2022 (5) TMI 108 - AT - Income Tax

Disallowance u/s. 14A - whether provisions of section 14A r.w.r. 8D are applicable where the assessee claimed to have incurred no expenditure for earning exempt income? - HELD THAT - From the additional evidence adduced in the course of hearing (page 1-9) it is evinced that the interest / finance charges expenditure debited to P L was merely pertaining to discounting of trade bills and guarantee commission which has been duly supported by the copies of bank advice issued by the bankers which per se discretely leads to an undisputed conclusion that there was no interest expenditure for the year under consideration. Further the perusal of audited financial statement placed revealed that the appellant had not only the sufficient capital reserved funds at its disposal but raised a short term interest-free borrowings from its holding company and both these facts patently ignored while carrying out the impugned disallowance. In the absence of outside borrowing vis- -vis absence of interest expenditure on any borrowed capital the appellant claims that no interest expenditure was indeed incurred for earning exempt dividend income stands tall and de fact remained uncontroverted by the Ld. DR consequently the disallowance made u/r 8D(2)(ii) remained baseless on records hence it deserves to be deleted accordingly we direct as such. Disallowance for indirect administrative expenditure u/r 8D(2)(iii) - DR after going through the details of additional evidence conceded to the revised computation of the appellant regarding the amount of disallowance worked out u/r 8D(2)(iii) consequently the disallowance on this count is restricted to 1, 92, 200/- which is worked out on the basis of average investment into the class of dividend earning fund. Disallowance to computation of book profit u/s 115JB - Section 115JB(1) of the Act provides the mode of computation of the total income and tax payable by the assessee u/s 115JB of the Act. Section 115JB(5) of the Act provides that save as otherwise provided in this section all other provisions of this Act shall apply to every assessee being a company mentioned in this section therefore if any expenditure relatable to earning of income exempt is disallowed u/s 14A of the Act and is added back to book profit under clause (f) of section 115JB of the Act the same would amount to doing violence with the statutory provision viz. sub-sections (1) and (5) of section 115JB of the Act. It is also pertinent to mention here that the amounts mentioned in clauses (a) to (i) of Explanation to section 115JB(2) of the Act are debited to the statement of profit and loss account then only the provisions of section 115JB of the Act would apply. lex lata the disallowance u/s. 14A of the Act is a notional disallowance and therefore by taking recourse to section 14A of the Act the amount cannot be added back to book profit under clause (f) of section 115JB of the Act and same can find force in the decision of Hon ble Apex Court in the case of Ajanta Pharma Ltd Vs CIT 2010 (9) TMI 8 - SUPREME COURT and VIREET INVESTMENT (P.) LTD. 2017 (6) TMI 1124 - ITAT DELHI Claim of depreciation made u/s 32 on diesel generator as renewable energy device - Disallowance of 80% depreciation claimed on Diesel Generators - Energy Saving Device - HELD THAT - A careful consideration of appendix-I reveals that all the sub- items of renewable energy devices i.e. devices for generating non-conventional energy qualify for higher rate of depreciation. An item number (m) specifies Any special devices including electric generators and pumps running on wind energy. Although at the first blush it may appear that this entry (m) includes electric generators and therefore diesel sets for generating electrical energy may fall under this sub-item but on proper scrutiny it would appear that what is contemplated is electric generators running on wind energy and pumps running on wind energy. Hence generator sets running on diesel would not fall under an entry (m) of sub-item (xiii). In view of the above analysis of III(8)(xiii)(m) in the table in Part A of Appendix I to the Income Tax Rules 1962 we are of the clear view that the diesel generator sets do not fall under entry number (m) so as to entitle the assessee to claim depreciation at the higher rate of 80% per cent. Thus since the item of diesel generator does not find its place in the enumerated list of class (xiii) of clause entry 8 of block III of New Appendix-I r.w.s. 5 of the IT-Rules the action of Ld. AO in not allowing the depreciation in the class of Plant Machinery carrying 80% rate of depreciation is sustained consequently the ground II and its counter parts are dismissed. Disallowance of leave encashment as unascertained liability - HELD THAT - Hon ble Supreme Court in the case of Bharat Earth Movers Vs CIT 2000 (8) TMI 4 - SUPREME COURT as observed that what should be certain is the incurring of the liability and the fact that the same is capable of being estimated with reasonable certainty although the actual quantification may not be possible and if the aforesaid requirements were satisfied then the liability could not be held as a contingent liability. Although the liability is in praesenti though it is to be discharged at a future date it would not make any difference if the future date on which the liability is to be discharged is not certain. In the backdrop of aforesaid observations the Hon ble Supreme Court had concluded that the provision made by an assessee for meeting the liability incurred by it under the leave encashment scheme proportionate with the entitlement earned by the employees of the company inclusive of the officers and the staff subject to the ceiling of accumulation as applicable on the relevant date would be entitled to deduction for the accounting year during which the provision is made for the said liability. On the basis of our aforesaid discussion fumus boni iuris and we are of the considered view that as the provision for leave encashment has been made by the appellant on actuarial basis therefore the same being in the nature of an ascertained liability could not have been added for the purpose of determining the book profit u/s 115JB of the Act ergo ground number III and all its counter parts of appeal raised by the assessee are allowed

