2020 (7) TMI 283 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - HELD THAT - As the interest free funds are in excess of the investments the presumption that arises is that interest free funds have been invested in investments which do not yield taxable income as held in the case of CIT vs. Reliance Utilities Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT . We find no infirmity in the order of the ld. CIT(A). Thus we uphold the deletion of the disallowance made under Rule 8D(2)(ii) of the Rules. Disallowance made under Rule 8D(2)(iii) CIT(A) has directed the AO to consider only those investments which have earned dividend during the year for the purpose of computation of disallowance under the Rules. This direction is in line with the propositions of law laid down in the case of CIT vs. M/s. REI Agro Ltd. 2014 (4) TMI 713 - CALCUTTA HIGH COURT and in the case of Vireet Investment Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI . Thus we see no reason to interfere with the direction of the ld. CIT(A) on this issue. Thus we dismiss ground no. 1 of the Revenue. Allowability of deduction us. 80IA - HELD THAT - Assessee is a developer and not merely a works contractor and is eligible for deduction u/s. 80- IA. Accordingly the claim for deduction u/s. 80-IA(4) is hereby allowed. Disallowance of employees contribution to PF ESI - HELD THAT - This issue is covered in favour of the assessee by the judgement in the case of PCIT vs. Rajasthan State Beverages Corporation Ltd. 2017 (7) TMI 1087 - SC ORDER . Thus we dismiss this ground of the Revenue. Deductibility of the provision for future losses - Revenue s contention is that these are unascertained liability and hence not deductible - HELD THAT - AO has merely rejected the claim of the appellant by calling it a contingent and unascertained expenditure. However as per the discussion in the various decisions discussed above it has been held that applicability of AS-7 is acceptable. In this case it has been argued that as the unbilled revenue has been offered for taxation therefore the provision for future losses as per AS-7 should be allowed. The AO has not pointed out any defect in the estimate or application of AS-7. In fixed price contracts the appellant having credited all its revenue as per the contract has to provide for all the foreseeable expenses which it is bound to incur as per the contract. The accounting standard AS-7 provides for such an eventuality. In view of the facts discussed above it is observed that the; company has followed AS-7 and has debited the future losses - deduction for Future loss is allowable. Disallowance u/s 14A of the Act while computing book profits u/s 115JB - HELD THAT - This issue is covered in favour of the assessee by the order of the Tribunal for the AY 2011-12 in assessee s own case as well as the judgement of the Special Bench of the Delhi Tribunal in the case of Vireet Investment Pvt. Ltd.. 2017 (6) TMI 1124 - ITAT DELHI

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act read with Rule 8D(2)(ii) of the Income Tax Rules.
2. Disallowance under Rule 8D(2)(iii) of the Income Tax Rules.
3. Deduction under Section 80-IA of the Income Tax Act.
4. Disallowance of employees' contribution to PF & ESI.
5. Deductibility of provision for future losses.
6. Disallowance under Section 14A while computing book profits under Section 115JB of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D(2)(ii):
The Tribunal upheld the CIT(A)'s decision that no disallowance can be made under Section 14A read with Rule 8D(2)(ii) as the assessee's interest-free funds were far in excess of the investments. This presumption aligns with the Bombay High Court's ruling in CIT vs. Reliance Utilities & Power Ltd., where it was held that interest-free funds are presumed to be invested in non-taxable income yielding investments.

2. Disallowance under Rule 8D(2)(iii):
The CIT(A) directed the AO to consider only those investments that earned dividends during the year for disallowance computation under Rule 8D(2)(iii). This direction follows the Calcutta High Court's ruling in CIT vs. M/s. REI Agro Ltd. and the Special Bench of the ITAT in Vireet Investment Pvt. Ltd. The Tribunal saw no reason to interfere with this direction.

3. Deduction under Section 80-IA:
The CIT(A) allowed the deduction under Section 80-IA, following the ITAT's earlier decision in the assessee's case for AY 2006-07 and 2009-10. The Tribunal noted that the assessee was a developer, not merely a works contractor, and hence eligible for the deduction. The CIT(A)'s detailed reasoning included that the assessee made investments, executed development work, and undertook various risks, which qualified them for the deduction under Section 80-IA.

4. Disallowance of employees' contribution to PF & ESI:
This issue was resolved in favor of the assessee based on the Supreme Court judgment in PCIT vs. Rajasthan State Beverages Corporation Ltd., which held that such contributions are allowable deductions.

5. Deductibility of provision for future losses:
The CIT(A) allowed the deduction for future losses amounting to ?4,73,81,883, following the guidelines of Accounting Standard AS-7. The Tribunal referenced multiple decisions, including the ITAT Mumbai Bench in Dredging International N.V. and Ashoka Buildcon Ltd., which supported the allowance of such provisions for foreseeable losses in fixed-price contracts. The CIT(A) noted that the assessee had recognized unbilled revenue and provided for future losses accordingly, which was in line with AS-7 and previous ITAT rulings.

6. Disallowance under Section 14A while computing book profits under Section 115JB:
This issue was covered in favor of the assessee by the Tribunal's order for AY 2011-12 and the Special Bench of the Delhi Tribunal in Vireet Investment Pvt. Ltd. The Tribunal upheld the CIT(A)'s order, dismissing the Revenue's ground.

Conclusion:
In all three appeals (ITA Nos. 1212, 1410 & 1950/Kol/2018), the Tribunal consistently upheld the CIT(A)'s orders on all grounds, dismissing the Revenue's appeals. The Tribunal's decisions were based on established legal precedents and consistent application of accounting standards and tax laws.