2020 (9) TMI 610 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D (3) - HELD THAT - Assessee company, with its audited accounts, have come up with specific computation that in order to earn the dividend income of ₹ 6,07,08,212/- they have incurred amount of ₹ 3,46,466/- and suo moto disallowed the same, AO was not empowered to invoke the provisions contained under section 14A read with Rule 8D in a mechanical manner without recording his satisfaction that working given by assessee company is not correct. AO has merely recorded that, I am not satisfied with the correctness of the claim of the assessee . No reasons as to how and why he has not got satisfied with the correctness of the claim of the assessee. So, we are of the considered view that AO as well as ld. CIT (A) have erred in making/confirming further disallowance u/s 14A read with Rule 8D over and above the disallowance made by the assessee, hence disallowance of ₹ 21,23,629/- made by the AO and confirmed by the ld. CIT (A) is hereby ordered to be deleted. Claim of TDS on deferred revenue - AO has not only disallowed the TDS relating to the deferred revenue but also added the TDS so disallowed as income - HELD THAT - In view of the undisputed factual position explained by the assessee and following the order passed by the coordinate Bench of the Tribunal in the case of HCL Comnet Systems and Services Ltd . 2020 (1) TMI 403 - ITAT DELHI we are of the considered view that the TDS credit is to be taken irrespective of the year to which it relates even when a related revenue is booked in subsequent financial year, the assessee is entitled to make claim of the entire TDS in the years of deduction. Assessee is entitled for credit for tax deducted at source proportionately across those years in which income is assessable to tax. Consequently, AO is directed to allow credit of TDS on proportionate basis as required under Rule 37BA (3)(ii).

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961 read with Rule 8D(2)(iii) of the Income Tax Rules, 1962.
2. Addition on account of credit of tax deducted at source (TDS) on deferred revenue.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D(2)(iii):

The assessee, M/s. HCL Comnet Limited, challenged the addition of ?21,23,629 made by the Assessing Officer (AO) under Section 14A of the Income Tax Act, 1961, read with Rule 8D(2)(iii) of the Income Tax Rules, 1962. The AO had made this disallowance on the grounds that the assessee had investments in shares and mutual funds, earning dividend income exempt from taxation. The AO invoked Section 14A read with Rule 8D, relying on CBDT Circular No. 5 of 2014, and calculated the disallowance at 0.5% of the average value of investments.

The Tribunal noted that the assessee had already made a suo moto disallowance of ?3,46,466 for earning the dividend income. It was also observed that the investments were funded by interest-free loans from the holding company, and no interest cost was attributed to these investments. The Tribunal found that the AO and CIT(A) failed to record valid satisfaction regarding the correctness of the assessee's disallowance calculation before invoking Rule 8D.

Citing the Delhi High Court's judgment in HT Media Ltd. vs. Pr. CIT and the Supreme Court's decision in Maxopp Investment Ltd. vs. CIT, the Tribunal emphasized that recording satisfaction by the AO is a mandatory pre-requisite before applying Rule 8D. The Tribunal concluded that the AO acted mechanically without proper satisfaction and ordered the deletion of the disallowance of ?21,23,629.

2. Addition on account of credit of TDS on deferred revenue:

The assessee also contested the addition of ?2,48,71,145 made by the AO on account of TDS credit on deferred revenue. The AO disallowed the TDS credit related to deferred revenue and added the TDS so disallowed as income.

The Tribunal referred to Section 199(3) of the Income Tax Act and Rule 37BA(3)(ii) of the Income Tax Rules, which allow proportionate credit of TDS across the years in which the income is assessable to tax. The Tribunal noted that the assessee provided after-sales services with upfront payments spanning 3 to 4 years, recognizing revenue on a percentage completion method. The TDS was deducted on the entire upfront payment as per statutory requirements.

The Tribunal relied on its previous decision in HCL Comnet Systems and Services Ltd. vs. DCIT, which held that TDS credit should be given proportionately across the years the income is assessable. Consequently, the Tribunal directed the AO to allow the TDS credit on a proportionate basis as required under Rule 37BA(3)(ii).

Conclusion:

The Tribunal allowed the appeal filed by the assessee, directing the deletion of the disallowance under Section 14A read with Rule 8D and the proportionate allowance of TDS credit on deferred revenue. The judgment emphasized the necessity of recording proper satisfaction by the AO before invoking disallowance provisions and upheld the principle of proportionate TDS credit as per the relevant rules.