Summary

Issues Involved:
1. Disallowance under Section 14A in the absence of exempt income.
2. Qualification of diesel generators as renewable energy devices for higher depreciation.
3. Provision for leave encashment as an unascertained liability for computing book profit under Section 115JB.

Detailed Analysis:

1. Disallowance under Section 14A:
The appellant company contested the disallowance under Section 14A read with Rule 8D in the absence of exempt income. The Assessing Officer (AO) observed that the appellant derived exempt dividend income of ?27,98,176/- and claimed no expenditure was incurred in earning this income. However, the AO noted an interest expenditure of ?1,29,679/- in the profit and loss account. The appellant argued that the investments were handled by an independent advisor without any fees and were made from its own funds, not borrowed ones. The AO, unsatisfied with the appellant’s claim, invoked Section 14A read with Rule 8D, resulting in a total addition of ?8,70,012/-. The CIT(A) upheld this disallowance due to the absence of separate accounts distinguishing the expenditures. Upon appeal, the Tribunal admitted additional evidence showing the interest expenditure was related to discounting trade bills and guarantee commission, not borrowed funds for investments. Consequently, the Tribunal directed the deletion of the disallowance under Rule 8D(2)(ii). However, for indirect administrative expenditure under Rule 8D(2)(iii), the Tribunal restricted the disallowance to ?1,92,200/- based on the average investment in dividend-earning funds. The Tribunal also clarified that disallowance under Section 14A is notional and should not be added back to book profit under Section 115JB.

2. Qualification of Diesel Generators for Higher Depreciation:
The appellant claimed 80% depreciation on a diesel generator, treating it as a renewable energy device under Entry III(8)(xiii)(m) of Appendix-I of the Income Tax Rules. The AO disallowed this, stating that the diesel generator did not run on wind energy and thus did not qualify as a renewable energy device. The CIT(A) upheld this view, relying on judicial precedents. The Tribunal agreed, stating that diesel generators run on conventional energy (diesel) and do not fall under the category of renewable energy devices, which are meant to run on wind energy. The Tribunal noted that the dictionary meaning of "renewable energy" pertains to sources that are not depleted when used, such as wind or solar power. Therefore, the Tribunal sustained the AO’s action of not allowing the higher depreciation rate and dismissed the appellant’s claim.

3. Provision for Leave Encashment as Unascertained Liability:
The AO added the provision for leave encashment of ?32,026/- to the book profit under Section 115JB, treating it as an unascertained liability. The appellant argued that the provision was based on actuarial calculations and thus was an ascertained liability. The CIT(A) upheld the AO’s view, stating that the liability was not taxable in the hands of employees and thus remained unascertained. The Tribunal, however, held that under the mercantile system of accounting, the liability for leave encashment, quantified by actuarial report, is an ascertained liability. The Tribunal referred to the Supreme Court’s judgment in "Bharat Earth Movers Vs CIT," which stated that a provision for leave encashment based on actuarial valuation is an ascertained liability. Therefore, the Tribunal concluded that the provision for leave encashment should not be added back to book profit under Section 115JB and allowed the appellant’s claim.

Conclusion:
The appeal was partly allowed, with the Tribunal directing the deletion of disallowance under Rule 8D(2)(ii) and restricting the disallowance under Rule 8D(2)(iii) to ?1,92,200/-. The Tribunal upheld the AO’s decision on the diesel generator’s depreciation claim but allowed the appellant’s claim regarding the provision for leave encashment.