2018 (6) TMI 1177 - AT - Income Tax

Disallowance of expenditure incurred in relation to exempt income u/s 14A r.w.s. 8D(2) - non recording of satisfactions by AO - Held that - On perusal of the facts available on record, though the AO in a cryptic manner said that I am not satisfied with the claim of the assessee that no expenses were incurred for earning exempt income and the expenditure relates to the exempt income is to be determined as per Rule 8D(2) of the Income-tax Act, 1962 , filed to record a satisfaction having regard to the accounts of the assessee that the assessee has incurred particular expense in relation to earn exempt income. Since the AO has not recorded his satisfaction in the assessment order before determining disallowance contemplated u/s 14A of the Act, invoking Rule 8D(2) to compute such disallowance is not in accordance with law. Sufficiency of own funds - if there are funds available both interest free and overdraft and / or loans, then a presumption would arise that investment would be out of the interest free funds generated or available with the company, if the interest free funds are sufficient to meet the investments. In this case, the assessee has filed necessary evidences to prove that its interest free funds are more than its investments in partnership firm which yielded exempt income and accordingly, the AO was erred in determining disallowances by invoking Rule 8D(2)(ii) of Income-tax Rules, 1962 in respect of interest expenditure. Addition towards unpaid service tax liability u/s 43B - Held that - Hon ble Delhi High Court in the case of CIT vs Noble & Hewitt India Pvt Ltd 2007 (9) TMI 238 - DELHI HIGH COURT held that when assessee did not debit the amount in the P&L account as an expenditure and nor he made the claim of deduction in respect of the said amount, the question of disallowing the deduction not claimed would not arise. In this case, on perusal of facts available on record, we find that the assessee has treated service tax collected from customers under the head current liability based on the interim order passed by the Hon ble jurisdictional High Court 2010 (7) TMI 461 - HIGH COURT OF BOMBAY - there is a valid and sound reason for the assessee to keep service tax collected from its customers under the head current liability . We further observe that the assessee has remitted service tax collected from customers in the subsequent assessment year as soon as the issue of constitutional validity has been decided by the Hon ble High Court. Therefore, we are of the considered view that the AO was erred in making disallowance - decided in favour of assessee

Summary

Issues Involved:
1. Disallowance of expenses incurred in relation to exempt income under Section 14A read with Rule 8D.
2. Disallowance of unpaid service tax liability under Section 43B.

Issue-wise Detailed Analysis:

1. Disallowance of Expenses Incurred in Relation to Exempt Income (Section 14A r.w.r. 8D):

The assessee, engaged in real estate development, filed its return of income for AY 2011-12, declaring a total income of ?1,44,49,230. The assessment was completed under Section 143(3), determining the total income at ?4,36,53,826, including an addition towards disallowance of expenses incurred in relation to exempt income under Section 14A read with Rule 8D.

The assessee argued that the Assessing Officer (AO) did not record his satisfaction regarding the correctness of the claim made by the assessee in respect of expenses incurred in relation to exempt income, which is a pre-condition under Section 14A(2). The assessee also contended that its own funds were more than the value of investments made in the partnership firm, thus no disallowance should be made. Additionally, the assessee argued that the interest expenses related to a term loan from India Bulls, used exclusively for project development, should not be considered for disallowance.

The Commissioner of Income Tax (Appeals) [CIT(A)] rejected the assessee's arguments, stating that the assessee failed to provide necessary evidence, such as bank statements and cash flow statements, to prove sufficient own funds. The CIT(A) confirmed the AO's quantification of disallowance under Rule 8D(2)(ii).

The Tribunal noted that the AO did not record his satisfaction as required under Section 14A(2) before invoking Rule 8D(2). The Tribunal cited the Supreme Court's decision in Maxopp Investments Ltd vs CIT and the Bombay High Court's decision in Godrej & Boyce Mfg Co Ltd vs CIT, emphasizing the necessity of the AO's satisfaction regarding the accounts of the assessee. The Tribunal concluded that the AO's failure to record such satisfaction made the invocation of Rule 8D(2) incorrect. The Tribunal also accepted the assessee's alternative argument, citing the Bombay High Court's decision in Reliance Utilities & Power Ltd vs CIT, which presumes that investments are made from interest-free funds if such funds are sufficient.

2. Disallowance of Unpaid Service Tax Liability (Section 43B):

The AO observed that the assessee collected service tax from customers but did not remit it to the government account, disallowing the unpaid liability under Section 43B. The assessee argued that the levy of service tax on builders was challenged before the Bombay High Court, which granted an interim stay on coercive collection. The assessee treated the collected service tax as a current liability, which was paid in the subsequent financial year after the High Court's decision.

The CIT(A) upheld the AO's decision, stating that service tax collected is a trading receipt and should be disallowed if not paid within the prescribed time under Section 43B.

The Tribunal found merit in the assessee's argument, noting that the service tax collected was treated as a current liability due to the interim stay by the High Court. The Tribunal cited the Bombay High Court's decision in CIT vs Ovira Logistics Pvt Ltd and the Delhi High Court's decision in CIT vs Noble & Hewitt India Pvt Ltd, which held that Section 43B does not apply to liabilities not claimed as expenditure in the Profit & Loss account. The Tribunal concluded that the AO erred in disallowing the unpaid service tax liability under Section 43B and directed the AO to delete the addition.

Conclusion:

The Tribunal allowed the appeal filed by the assessee, directing the AO to delete the additions made towards the disallowance of expenses incurred in relation to exempt income under Section 14A and the unpaid service tax liability under Section 43B. The order was pronounced in the open court on 20th June 2018.