2018 (3) TMI 423 - AT - Income Tax

Disallowance u/s 14A - addition to the book profit u/s 115JB - Held that - We find the Assessing Officer made disallowance u/s 14A and also added the same to the book profit u/s 115JB. We find the ld. CIT(A) restricted such disallowance to ₹ 12,75,500/- and also directed the Assessing Officer to add the amount of ₹ 12,75,500/- to the book profit instead of ₹ 14,72,158/- as expenditure incurred in relation to the exempt income. Tribunal in assessee s own case for assessment year 2006-07 2016 (4) TMI 1306 - ITAT DELHI , we deem it proper to restore the issue to the file of the Assessing Officer for adjudication of the issue afresh in the light of the decision of the Tribunal and in accordance with law after giving due opportunity of being heard to the assessee. Interest charged u/s 234B and 234C in respect of disallowance on account of provision for bad and doubtful debts and deferred tax liability made under MAT provision of the I.T. Act - Held that - No interest u/s 234B and 243C could have been levied consequent to inclusion of the above two items while computing book profit as per Explanation (1) to section 115JB which were brought on the statute book with retrospective effect from 01.04.2001 by the Finance Act, 2008 and 2009 respectively and that after filing of the return of income. The assessee cannot be held as a defaulter of payment of advance tax on account of a subsequent amendment which came into force retrospectively after filing of the return. So far as the decision relied on by the ld. DR in the case of Rolta India Ltd. (2011 (1) TMI 5 - SUPREME COURT OF INDIA) is concerned, the same relates to the levy of interest u/s 234B on the tax calculated on book profit u/s 115JA. There is no dispute to the fact that the assessee is liable to interest u/s 234B on the tax calculated on book profit u/s 115J/115JA. The question before the Hon ble Supreme Court was as to whether the assessee which is a MAT company was not in a position to estimate its profit for the current year prior to the end of the financial year on 31st March. However, in the instant case the amendments which got the assent of the President were brought into the statue book after the end of the financial year. Therefore, the assessee was not in a position to estimate its liability under the MAT provisions. Addition to the total income of the assessee by disallowing payment of royalty by the assessee to its AE being at arm s length price - Held that - So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purpose of business; it was no concern of the TPO to disallow it on any extraneous reasoning. He was expected to examine the international transaction as he actually found them and then make suitable adjustment but a wholesale disallowance of the expenditure is not warranted. It has further been held that it is not open to the TPO to question the judgment of the assessee as to how it should conduct its business and regarding the necessity or otherwise of incurring the expenditure in the interest of its business. It is entirely the choice of the assessee as to from whom it contemplates to source its technology or technical knowhow and as to what steps should be taken to meet the competition prevalent in the market and to stave off the competitors. This is the domain of the businessman and the TPO has no say in the matter. The Revenue cannot justifiably claim to place itself in the arm chair of businessman or in the position of the Board of Directors and assume the role to decide how much is the reasonable expenditure having regard to the circumstances of the case. In view of the above discussion and in view of the detailed reasoning giving by the CIT(A) while deleting the disallowance made by the Assessing Officer. Addition on account of provision for gratuity to book profit as per provision of section 115JB - Held that - It is an admitted fact that the provision for such gratuity was made on the basis of actuarial valuation which even has been accepted by the Assessing Officer. The only grievance of the Assessing Officer is that since the actual payment of the gratuity is deferred to a later date on the happening of certain events namely death or voluntary retirement of the employee which are uncertain events, therefore, such provision is as an unascertained liability. However, the various Benches of the Tribunal are continuously and consistently holding that when the provision for gratuity is being made on the basis of actuarial valuation, it cannot be said to be an unascertained liability and added in terms of clause (c) to Explanation (1) to section 115JB of the I.T. Act. The Hon ble Bombay High Court in the case of CIT v. Echjay Forgings Private Limited 2001 (2) TMI 56 - BOMBAY High Court has held that since provision for gratuity was made on the basis of actuarial valuation, it was an ascertained liability and the said amount would not be added to the net profits. - Decided against revenue

Issues Involved:
1. Disallowance under Section 14A and MAT Provisions under Section 115JB.
2. Charging of Interest under Sections 234B and 234C.
3. Transfer Pricing Adjustment on Royalty Payment.
4. Addition of Provision for Gratuity to Book Profit under Section 115JB.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A and MAT Provisions under Section 115JB:
The assessee contested the disallowance of ?12,75,500 under Section 14A, arguing that Rule 8D of the IT Rules was not applicable for AY 2007-08. The Tribunal noted that the CIT(A) had restricted the disallowance to ?12,75,500 from ?14,72,158, considering 0.5% of the average value of investments as administrative costs. The Tribunal, following its decision for AY 2006-07, restored the issue to the Assessing Officer for fresh adjudication, emphasizing that Rule 8D is applicable only from AY 2008-09.

2. Charging of Interest under Sections 234B and 234C:
The assessee challenged the levy of interest under Sections 234B and 234C for disallowances on account of 'Provision for bad and doubtful debts' and 'Deferred tax liability', which were inserted retrospectively. The Tribunal, referencing decisions from the Hon'ble Orissa and Calcutta High Courts, held that the assessee cannot be deemed a defaulter for advance tax payments due to retrospective amendments. Consequently, the Tribunal deleted the interest charged under Sections 234B and 234C.

3. Transfer Pricing Adjustment on Royalty Payment:
The TPO had made an adjustment of ?4.09 crores by determining the ALP of royalty paid for the Float Glass division at NIL, based on a comparison with other companies. The CIT(A) found that the assessee had received continuous technical know-how and support from its AEs, which justified the royalty payments. The Tribunal upheld the CIT(A)'s decision, noting that the royalty payments were essential for the assessee's business operations and were made at arm's length. The Tribunal also emphasized that the AE's shareholding did not allow significant influence over the assessee's business decisions.

4. Addition of Provision for Gratuity to Book Profit under Section 115JB:
The Assessing Officer added ?40,36,786 to the book profit, considering it an unascertained liability. The CIT(A) deleted the addition, stating that the provision for gratuity was based on actuarial valuation and thus, an ascertained liability. The Tribunal upheld the CIT(A)'s decision, referencing various judicial pronouncements that supported the view that actuarial-based provisions are ascertained liabilities and should not be added to the book profit under Section 115JB.

Conclusion:
The Tribunal allowed the assessee's appeal for statistical purposes regarding the disallowance under Section 14A and MAT provisions, deleted the interest charged under Sections 234B and 234C, upheld the deletion of the transfer pricing adjustment on royalty payment, and confirmed the deletion of the addition of provision for gratuity to book profit under Section 115JB. The Revenue's appeal was dismissed.

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