2018 (8) TMI 979 - AT - Income Tax

Deduction u/s 80IA - assessee has allegedly not maintained the separate books of accounts - failure to comply with audit as prescribed under section 80 IA (7) of the act in respect of the windmill undertakings - Held that - According to the subsection 7 of section 80 IA the only requirement is that, the accounts of the undertaking are required to be audited. In the present case, the assessee has submitted the audited accounts. If the auditor has not qualified those audited accounts, there is no reason to reject them at the threshold without making further verification. The Ld. assessing officer should have verified whether the assessee has properly computed the income derived from the industrial undertaking or not. If the assessing officer finds that such working is not proper then only he can say that that the audited accounts of the assessee are not reliable. The principle of consistency also demands the assessee may be treated as eligible for deduction and it may not be rejected merely based on non-maintenance of books of accounts. Same is also not found as the mandatory conditions for deduction. Therefore, we do not approve the approach of the assessing officer in rejecting the claim of the assessee at the threshold merely on the basis that no separate books of accounts are maintained even when the assessee has submitted the audit report of the accounts of the industrial undertaking which was the requirement of subsection 7 - Deduction allowed - Decided in favor of assessee. Assessment u/s 144C - Disallowance u/s 14A r.w.rule 8D - built-in cost in the investment activity - appropriation of cost of composite funds needed to be allocated towards earning of exempt income - expenses having direct/ proximate nexus with earning of the dividend income - failure on the part of DRP/AO to record satisfaction for the purpose of section 14A - Nature of expenses incurred on repair of cost tank - revenue or capital expenditure - Held that - before invoking the provisions of rule 8D the Ld. assessing officer has failed in his duty as per the provisions laid out under section 14 A read with rule 8D to point out any discrepancy in the claim made by the assessee having regard to its accounts. It is further the fact that investment of the assessee in the mutual fund is out of this para surplus funds. - Additions made u/s 14A deleted. Regarding expenditure on repairs - Held that - In the light of the various discussion, it is respectfully submitted that there is no warrant to make any disallowance of the revenue portion of engineering services, since there can be no doubt or ambiguity about rendering of the services before 31.3.2010 and accordingly, 14% of the expenditure should be allowed as revenue expenditure. - Decided in favor of assessee.

Summary

Issues Involved:
1. Disallowance under section 14A of ?90,44,496.
2. Disallowance of engineering fees of ?81,94,914.
3. Disallowance under section 80IA(4)(IV) of ?18,35,10,396.
4. Miscellaneous disallowances including horticulture expenditure, computer supplies, software purchase, and security services.

Issue-wise Detailed Analysis:

1. Disallowance under section 14A of ?90,44,496:
The assessee argued that the investment in mutual funds was made out of its own surplus funds, and no borrowings were involved. The assessee had already disallowed ?3,17,216 suo moto, attributing it to the salary of one accountant and a portion of the finance director's remuneration. The Assessing Officer (AO) applied Rule 8D without recording satisfaction regarding the correctness of the assessee’s claim, resulting in a disallowance of ?90,44,496. The Tribunal found that the AO failed to record the necessary satisfaction as required under section 14A(2) and Rule 8D, and thus, the disallowance was deleted. The Tribunal referred to its decision in the assessee's own case for the assessment year 2009-10, emphasizing the need for the AO to point out discrepancies in the assessee's claim before invoking Rule 8D.

2. Disallowance of engineering fees of ?81,94,914:
The assessee had incurred ?5,85,35,098 as the second installment of engineering fees for cold tank repair, of which ?81,94,914 was claimed as revenue expenditure and the rest capitalized. The AO treated the entire amount as capital expenditure. The Tribunal noted that a similar issue for the assessment year 2009-10 was remanded back to the AO for verification. Following the same reasoning, the Tribunal remanded the issue back to the AO to verify the nature of the expenditure and decide accordingly.

3. Disallowance under section 80IA(4)(IV) of ?18,35,10,396:
The AO disallowed the deduction under section 80IA on the grounds that the assessee did not maintain separate books of accounts and failed to comply with the audit requirements. The assessee argued that it maintained separate books, which were duly audited, and revenue was recognized based on credit notes issued by the Gujarat Electricity Board. The Tribunal found that the AO rejected the claim without proper verification. The Tribunal also noted that the assessee's claim for deduction under section 80IA was allowed in previous years, invoking the principle of consistency. Consequently, the issue was remanded back to the AO for verification of the audited accounts and proper examination.

4. Miscellaneous disallowances:
The AO disallowed various expenditures, including horticulture expenses, computer supplies, software purchase, and security services, treating them as capital expenditure. The Tribunal referred to its decisions in the assessee's own case for the assessment years 2007-08 and 2008-09, where similar disallowances were deleted. The Tribunal upheld the directions of the Dispute Resolution Panel (DRP) to delete these disallowances, finding no reason to deviate from its earlier decisions.

Conclusion:
The appeals were disposed of with the Tribunal allowing the assessee's appeal on the disallowance under section 14A and remanding the issues of engineering fees and section 80IA deduction back to the AO for verification. The revenue's appeal against the DRP's directions on miscellaneous disallowances was dismissed.