2016 (9) TMI 1664 - AT - Income Tax

Addition on account of investment in shares made u/s 14A read with rule 8D - as DR contended that the assessee had diverted interest bearing fund for non-business purposes, therefore, the Assessing Officer was justified in invoking the provisions of Section 14A - HELD THAT - We find that in the assessee s own case for the assessment year 2008-09 the matter travelled to the Tribunal and the Tribunal after elaborately discussing the issue 2013 (9) TMI 1300 - ITAT INDORE as held assessee has made investment in shares of group companies as a matter of commercial expediency. We also found that the assessee was having huge reserve as well as surplus funds available out of its profit. However, to show that investment in shares of Associate concerns have been made out of non interest bearing funds, is on the assessee and burden lies on him to demonstrate before the Departmental Authorities that no interest bearing fund has been used. It is also a matter of record that since investment has been made under commercial necessities, the proposition laid down in the case of S. A. Builders Limited 2006 (12) TMI 82 - SUPREME COURT is required to be considered before disallowing interest expenditure having been incurred on the funds borrowed for the purpose of business - investment in group companies were having taxable income and assessee has offered substantial long term and short term capital gains in the returns of subsequent years. Thus we direct the AO to decide the matter afresh in terms of the above observations of the Tribunal. We direct accordingly. Addition of prior period expenses - assessee company has claimed prior period expenses related to reversal of monthly toll charges under settlement with SPV Company Path Oriental Highways Ltd and income has been offered in respective year whereas there is no income received to the assessee - HELD THAT - Tribunal in its order in the assessee s own case for the assessment year 2008-09 2013 (9) TMI 1300 - ITAT INDORE has restored this issue to the file of the Assessing Officer as held As per the accounting standard, in case of construction contractor, the contract revenue would accrue or arise only in respect of initial amount of revenue agreed in the contract. However, in respect of variations of claim and incentive, the revenue would accrue and arise only in the situation, when there is not only probability of acceptance of claim but also when variations, claim or inventive are reliably measurable. Both the conditions enjoyed in respect of variations, claim or incentive payment are cumulative and unless both the conditions are met out together, no revenue claim or incentive can be recognized in the books of account. In the instant case, the claim of the assessee company has been rejected by POHL at thrash hold only and even the process of negotiations have not got commenced during the year under consideration. As the alleged amount of proforma invoice has neither been received nor accrued to the assessee during the relevant assessment year under consideration. Therefore, there is no justification in the action of CIT(A) for bringing to tax net such amount during the year under consideration. However, the Department is at liberty to tax such income in the year of actual receipt, in any subsequent year. Accordingly, we restore the matter back to the file of Assessing Officer to verify and tax this income in the year of actual receipt. Thus Assessing Officer is directed to verify the claim of prior period expenses and decide the same as per the above judgment of the Tribunal. Therefore, we restore this issue as per the above direction.

Summary

Issues Involved:
1. Deletion of addition made on account of investment in shares under Section 14A read with Rule 8D of the Income Tax Rules.
2. Deletion of addition made on account of prior period expenses.

Issue-wise Detailed Analysis:

1. Deletion of Addition Made on Account of Investment in Shares under Section 14A Read with Rule 8D:

The primary issue is whether the CIT(A) was justified in deleting the addition of Rs. 1,80,71,675/- made by the Assessing Officer (AO) under Section 14A read with Rule 8D of the Income Tax Rules. The Tribunal referenced its previous decision in the assessee's case for the assessment year 2008-09, where it was determined that the provisions of Section 14A could only be invoked if the assessee had incurred expenditure in relation to income that does not form part of the total income. The Tribunal emphasized that both conditions under sub-section (1) of Section 14A must be cumulatively fulfilled before the computation machinery under sub-section (2) of Section 14A could be applied.

The assessee argued that the investments were made out of interest-free funds, specifically internal accruals, and therefore, the disallowance of interest under Section 14A was unjustified. The Tribunal noted that the assessee had substantial interest-free funds and that investments in group companies were made out of these funds. The Tribunal also highlighted that the income from these investments was taxable and had been offered in subsequent years. The Tribunal directed the AO to re-examine the issue, considering the observations and judicial pronouncements cited by the assessee.

2. Deletion of Addition Made on Account of Prior Period Expenses:

The second issue concerns the deletion of an addition of Rs. 34,06,665/- made by the AO on account of prior period expenses. The AO had disallowed the claim on the grounds that the income related to these expenses was part of the 80IA claim and should have been lodged in the assessment year 2008-09. The CIT(A) allowed the claim, stating that the net profit shown in the profit and loss account, drawn in accordance with Schedule VI of the Companies Act, 1956, should not be disturbed. The CIT(A) also noted that the income for both assessment years was computed under Section 115JB, and the appellant's action of treating certain income in one year and reversing it in the subsequent year was justified.

The Tribunal referenced its decision in the assessee's case for the assessment year 2008-09, where it restored a similar issue to the AO for verification. The Tribunal observed that the assessee had entered into an EPC contract and raised bills accordingly, recognizing income in its books of account. However, the proforma invoices raised for escalation costs were rejected by the contracting party, and no income was accrued or received by the assessee. The Tribunal emphasized that income tax is charged on income that is either received or accrued, and in this case, no income had accrued or been received. The Tribunal directed the AO to verify the claim of prior period expenses and tax the income in the year of actual receipt.

Conclusion:

The Tribunal allowed the appeal for statistical purposes, directing the AO to re-examine both issues in light of the observations made and the judicial pronouncements cited. The AO is to verify the claims and decide accordingly. The order was pronounced in open Court on 20th October, 2016.