2019 (4) TMI 618 - AT - Income Tax

Disallowance of prior period expenses - netting off of prior period expenses & income - allowable revenue expenditure u/s 37 - HELD THAT - CIT(A) has rightly observed that prior period expenses claimed by the assessee are of revenue in nature, and they have been crystallized during the accounting period relevant to this assessment year. Considering this aspect, the ld.CIT(A) has rightly deleted the disallowance. A reference to the decision in the case of Adani Enterprises 2016 (7) TMI 1250 - GUJARAT HIGH COURT has also been made for the proposition that once an income pertaining to prior period is being recognized in the current year, and offered for taxation, then equal treatment be given to prior period expenditure which are revenue in nature and crystallized in this year. - Decided against revenue Disallowance u/s 14A r.w. Rule 8D - HELD THAT - There is no dispute with regard to the fact that the assessee has earned ₹ 4.29 crores as dividend income. The assessee has made investment of ₹ 9.14 crores. It has interest free funds of ₹ 433.13 crores. The ld.CIT(A) by putting reliance upon the judgment of CIT Vs. Suzlon Energy Ltd. 2013 (7) TMI 697 - GUJARAT HIGH COURT and CIT Vs. Torrent Power Ltd. 2014 (6) TMI 185 - GUJARAT HIGH COURT has held that when the assessee has more interest free funds, then it is to be construed that investment was made out of interest free funds and no disallowance is to be made on account of interest expenditure. Administrative expenses are required to be calculated for disallowance under section 14A of the Act. However, the ld.AO shall take into consideration the average of investment, which has yielded tax free income during the year. This exercise be carried out after providing due opportunity of hearing to the assessee. In view of the above, ground no.2 raised by the Revenue is rejected MAT computation u/s 115JB including disallowance under section 14A - HELD THAT - As relying on VIREET INVESTMENT (P.) LTD. 2017 (6) TMI 1124 - ITAT DELHI question answered in favour of the assessee and held that computation for the purpose of clause (f) of Explanation 1 to Section 115JB(2) is to be made without resorting to the computation as contemplated under section 14A r.w. rule 8D. Respectfully following the above allow this ground of appeal and direct the AO not to make adjustments in book profit for the purpose of MAT liability on the basis of calculations made with Rule 8D of the Income Tax Rules.

Summary

Issues involved:
1. Disallowance of prior period expenses.
2. Disallowance under section 14A r.w. Rule 8D of the Income Tax Rules.
3. Inclusion of disallowance under section 14A in the book profit computed under section 115JB of the Act.

Disallowance of prior period expenses:
The dispute arose regarding the addition of ?71,35,647 by the AO as a disallowance out of the claim of prior period expenses. The Tribunal remitted the issue back to the AO to examine the exact nature of the liability and the period of income. The AO found that the prior period income was ?1,09,70,593 and allowed relief to that extent, restricting the disallowance to ?71,35,647. The CIT(A) deleted this disallowance, emphasizing that the prior period expenses were revenue in nature and crystallized during the relevant accounting period. The CIT(A) referred to the Gujarat High Court's decision in a similar case to support the deletion of disallowance.

Disallowance under section 14A r.w. Rule 8D of the Income Tax Rules:
The issue revolved around the calculation of disallowance under section 14A r.w. Rule 8D. The AO initially disallowed ?3,25,92,000, which was later revised to ?36,35,685. The CIT(A) partially upheld the disallowance. The first component, interest expenditure of ?31,65,175, was deleted by the CIT(A) as the assessee had more interest-free funds than investments. The remaining component, administrative expenses of ?4,70,510, was upheld by the CIT(A. The Tribunal directed the AO to consider the average investment yielding tax-free income while calculating administrative expenses for disallowance under section 14A.

Inclusion of disallowance under section 14A in the book profit:
The assessee contested the inclusion of ?4,70,510 disallowed under section 14A in the book profit computed under section 115JB. Citing a Special Bench decision, the Tribunal held that such disallowance should not impact the book profit calculation under section 115JB. Following the Special Bench's decision, the Tribunal directed the AO not to make adjustments in the book profit for MAT liability based on Rule 8D calculations. As a result, the Revenue's appeal was dismissed, and the assessee's appeal was partly allowed.

This detailed analysis of the judgment from the Appellate Tribunal ITAT AHMEDABAD highlights the key issues, arguments presented, decisions made, and the legal reasoning behind each decision.