2016 (10) TMI 883 - AT - Income Tax

Dsiallowance u/s 14A - NIL disallowance by the assessee - Held that - We are unable to see any observations and conclusion of the A.O which states that the A.O was not satisfied with the correctness of NIL disallowance claim of the assessee and thus, as per sub-section (2) of section 14A of the Act, the A.O cannot proceed to determine the amount of expenditure incurred in relation to such income which does not form part of total income under this Act in accordance with the method as prescribed in Rule 8D of the Rules. In our humble understanding and language used by the Legislature in section 14A of the Act. The word A.O has been used and we are unable to see any intention of the Legislature which mandates that compliance of sub-section (2) of section 14A of the Act can be made at the first appellate stage by the ld. CIT(A). Thus, we decline to accept the contention of the ld. counsel of the Revenue. On the basis of foregoing discussion, we are of the considered opinion that the disallowance made by the A.O and partly upheld by the ld. CIT(A) u/s 14A r.w.r. 8D(2)(ii) of the Rules is not sustainable in view of the proposition laid down by the Hon ble High Court of Delhi in the case of Taishika 2014 (12) TMI 482 - DELHI HIGH COURT and thus we demolish the same. Prior period expenses - disallowance on the preliminary ground these were not in fact in the nature of prior period expenses - Held that - since these expenses/incomes are for the projects completed in the past years but were subjected to final payments to be made to the vendor or receivable from clients these difference arose and hence have been accounted for during the current period. The A.O has not controverted the above explanation and submission of the assessee and proceeded to make disallowance and addition by observing that the assessee is maintaining its books of accounts on mercantile basis. - the claim of the assessee was allowed consistently during the earlier and subsequent A.Y and expenses claimed by the assessee were shown under the heard of prior period expenses but it was incurred during the previous year relevant to A.Y 2009- 10. Thus the same cannot be disallowed and added to the income of the assessee. Therefore, the A.O is directed to allow the claim of the assessee

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Disallowance of prior period expenses.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act, 1961:

Grounds of Appeal:
The assessee contested the partial disallowance of ?18,48,519 made by the Assessing Officer (AO) under Section 14A by applying Rule 8D, which was sustained to the extent of ?12 lakhs by the Commissioner of Income Tax (Appeals) [CIT(A)].

Arguments by the Assessee:
The assessee argued that the AO recorded satisfaction on an incorrect premise and applied Rule 8D mechanically without substantial allegations. The investments in joint ventures, which are taxable, were incorrectly considered for disallowance under Section 14A. The CIT(A) recognized the relevant facts but upheld the addition on an unjustified premise.

Observations by CIT(A):
The CIT(A) noted that there were no secured or unsecured loans during the relevant financial year, thus no direct or indirect expenses could be disallowed under Section 14A read with Rule 8D(2)(ii). The CIT(A) reduced the disallowance from ?18,48,519 to ?12 lakhs, considering administrative and managerial expenses at 0.5% of the average value of investment.

Tribunal's Analysis:
The Tribunal referenced the Delhi High Court's decision in CIT Vs. Taishika Engineering, which stipulates that the AO must be dissatisfied with the correctness of the disallowance or NIL disallowance made by the assessee before invoking Rule 8D. The Tribunal noted that the AO did not express any dissatisfaction with the NIL disallowance by the assessee. Therefore, the AO's action under Section 14A was not justified. The Tribunal concluded that the disallowance made by the AO and partly upheld by the CIT(A) was unsustainable and allowed the assessee's appeal for AY 2008-09.

2. Disallowance of Prior Period Expenses:

Grounds of Appeal:
The assessee contested the disallowance of expenses claimed as prior period expenses, arguing that these expenses were not, in fact, prior period expenses.

Arguments by the Assessee:
The assessee contended that the expenses got crystallized during the year under consideration and were allowed in earlier and subsequent years. The AO did not raise any doubts about the correctness or quantum of the claimed expenses.

Observations by AO:
The AO disallowed the expenses, stating that the assessee, maintaining books on a mercantile basis, could not claim expenses that neither accrued nor were incurred during the relevant financial year. The AO added back the prior period negative income and expenditure to the income of the assessee.

Tribunal's Analysis:
The Tribunal observed that the AO did not dispute the correctness of the expenses but disallowed them based on the accounting method. The Tribunal noted that similar claims were allowed in earlier and subsequent years. The expenses were incurred during the relevant financial year and thus could not be disallowed. The Tribunal directed the AO to allow the claim of the assessee and consequently allowed the appeal for AY 2009-10.

Conclusion:
Both appeals of the assessee were allowed, with the Tribunal directing the deletion of disallowances made under Section 14A and for prior period expenses. The order was pronounced in the open court on 02.09.2016.