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2021 (3) TMI 825 - AT - Income TaxDisallowance u/s 80IA - AO disallowed deduction claimed stating that the assessee does not have any profits available for claiming deduction - business losses/ deprecation of earlier years, which have been set off against the income have been notionally brought forward and set off against the profits for the relevant assessment year thereby reducing the profits - assessee stated that for the purpose of computing deduction u/s 80IA, unabsorbed depreciation of earlier years already set off against income of the assessee in the preceding years should not be notionally brought forwarded and set off u/ s 80 IA(5) for determining claim of deduction - HELD THAT - In the present case, there is no dispute that the losses incurred by the assessee were already been set off and adjusted against the profits of the earlier years. During the relevant assessment year, the assessee has exercised the option of claiming deduction u/ s 80IA. There is no unabsorbed depreciation or loss of the eligible undertaking and the same were already absorbed in the earlier years. There is a positive profit during the year. The Assessing Officer s calculation of treating the each unit independently and setting off the profits against the losses of the unit which have already been set off against by the profits of the assessee in the earlier years cannot be held to be legally valid. AO is directed to verify the same for accuracy of the figures from the returns filed for the earlier assessment years. The appeal the revenue on this issue is dismissed. Whether the brought forward losses need to be set off against the profits earned during the year before claiming the deduction u/s 80IA or not? - On a concurrent reading of what constitutes on initial assessment year and the provision for brought forward of losses, the eventual conclusion derives from such reading is that in case the assessee has existing brought forward losses which were either could not be set off against the profits and if the assessee considers any year as the initial assessment year for the benefit of Section 80IA in such cases, the eligible profits would be determined only after setting off of the losses/ unabsorbed depreciation carried forward in the year the deduction is claimed. Deduction u/ s 14A r.w.r. 8D - Whether the Assessing Officer have recorded any cogent reason for his dissatisfaction or not? - HELD THAT - In the instant case, the AO cannot be faulted for not being satisfied with the claim of the assessee. The AO is justified in presuming that the assessee has incurred expenditure towards administrative activities necessary to earn the exempt income. Once, the inference of the AO is found to be correct, the provisions of Rule 8D sets in. Owing to the decisions of the Hon ble Courts and the facts of the instant case, we hold that the Assessing Officer has rightly not satisfied with the contentions of the assessee and the disallowance. Whether the ld. CIT (A) was correct in deleting the amount under Rule 8D(2)(ii) or not? - CIT (A) deleted the addition - We hold that in the absence of incurring of any expenditure of interest by the assessee to any party on account of interest with regard to the amounts invested, we hold that the provisions of Section 8 D(2)(ii) cannot be attracted. Hence, we hereby decline to interfere with the action of the ld. CIT (A). Whether the ld. CIT (A) was correct in confirming the amount under Rule 8D(2)(iii) or not? - During the year, the assessee has received ₹ 29.86 Cr. and claimed that no expenditure has been incurred for earning this income. During the assessment proceedings before the AO, the assessee has offered ₹ 2,30,000/- as approximate expenditure incurred. As per the settled position and on the facts of the case as mentioned above, the provisions of Rule 8D(2)(iii) are invited to the facts of the case. Hence, the action of the AO determining of percentage of the average investments for disallowance as per Rule 8D(2)(iii) cannot be faulted with. Disallowance should be confined to the investments yielding exempt income. Hence, the ground of the assessee on this aspect is accepted. The revenue is hereby directed to re- compute the disallowance taking into account only those investments that have yielded exempt income. TDS u/s 194A - disallowance u/s 40 (a)(ia) on the ground that no TDS was deducted on the guarantee commission paid to the bank - HELD THAT - Notification No. 56/2012 dated 31.12. 2012 clarifies that no tax will be deducted at source w.e. f. 01. 01.2013. This cannot imply that deduction of tax will be done prior to 01.01.2013. This is a clarificatory notification. The clarifications issued by the Board pertain to the statute in force from the date of insertion. Circulars cannot be treated as amendments which generally have a prospective effect unless specified as retrospective. In our view the assessee was not required to deduct TDS on bank guarantee commission as there is a conspicuous absence of principle - agent relationship envisaged under Section 194H. There is no principle- agent relationship between a bank and its customers. Further, the amount charged by a bank, not in the nature of a commission as per Act. Disallowance on account of CSR - AO disallowed the expenditure claimed stating it was not incurred wholly and exclusively for the purpose of business of the assessee - CIT (A) supported the order of the Assessing Officer holding that the Corporate Social Responsibility expenditure is an application of income. An application of income is not an allowable deduction for computing taxable income of any company - HELD THAT - The expenditure incurred by the assessee is in no way connected with the business of the assessee or earning of the income. As per section 37 therefore the expenditure has not been incurred wholly and exclusively for the purpose of the business and cannot be allowed as a deduction. We have also gone through the arguments of the assessee that the explanation is prospective in nature. Since, we are of the view that the explanations are only with regard to the main provisions of the Act, the explanation are brought in to pact the provisions and to avoid any confusion in interpretation. The effect of the explanation shall be from the date of insertion of the provision. The explanations gives clarity to the statute as it is and as it was meant to be. Hence, keeping in view the clear provisions of the Section 37(1), Explanation thereof, Section 135 of the Companies Act, and keeping in view the fact that the CSR expenses are a charge on the profits and the expenses incurred by the assessee are not expenditure allowed as per Sections 30 to 36, we dismiss the appeal of the assessee on this ground. Education ( SHEC ) on Income Tax and Fringe Benefit Tax is an allowable expenditure for computing total income as per the provisions of the Income Tax Act, 1961 - HELD THAT - Keeping in view the provisions of the Act pertaining to Section 40(a)(ii) and Section 115JB, Circular of the CBDT No. 91/58/66-ITJ(19), the orders of Co-ordinate Benches of ITAT and judicial pronouncements of the Hon ble High Court of Bombay and Hon ble High Court of Rajasthan, we hereby direct the revenue to allow the claim of deduction of the Education Cess and FBT as per the provisions of Section 37 of the Income Tax Act.
Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act. 2. Deduction under Section 80IA of the Income Tax Act. 3. Disallowance of Corporate Social Responsibility (CSR) expenditure. 4. Charging of interest under Section 234C of the Income Tax Act. 5. Disallowance under Rule 8D(2)(ii) and Rule 8D(2)(iii) of the Income Tax Rules. 6. TDS on bank guarantee commission. 7. Deduction of Education Cess and Fringe Benefit Tax (FBT). Issue-wise Detailed Analysis: 1. Disallowance under Section 14A of the Income Tax Act: The assessee challenged the disallowance under Section 14A, arguing that only ?2,30,000 should be disallowed. The CIT(A) upheld the AO's application of Rule 8D(2)(iii) without recording dissatisfaction. The Tribunal held that the AO had applied his mind and recorded dissatisfaction as required by Section 14A. It was decided that the AO rightly concluded that the assessee incurred expenditure towards earning exempt income. The Tribunal upheld the disallowance under Rule 8D(2)(iii) but directed the revenue to re-compute the disallowance considering only those investments that yielded exempt income. 2. Deduction under Section 80IA of the Income Tax Act: The AO disallowed the deduction claimed under Section 80IA, stating that the assessee had no profits available due to brought forward losses. The Tribunal referred to Circular No. 1/2016 and held that the assessee is entitled to claim deduction from the assessment year 2009-10 as the initial assessment year. The Tribunal clarified that the initial assessment year for the claim of deduction need not be the first year of commencement of operations. It was concluded that the brought forward losses that were already set off against regular profits cannot be brought again for determining profits eligible for deduction. 3. Disallowance of Corporate Social Responsibility (CSR) expenditure: The AO disallowed CSR expenditure of ?51,05,000, stating it was not incurred wholly and exclusively for business purposes. The CIT(A) upheld this disallowance, relying on various judicial decisions. The Tribunal agreed, stating that CSR expenses are considered an application of income and not allowable as a deduction for computing taxable income. The Tribunal confirmed the addition of ?51,05,000. 4. Charging of interest under Section 234C of the Income Tax Act: The assessee challenged the charging of interest under Section 234C. The Tribunal did not specifically address this issue in detail, implying that the charging of interest under Section 234C was upheld as per the provisions of the Act. 5. Disallowance under Rule 8D(2)(ii) and Rule 8D(2)(iii) of the Income Tax Rules: The AO disallowed ?7,91,95,087 under Rule 8D(2)(ii). The CIT(A) deleted this addition, and the Tribunal upheld the deletion, noting that the assessee did not incur any interest expenditure on borrowed funds for investments. The Tribunal confirmed the disallowance under Rule 8D(2)(iii), stating that the AO correctly determined the percentage of average investments for disallowance. 6. TDS on bank guarantee commission: The AO disallowed the deduction for bank guarantee commission due to non-deduction of TDS. The Tribunal held that the assessee was not required to deduct TDS on bank guarantee commission, as there was no principal-agent relationship between the bank and the customer. The Tribunal upheld the deletion of the disallowance made by the AO under Section 40(a)(ia). 7. Deduction of Education Cess and Fringe Benefit Tax (FBT): The assessee raised an additional ground for the deduction of Education Cess and FBT. The Tribunal admitted this ground and directed the revenue to allow the claim of deduction of Education Cess and FBT as per the provisions of Section 37 of the Income Tax Act, following various judicial precedents. Conclusion: - On the issue of Section 80IA, the appeal of the assessee is allowed. - On the issue of Rule 8D(2)(ii), the appeal of the revenue is dismissed. - On the issue of Rule 8D(2)(iii), the appeal of the assessee is dismissed. - On the issue of exempt income yielding investments, the appeal of the assessee is allowed. - On the issue of TDS, the appeal of the assessee is allowed. - On the issue of CSR, the appeal of the assessee is dismissed. - On the issue of Education Cess, the appeal of the assessee is allowed. The appeal of the assessee is partly allowed, and the appeal of the revenue is dismissed.
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