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2020 (5) TMI 577 - AT - Income TaxDisallowance u/s 14A r.w.r 8D - HELD THAT - In this case, the assessment year involved is 2006-07. Rule 8D was introduced with effect from 24/03/2008 which was prospective in operation and cannot be applied retrospectively as held by the Delhi High Court in the case of Maxopp Investment Ltd. vs. CIT 2011 (11) TMI 267 - DELHI HIGH COURT . Accordingly, we direct the AO to disallow only 2% of expenses incurred towards exempted income. Thus, this ground of appeal of the assessee is partly allowed. Addition of sale proceeds of Rubber Trees and of timber under Rule 7A of the Income Tax Rules.1962 - as contended that Rule 7A cannot be applied as the income from sale of rubber trees is not agricultural income - HELD THAT - High Court observed in the case of Harrisons Malayalam Ltd 2019 (1) TMI 1359 - KERALA HIGH COURT that sale of old and unyielding trees would not give rise to the exempt income. If there is no exempt income, then there is no question of application of Rule 7A. In such circumstances, the claim of the assessee is to be allowed. Jurisdictional High Court considered its own judgment in the case of CIT vs. Thiruvambadi Rubber Co. Ltd. 2011 (6) TMI 452 - KERALA HIGH COURT Being so, the reliance placed by the CIT(A) on the judgment of the Jurisdictional High Court in the case of CIT vs. Thiruvambadi Rubber Co. Ltd. 2011 (6) TMI 452 - KERALA HIGH COURT is totally misplaced. Accordingly, we hold that the sale proceeds on sale of rubber trees and timber cannot be brought to tax under Rule 7A of the I.T. Rules. Thus, this ground of appeal of the assessee is allowed. MAT computation - Diminution in the value of investment, provision for lease rent and provision for bad debts - arriving at the book profit u/s. 115JB, treating the same as a provision for an unascertained liability - HELD THAT - We are of the opinion that the amount set aside as provision for diminution in the value of investment is to be added back to the book profit as shown in the profit and loss account in view of the retrospective amendment introduced by Finance Act No. 2, 2009 by introducing clause (i) (c) . By virtue of the said amendment the amount set aside as provision for diminution in the value of any asset is to be added back in view of the specific clause (i) in the said Explanation. Being so, we do not find any infirmity in the order of the lower authorities in adding back the said amount to the book profits shown in the profit and loss account . Similar provision was made for lease rent as unascertained liability which is hit by the provisions of clause (c) in Explanation (2) of section 115JB of the Act. The contention of the Ld. AR is that the assessee is following mercantile system of accounting and therefore, the provision is to be allowed, though it was crystallized in the year in which the order of the Government of Kerala in G.O. (Ms) No.162/13/RD dated 26-04-2013 was passed. We are not in agreement with this contention of the Ld. AR. Being so, we are not in agreement with the Ld. AR s contention that this ascertained liability is to be allowed in view of mercantile system of accounting followed by the assessee - Provision for lease rent is unascertained liability in the assessment year under consideration and it is to be allowed in the year of crystallization of the expenditure. This ground of appeal of the assessee is dismissed. The appeal of the assessee is partly allowed. Payment of interest for delay in payment of agricultural income tax as a deduction while computing the income of assessee under Income Tax Act - HELD THAT - Interest incurred for delay in payment of Agricultural income tax also cannot be allowed u/s 36(1)(iii) as the condition laid down u/s 36(1)(iii) has not been fulfilled. In other words, interest paid is not for the purpose of the business of the assessee on which income assessee is paying income tax. In our opinion, the interest paid is having direct nexus with agricultural income which is exempt from tax u/s 10(1). Therefore, such payment of interest cannot be allowed u/s 36(1)(iii) also. We have also carefully gone through all the case law cited by the Ld. AR, which have no relevance to the facts of the case. In view of this discussion, we are inclined to dismiss all the grounds of appeal of the assessee. The assessee appeal is dismissed.
