2019 (4) TMI 1654 - AT - Income Tax

Disallowance of expenses u/s.14A in respect of earning such exempt income - AO asked the assessee to furnish details of expenses incurred for earning exempt income and also show-caused as to why the expenses incurred and claimed in respect of exempt income should not be disallowed u/s.14A of the Act r.w.r 8D - HELD THAT - It is now well settled that without recording any subjective satisfaction with cogent reasons, the ld. AO cannot proceed to make disallowance u/s.14A of the Act or by adopting computation mechanism provided in rule 8D(2) of the rules. This position has been made very clear by the recent decision of Hon ble Supreme Court in case of Maxopp Investment Ltd., vs. CIT 2018 (3) TMI 805 - SUPREME COURT OF INDIA AO had not recorded any satisfaction with cogent reasons for rejecting the claim of the assessee that no expenditure was incurred for earning exempt income, the disallowance u/s.14A of the Act made by the AO deserves to be deleted. Suo-moto offered a sum of ₹ 5 lakhs for disallowance u/s.14A on an adhoc basis during the course of assessment proceedings. Even this was not considered by the ld. AO while framing the assessment. Only dividend bearing investments are to be considered for the purpose of computing the disallowance u/s.14A of the Act r.w.rule 8D of the rules. Reliance in this regard is placed on the special bench decision of Delhi High Court in the case of ACIT vs. Vireet Investments Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI Consideration of revised claim made by the assessee towards deduction of provision for bad and doubtful debts written back - HELD THAT - CIT(A) had accepted the claim for reducing the provision for doubtful debts written back in the sum of ₹ 23,96,673/- from the total income after considering the fact that the said sum was duly disallowed by the assessee in the computation of income in earlier years in the year in which said provisions were made. Hence, adding the very same sum in the year under consideration would lead to double addition. Accordingly, we hold that the ld. CIT(A) had rightly granted relief to the assessee by placing reliance on the decision of Hon ble Jurisdictional High Court in the case of Pruthvi Brokers and Shareholders Pvt. Ltd., 2012 (7) TMI 158 - BOMBAY HIGH COURT wherein clarified that the judgment of Hon ble Supreme Court in the case of Goetze India Ltd., 2006 (3) TMI 75 - SUPREME COURT does not impinge upon the hearing of the Income Tax Appellate Tribunal as well as CIT(A) to consider the claim of the assessee and direct the Assessing Officer to allow the claim of the assessee. Addition made towards compensation in the form of mark-up of reimbursement - HELD THAT - Since the method adopted by the transfer pricing officer for computing the arm's-length price is not as per the provision of law, the action of the authorities below is not sustainable. Hence, we direct that addition in this regard should be deleted. Disallowance of liquidated damages - HELD THAT - As decided in assessee's own case 2013 (4) TMI 925 - ITAT MUMBAI decided in favour of the assessee on the said orders by the ITAT, we do not see any reason for taking a different view on this issue in the absence of any material change in the facts of the case and thus the order of the Ld.CIT(A) on this count is upheld.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules.
2. Consideration of revised claim made by the assessee towards deduction of provision for bad and doubtful debts written back.
3. Addition made towards compensation in the form of mark-up of reimbursement.
4. Disallowance of liquidated damages.

Detailed Analysis:

I. Disallowance under Section 14A of the Act read with Rule 8D of the Rules:
The assessee, engaged in the business of manufacturing and trading of diesel engines and engineering goods, claimed dividend income as exempt without making any disallowance of expenses under Section 14A. The Assessing Officer (AO) was not satisfied with the assessee's claim of no expenditure incurred for earning exempt income and proceeded to compute the disallowance using Rule 8D, resulting in a disallowance of ?71,69,172/-. The Commissioner of Income Tax (Appeals) [CIT(A)] noted that in a similar situation for A.Y.2007-08, no disallowance was made under Rule 8D(2)(ii) and concluded that the assessee had sufficient own funds. However, the CIT(A) upheld the AO's action regarding administrative expenses under Rule 8D(2)(iii) with an exception for strategic investment. The Tribunal found that the AO did not record any satisfaction with cogent reasons for rejecting the assessee's claim that no expenditure was incurred for earning exempt income, as required by Section 14A(3) read with Rule 8D(1). Citing the Supreme Court decision in Maxopp Investment Ltd. vs. CIT, the Tribunal directed the AO to delete the disallowance in toto for A.Y.2009-10.

II. Consideration of revised claim made by the assessee towards deduction of provision for bad and doubtful debts written back:
During assessment proceedings, the assessee realized that it had erroneously offered to tax a provision for doubtful debts amounting to ?23,96,673/- which had already been disallowed in earlier years. The AO denied the assessee's request to reduce the total income by this amount since the time limit for filing a revised return had expired. The CIT(A) accepted the claim, relying on the Jurisdictional High Court decision in CIT vs. Pruthvi Brokers and Shareholders Pvt. Ltd., which clarified that appellate authorities could entertain such claims even if the revised return was not filed. The Tribunal upheld the CIT(A)'s decision, dismissing the revenue's appeal.

III. Addition made towards compensation in the form of mark-up of reimbursement: ?8,98,575/-:
The AO made an adjustment to the Arm's Length Price (ALP) for reimbursement transactions, adding a 10% mark-up, which was confirmed by the CIT(A). The Tribunal noted that this issue was covered in favor of the assessee in its own case for A.Y.2008-09, where it was held that the method adopted by the Transfer Pricing Officer (TPO) for computing the ALP was not as per the prescribed methods under Section 92C of the Act. Following the precedent, the Tribunal directed that the addition should be deleted.

IV. Disallowance of liquidated damages: ?1,64,43,351/-:
The AO disallowed the assessee's claim for liquidated damages on the grounds that no evidence was provided to establish the liability or payments. The CIT(A) noted that similar disallowances had been deleted in earlier years and that the liquidated damages were incurred under contractual obligations in the normal course of business. The Tribunal found that this issue had been consistently decided in favor of the assessee in previous years and upheld the CIT(A)'s decision to delete the disallowance.

Conclusion:
The Tribunal allowed the assessee's appeal and dismissed the revenue's appeal, directing the deletion of disallowances and additions made by the AO. The judgment emphasized the importance of recording satisfaction with cogent reasons for disallowances under Section 14A and adhering to prescribed methods for computing ALP.