2021 (1) TMI 530 - AT - Income Tax

Disallowance u/s 14A - Assessee has come up with specific plea that for earning exempt dividend income, it has not incurred any expenditure, hence no suo motu disallowance has been made - HELD THAT - When we examine the order passed by the AO we find that he has proceeded on the premise that since the assessee has earned huge dividend income, some expenditure would have been incurred for earning the same. AO has accepted the audited books of account maintained by the assessee company which is a Government undertaking. When it is undisputed fact on record that assessee company being a Government undertaking has made investment in specific Government securities and moreover substantial portion of investments is coming from earlier years, no question arises to incur separate expenses. In order to invoke the provisions contained u/s 14A read with Rule 8D(2)(iii), the AO is mandatorily required to record his dissatisfaction that claim of the assessee as to not incurring any expenses is not correct. So, without recording proper satisfaction, disallowance under Rule 8D is not sustainable. AO without bringing on record an iota of evidence if assessee has incurred expenses to earn the dividend income proceeded to invoke the provisions contained under section14A r/w Rule 8D(2)(iii) mechanically which is not permissible. Addition of expenditure made towards Corporate Social Responsibility (CSR) and sustainable development - HELD THAT - Expenses claimed by the assessee company have been incurred as per guidelines of the Ministry concerned with approval of the Board to the best business interest of the assessee company. So AO, without examining the nature of the expenses, disallowed the claim mechanically even by ignoring the rule of consistency. Moreover, CSR expenses have been incurred by the assessee on the direction of the Government of India and identical issue has been decided by the coordinate Bench of the Tribunal in case of M/s. HLL Lifecare Ltd. 2018 (6) TMI 552 - ITAT COCHIN - no illegality or perversity in the findings returned by the ld. CIT (A) in deleting the addition made by the AO on account of disallowance of CSR expenditure - Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of disallowance under section 14A of the Income Tax Act, 1961 for Assessment Years 2013-14 and 2014-15.
2. Deletion of addition on account of Corporate Social Responsibility (CSR) expenses for Assessment Years 2013-14 and 2014-15.
3. Disallowance of sustainable development expenses for Assessment Year 2013-14.

Detailed Analysis:

1. Deletion of Disallowance under Section 14A:
The Revenue challenged the deletion of disallowance under section 14A, amounting to ?1,15,21,250/- and ?13,21,75,000/- for AYs 2013-14 and 2014-15 respectively. The Tribunal noted that the assessee, a Government undertaking, had substantial investments in specified Government securities from earlier years and earned significant dividend income during the assessment years. The assessee claimed that no expenditure was incurred to earn the exempt dividend income, and thus, no disallowance was made by itself.

The AO disallowed the amount based on the assumption that some expenditure must have been incurred to earn the dividend income, without recording proper dissatisfaction as required under section 14A read with Rule 8D(2)(iii). The Tribunal upheld the CIT(A)'s decision to delete the disallowance, citing the lack of evidence and mechanical application of the provisions by the AO. The Tribunal relied on precedents from the Delhi High Court and its own earlier decisions in the assessee's case, confirming that substantial investments were made in earlier years, and no separate expenses were incurred for earning the dividend income.

2. Deletion of Addition on Account of CSR Expenses:
The Revenue also challenged the deletion of additions made on account of CSR expenses, amounting to ?6,44,00,000/- and ?5,32,92,063 for AYs 2013-14 and 2014-15 respectively. The Tribunal observed that the assessee, a Government undertaking, executed various projects for sustainable development as per the guidelines issued by the Department of Public Enterprises. The AO disallowed the CSR expenses by misinterpreting section 37(1) of the Act, stating that such expenses were not incurred for business purposes.

The Tribunal noted that identical CSR expenses were allowed in earlier years and that the AO failed to examine the nature of the expenses properly. The Tribunal cited various judicial precedents, including decisions from the Kerala High Court and ITAT Mumbai Bench, which held that CSR expenses incurred by Government undertakings are allowable as business expenditure. The Tribunal found no illegality in the CIT(A)'s decision to delete the disallowance of CSR expenses for both assessment years, emphasizing that the expenses were incurred as per Government directions and were necessary for business purposes.

3. Disallowance of Sustainable Development Expenses:
The assessee challenged the disallowance of ?77,18,481/- on account of sustainable development expenses for AY 2013-14. The Tribunal noted that the CIT(A) upheld the disallowance without considering that similar expenses were allowed in earlier years. The Tribunal emphasized the need for consistency and set aside the issue to the AO, directing them to follow earlier years' orders if the facts were not distinguishable. This ground was allowed for statistical purposes.

Conclusion:
Both appeals filed by the Revenue were dismissed, and the cross-objection filed by the assessee was allowed for statistical purposes. The Tribunal upheld the deletion of disallowance under section 14A and CSR expenses, while the issue of sustainable development expenses was remanded back to the AO for reconsideration in line with earlier years' orders.