2016 (8) TMI 68 - AT - Income Tax

Disallowance of notional expenditure u/s.14A - Held that - The assessment year involved herein is 2006-07 and Rule-8D came into statutory book only with effect from 24.03.2008. Thus, the Rule-8D is applicable from assessment year 2008-09 only and not applicable to the assessment year 2006-07. Being so we direct the AO to disallow 2% of exempted income towards notional expenditure incurred for the purpose of earning this income. Disallowance of compensation - Held that - The amount of ₹ 30 lakhs was still appearing in the balance sheet of assessee under the head provisions for claims and compensation and it was not written off in the books of accounts of assessee. Being so, it cannot be treated as bad debt in the assessment year under consideration. As decided in the case of M/s.T.R.F. Ltd., reported in 2010 (2) TMI 211 - SUPREME COURT after the amendment of section 36(1)(vii) of the Income-tax Act, 1961, with effect from April 1, 1989, in order to obtain a deduction in relation to bad debts, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable it is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. Addition made in respect of surrender value of Key Man Insurance Policy as income of assessee - Held that - once there is an assignment of Key Man Insurance Policy by employer company to employee, insurance policy gets converted into an ordinary policy and hence, in that case, maturity value received by employee would not be subject o tax in view of section 10(10D) of the Act. In our opinion, the argument of assessee s counsel is totally misplaced that the two insurance policies were taken in the name of Managing Director of the assessee company i.e. present assessee for amounting to ₹ 100 lakhs each. The said policy was assigned to the assessee on 31.03.2006, and the surrender the value of that policy amounting to ₹ 58,74,752/- was offered as income as perquisite u/s. 17(3) of the Act for assessment year 2006-07. Subsequently, within a short time, the said policy was encashed at ₹ 97,03,083/- on 29.06.2006. In our opinion, the device adopted by the assessee by assigning the policy and encahsing the same is nothing but colorable device adopted to evade tax and we do not find any merit in the argument of assessee s counsel

Summary

Issues Involved:
1. Disallowance of notional expenditure u/s.14A of the Act for A.Y. 2006-07.
2. Disallowance of compensation for non-construction of penthouse.
3. Disallowance of land lease charges under section 194I of the Act for A.Y. 2006-07.
4. Reopening of assessment for A.Y. 2007-08.
5. Addition of surrender value of Key Man Insurance Policy as income for A.Y. 2007-08.

Analysis:
1. Disallowance of Notional Expenditure (A.Y. 2006-07):
The AO disallowed notional expenditure under section 14A of the Act. The CIT(A) confirmed the disallowance based on huge investments made by the assessee. However, the ITAT held that Rule-8D is not applicable for the assessment year 2006-07. Relying on relevant case law, the ITAT directed the AO to disallow 2% of exempted income towards notional expenditure. Thus, this ground was partly allowed.

2. Disallowance of Compensation (A.Y. 2006-07):
The issue involved non-construction of a penthouse leading to a dispute over compensation. The CIT(A) upheld the AO's decision that the amount was a provision and capital in nature, not an expenditure. The ITAT concurred, citing the Supreme Court's ruling that for bad debts, it must be written off as irrecoverable. As the amount was not written off, the ground was dismissed.

3. Disallowance of Land Lease Charges (A.Y. 2006-07):
The issue concerned disallowance of land lease charges under section 194I, which the appellant did not press during the hearing. Consequently, the ground was dismissed as not pressed.

4. Reopening of Assessment (A.Y. 2007-08):
The appellant did not press the ground related to the reopening of assessment for A.Y. 2007-08, leading to its dismissal.

5. Addition of Surrender Value of Key Man Insurance Policy (A.Y. 2007-08):
The dispute involved the surrender value of a Key Man Insurance Policy being added as income. The CIT(A) upheld the addition, considering the policy conversion and tax implications. The ITAT agreed, dismissing the appeal based on the colorable device used to evade tax. The judgment cited relevant case law to support the decision, leading to the dismissal of this ground as well.

In conclusion, both appeals of the assessee were dismissed by the ITAT based on the detailed analysis and interpretation of the legal provisions and case laws presented in the judgment.