Issues Involved:
1. Withdrawal of Revenue’s Appeal for AY 2012-13. 2. Disallowance of Interest under Section 14A of the Income Tax Act, 1961 for AY 2006-07. 3. Addition of Sale Proceeds of Rubber Trees and Timber under Rule 7A of the Income Tax Rules, 1962 for AY 2006-07. 4. Addition of Provisions for Diminution in Value of Investment, Lease Rent, and Bad Debts under Section 115JB for AY 2006-07. 5. Disallowance of Interest on Delayed Payment of Agricultural Income Tax for AY 2012-13. Detailed Analysis: 1. Withdrawal of Revenue’s Appeal for AY 2012-13: At the hearing, the Revenue's representative filed a letter stating that the tax effect in this appeal is below the monetary limit prescribed by CBDT Circular No. 17/2019. Consequently, the appeal was dismissed as withdrawn. 2. Disallowance of Interest under Section 14A of the Income Tax Act, 1961 for AY 2006-07: The assessee contested the disallowance of ?18,43,500/- under Section 14A r.w.r 8D. The CIT(A) upheld the disallowance, citing lack of evidence to show investments were made from surplus funds and not borrowed funds. The CIT(A) also noted the provisions of Section 14A and Rule 8D are applicable even if no exempt income is earned, as per CBDT Circular No. 5/2014. The Tribunal noted that Rule 8D, introduced prospectively from 24/03/2008, cannot be applied retrospectively to AY 2006-07. Citing the Delhi High Court's judgment in Maxopp Investment Ltd. vs. CIT, it was held that the Assessing Officer must first be dissatisfied with the assessee's claim before invoking Rule 8D. The Tribunal directed the Assessing Officer to disallow only 2% of expenses incurred towards exempted income, thus partly allowing the assessee's appeal. 3. Addition of Sale Proceeds of Rubber Trees and Timber under Rule 7A of the Income Tax Rules, 1962 for AY 2006-07: The assessee argued that Rule 7A, applicable for income from rubber manufacture, does not apply to sale proceeds of rubber trees and timber, which are capital receipts. The CIT(A) upheld the Assessing Officer's addition, relying on the Kerala High Court's decision in Thiruvambadi Rubber Co. Ltd. The Tribunal, referring to its own decision in Harrisons Malayalam Ltd. vs. DCIT and the Kerala High Court's observation, concluded that Rule 7A does not cover income from the sale of rubber trees. Therefore, the sale proceeds of rubber trees and timber cannot be taxed under Rule 7A, allowing the assessee's appeal. 4. Addition of Provisions for Diminution in Value of Investment, Lease Rent, and Bad Debts under Section 115JB for AY 2006-07: The Assessing Officer added provisions for diminution in the value of investment, lease rent, and bad debts to the book profit under Section 115JB. The CIT(A) confirmed this, citing amendments by the Finance Act, 2008 and 2009, and relevant case laws. The Tribunal upheld the addition of provision for diminution in the value of investment, citing the retrospective amendment and relevant case laws. However, it disagreed with the addition of provision for lease rent, considering it an unascertained liability to be allowed in the year of crystallization. Thus, the appeal was partly allowed. 5. Disallowance of Interest on Delayed Payment of Agricultural Income Tax for AY 2012-13: The assessee claimed deduction for interest on delayed payment of Agricultural Income Tax (AIT), arguing it was compensatory. The CIT(A) upheld the Assessing Officer's disallowance, referencing the Supreme Court's decision in East India Pharmaceutical Works Ltd. The Tribunal dismissed the assessee's appeal, stating that interest on delayed AIT payment is not connected to business income under the Income Tax Act and cannot be allowed under Sections 37 or 36(1)(iii). The Tribunal found no relevance in the case laws cited by the assessee. Conclusion: - Revenue’s appeal for AY 2012-13 dismissed as withdrawn. - Assessee’s appeal for AY 2006-07 partly allowed regarding disallowance under Section 14A. - Assessee’s appeal for AY 2006-07 allowed regarding addition under Rule 7A. - Assessee’s appeal for AY 2006-07 partly allowed regarding additions under Section 115JB. - Assessee’s appeal for AY 2012-13 dismissed regarding disallowance of interest on delayed AIT payment.
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