which will not match with the income of the assessee recipient disclosed in the return of income. Admittedly, the accounting standard issued by the ICAI are mandatory to be followed by the assessee under the Companies Act. But the question arises, such accounting standards should also be followed while working out the income under the provisions of the income tax Act. So far, the Income Tax Act has not notified the accounting standard 19 issued by the ICAI, though mandatory for the assessee to follow while preparing its books of accounts, but this is not the same under the Income Tax Act. Hence the ground of appeal of the assessee is dismissed. Addition on the transfer of residential flat as short term capital gain - HELD THAT - The provisions of section 53A of TOPA were amended w.e.f. 24.09.2001 whereby the requirement of registration of agreement was made mandatory. While the provisions of s. 53A prior to the said amendment were applicable irrespective of whether the contract between the parties had been registered or not, the said relaxation in registration was done away with pursuant to the said amendment. To attract the provisions of section 53A of the Act, it is necessary that the possession of the property should be handed over to the transferee. However, in the case on hand, the possession of the property has not been transferred. Accordingly, we are of the view that the transfer has not taken place within the meaning of the provisions of section 2(47) of the Act and consequently the provisions of capital gain cannot be attracted. Besides the above, we also note that there is no loss to the Revenue in the given facts and circumstances for the reason that the assessee has already shown capital gain in the subsequent year. If, the addition sustained in the year under consideration then the same has to be deleted in the subsequent year. After considering the facts in totality as discussed above, we are not inclined to a the finding of the authorities below. Hence the ground of appeal of the assessee is allowed. Addition on account of prior period expenses - HELD THAT - As decided in own case Revenue fails to rebut the fact that the assessee has already succeeded on this prior period expenditure disallowance issue in preceding assessment years, We further find that hon'ble jurisdictional high court decision in Adani Enterprises 2016 (7) TMI 1250 - GUJARAT HIGH COURT holds that such a disallowance is not to be invoked in case an assessee is assessed at the same rate in the two assessment years in question. We therefore affirm the CIT(A)'s findings under challenge. The Revenu s sole substantive ground

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D.
2. Addition on account of securitization gains.
3. Addition of bank guarantee commission income.
4. Addition of interest income on Non-Performing Assets (NPA).
5. Disallowance of lease operating expenses.
6. Addition of short-term capital gains on transfer of residential flat.
7. Deduction of education cess and secondary and higher education cess.
8. Deduction of Employee Stock Option Plan (ESOP) cost.
9. Addition of prior period expenses.
10. Disallowance of interest on capital work in progress.

Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:
The Tribunal noted that the disallowance under Section 14A r.w. Rule 8D was made by the AO and confirmed by the CIT(A) based on the assessee's investment in tax-free securities. The Tribunal referenced its earlier decisions and the Gujarat High Court's decision, which held that if the assessee had sufficient own funds to cover the tax-free investments, no disallowance of interest expenses was warranted. The Tribunal directed the AO to reconsider the administrative expenses disallowance after giving the assessee an opportunity to provide the basis for its suo moto disallowance.

2. Addition on account of securitization gains:
The assessee's treatment of securitization gains as per RBI guidelines was initially disallowed by the AO and confirmed by the CIT(A). The Tribunal referred to its earlier decisions and the Gujarat High Court's ruling that RBI guidelines must be followed for income recognition. The Tribunal found that the amortization of securitization gains was a timing difference and directed the AO to delete the addition.

3. Addition of bank guarantee commission income:
The AO added the entire bank guarantee commission income upfront, which was confirmed by the CIT(A). The Tribunal, referencing earlier decisions, held that the commission should be recognized over the period of the guarantee. The Tribunal noted that the assessee's method of pro-rata recognition was in line with the matching concept and directed the AO to delete the addition.

4. Addition of interest income on Non-Performing Assets (NPA):
The AO added interest income on NPAs based on Rule 6EA, which was upheld by the CIT(A). The Tribunal referred to the RBI guidelines and the Gujarat High Court's decision, which mandated that interest on NPAs should be recognized on a cash basis. The Tribunal directed the AO to delete the addition, emphasizing that the RBI guidelines take precedence over Rule 6EA.

5. Disallowance of lease operating expenses:
The AO disallowed additional lease operating expenses claimed by the assessee based on straight-line method (SLM) as per AS 19, which was confirmed by the CIT(A). The Tribunal held that while AS 19 is mandatory under the Companies Act, it is not recognized under the Income Tax Act. The Tribunal upheld the disallowance, stating that the expenses should be claimed based on accrual.

6. Addition of short-term capital gains on transfer of residential flat:
The AO added short-term capital gains on the sale of a residential flat, which was confirmed by the CIT(A). The Tribunal noted that the transfer was not complete as possession was handed over in the subsequent year. The Tribunal directed the AO to delete the addition, acknowledging that the income was already offered to tax in the subsequent year.

7. Deduction of education cess and secondary and higher education cess:
The assessee claimed deduction of education cess and secondary and higher education cess, which was not claimed in the return of income. The Tribunal admitted the additional ground and directed the AO to examine the eligibility of the deduction afresh.

8. Deduction of Employee Stock Option Plan (ESOP) cost:
The assessee claimed deduction of ESOP cost, which was not claimed in the return of income. The Tribunal admitted the additional ground and directed the AO to examine the eligibility of the deduction afresh.

9. Addition of prior period expenses:
The AO disallowed prior period expenses, which was deleted by the CIT(A). The Tribunal upheld the CIT(A)'s decision, referencing its earlier rulings that if the expenses crystallized during the year, they should be allowed.

10. Disallowance of interest on capital work in progress:
The AO disallowed interest on capital work in progress, which was deleted by the CIT(A). The Tribunal upheld the CIT(A)'s decision, noting that the assessee had sufficient own funds to cover the capital work in progress, and thus, no interest disallowance was warranted.

Conclusion:
The Tribunal provided detailed rulings on each issue, often referencing earlier decisions and higher judicial authorities. The Tribunal allowed certain grounds for statistical purposes, directing the AO to re-examine the issues, while upholding or deleting additions based on established precedents and the specific facts of the case.