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2018 (8) TMI 130 - AT - Income TaxDisallowance u/s 14A - Held that - We direct the AO to delete the disallowance made u/s 14A r.w.r. 8D(2)(iii) as the disallowance u/s 14A cannot exceed the exempt income. Ground No. 2 is allowed. Disallowance u/s 43B - Held that - Hon ble Supreme Court in various decisions held that levy of interest on breach of the respective Act is compensatory in nature. The interest which is in the nature of breach of Act alone can be disallowed and in compensatory nature cannot be disallowed. Ld. CIT(A) has relied on case laws on sales tax. In those cases it was held that sales tax is a statutory obligation. But in the present case the interest is levied on service tax excise duty and ESI. These are compensatory in nature unlike sales tax Act. Therefore the provisions of section 43B are not attracted. With regard to interest paid to HDFC Bank in our view HDFC Bank is not public financial institution. It is only private sector Bank. Interest paid to HDFC is outside the purview of section 43B. The amounts paid towards interest under the aforementioned heads do not come under the provisions of section 43B hence the disallowance is hereby deleted. Accordingly ground No. 3 is allowed.
Issues Involved:
1. Disallowance under Section 14A read with Rule 8D(2)(iii) of the Income-tax Act, 1961. 2. Disallowance under Section 43B of the Income-tax Act, 1961. Issue-wise Detailed Analysis: 1. Disallowance under Section 14A read with Rule 8D(2)(iii): The assessee challenged the disallowance of ?78,74,968/- made by the Assessing Officer (AO) under Section 14A of the Act, read with Rule 8D(2)(iii). The AO contended that the assessee must have incurred administrative/managerial expenses to manage its non-current investments amounting to ?157,49,93,744/-. Consequently, the AO applied Rule 8D and calculated the disallowance at 0.5% of the average value of investments. The assessee argued that no fresh investments were made, nor were any investments sold during the year, and no dividend was received. Hence, no expenditure was incurred for managing the investments. However, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's disallowance, stating that it was in conformity with Rule 8D(2)(iii). Upon further appeal, the Tribunal referred to decisions from coordinate benches, notably in the cases of M/s SNJ Synthetics Ltd. and M/s Kamadhenu Sukrit Pvt. Ltd., which held that disallowance under Rule 8D should not exceed the exempt income earned. The Tribunal concluded that since the disallowance resulted in an absurd situation where the disallowed amount exceeded the exempt income, it should be restricted to the amount of exempt income. Therefore, the Tribunal directed the AO to delete the disallowance exceeding the exempt income, allowing this ground of appeal. 2. Disallowance under Section 43B: The AO disallowed ?1,76,564/- out of ?11,05,393/- of unpaid statutory liabilities under Section 43B. The assessee argued that this amount represented interest paid to a bank and on delayed payments of service tax, excise duty, and Employees' State Insurance (ESI), which should not attract disallowance under Section 43B. The CIT(A) upheld the AO’s disallowance. The Tribunal reviewed the provisions of Section 43B, which mandates that certain statutory payments are deductible only when actually paid. It noted that interest on service tax, excise duty, and ESI is compensatory and not penal in nature. The Tribunal cited Supreme Court rulings that compensatory interest does not attract disallowance under Section 43B. Furthermore, the interest paid to HDFC Bank does not fall under the purview of Section 43B as HDFC Bank is a private sector bank, not a public financial institution. Consequently, the Tribunal held that the disallowance of ?1,76,564/- was not justified and directed the AO to delete it, thereby allowing this ground of appeal. Conclusion: The Tribunal allowed the appeal filed by the assessee, directing the deletion of disallowances made under Sections 14A and 43B of the Income-tax Act, 1961. The disallowance under Section 14A was restricted to the amount of exempt income, and the disallowance under Section 43B was deleted as the interest payments were compensatory in nature and not covered by the provisions of Section 43B.
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