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2022 (12) TMI 1561 - AT - Income TaxDisallowance of expenses in earning exempt income u/s. 14A r/w Rule 8D - HELD THAT - As per the spirit of the decision of Hon ble Kerala High Court Catholic Syrian Bank 2010 (10) TMI 1068 - KERALA HIGH COURT the AO can resort to Rule 8D of the Rules only if he in terms of Sec. 14A(2) of the Act he arrives at a satisfaction that having regard to the accounts of the assessee that the claim of the assessee in respect of expenditure in relation to income which does not form part of the total income under the Act is incorrect. Therefore the AO cannot blindly apply Rule 8D of the Rules without first complying with the requirements of Sec. 14A(2) of the Act. This exercise has to be necessarily carried out by the AO and therefore we are of the view that the issue requires fresh examination by the AO as directed by the Tribunal in it s order after affording the Assessee opportunity of being heard and after considering the submissions made before us with regard to the amount to be disallowed u/s. 14A of the Act and in particular the mandate laid down in the provisions of Sec. 14A(2) of the Act. The AO will also consider the specific submissions made by the Assessee before us as to why disallowance u/s. 14A of the Act cannot be made in the case of the Assessee. We therefore allow both the appeals by the Revenue and the Assessee for statistical purpose. Disallowance of deduction on account of provision for leave encashment - HELD THAT - Hon ble Supreme Court in the case of Exide Industries 2020 (4) TMI 792 - SUPREME COURT overruled the decision of Calcutta High Court in the case of Exide Industries 2007 (6) TMI 175 - CALCUTTA HIGH COURT and upheld the constitutional validity for deduction of leave encashment on payment basis under section 43B(f) of the Act. Deduction on account of provision for leave encashment cannot be allowed unless it is actually paid. Assessee will not be entitled to claim deduction on leave encashment on the basis of the provision. Deduction on account of amortization of premium on securities not claimed or allowed in earlier years now allowable on sale of securities of the Act in the computation of total income instead of the correct amount - It was not a case where no claim was made in the return of income but a case where only the quantum of deduction claimed was sought to be enhanced. An additional ground was raised before CIT(A) to adjudicate the claim of the Assessee but the same was not adjudicated or considered by the CIT(A). We therefore restore the issue to CIT(A) to consider the additional claim made by the Assessee. Non examining of claim made without filing a revised return of income - Revised the original claim and claimed enhanced deduction on account of amortization of premium on securities not claimed or allowed in earlier years now allowable on sale of securities - HELD THAT - The law by now is well settled that the appellate authority under the Act can entertain a legal claim even though the said claim has not been made by way of a revised return of income. In Jute Corporation of India Ltd. 1990 (9) TMI 6 - SUPREME COURT it was held that the first appellate authority has wide powers u/s. 251(1)(a) of the Act and can entertain an additional claim. In the case of Chicago Pneumatic India Ltd. 2007 (3) TMI 409 - ITAT MUMBAI in the context of allowability of new claims during the assessment proceedings without having recourse to a revised return has placing reliance on principle embedded in Article 265 of Indian constitution (No tax can be collected except by the authority of law) CBDT Circular No. 14 dated 11 April 1955 and explaining the ratio of the Goetz (india) Ltd. 2006 (3) TMI 75 - SUPREME COURT ruling categorically held that assessee has the right to make new claims during assessment proceedings without recourse to a revised return. The CIT(A) in our view therefore ought to have entertained the claim of the Assessee in this regard. Deduction on account of bad debts written off in accordance with the provisions of Sec. 36(1)(vii) - HELD THAT - Before CIT(A) the claim was made for deduction. The CIT(A) however held that the claim was not made in the original return filed and no revised return was filed and hence the claim cannot be entertained. We are of the view that in the light of the discussion on identical issue in the earlier paragraphs the claim of the Assessee should be examined and rejecting the claim without even examining the same on merits was not proper and that the CIT(A) ought to have entertained the claim. Since the issue requires examination by the AO we deem it fit and proper to remand this issue for consideration on merits. Deduction u/s. 36(1)(viii) - what is the sum to be reduced from the gross income as deduction under clause 36(1)(viii)? - HELD THAT - CIT(A) rightly appreciated the position that while computing profits of eligible business only proportionate expenses relatable to the eligible business should be reduced from gross receipts from eligible business to arrive at the profits of the eligible business. Expenses which are not pertaining to eligible business cannot enter into computation of net income from eligible business and this position has rightly been appreciated by the CIT(A) and hence his order on this issue is upheld and the ground of appeal of the revenue is dismissed. Proceedings u/s. 154 for quantification of deduction u/s. 36(1) -HELD THAT - We are of the view that the CIT(A) in his order dated 23.1.2014 has upheld the quantification of deduction u/s. 36(1)(viii) of the Act at Rs. 18 Crores as claimed by the Assessee. Therefore the AO cannot rectify the said quantum in an order u/s. 154 of the Act and that in the event of dispute with regard to the quantum of amount that should have been allowed u/s. 36(1)(viii) of the Act the AO ought to have filed appeal against the order of CIT(A) dated 23.1.2014 and without doing so ought not to have resorted to proceedings u/s. 154.
1. ISSUES PRESENTED and CONSIDERED
The primary issues considered in this judgment revolve around the disallowance of expenses under Section 14A of the Income Tax Act, 1961, read with Rule 8D of the Income Tax Rules, 1962, concerning the earning of exempt income. The Tribunal also considered issues related to the deduction on account of provision for leave encashment under Section 43B(f), the treatment of securities as stock-in-trade, and the applicability of Section 36(1)(viii) regarding special reserves for financial corporations. 2. ISSUE-WISE DETAILED ANALYSIS Disallowance under Section 14A and Rule 8D: - Relevant Legal Framework and Precedents: Section 14A of the Income Tax Act disallows deductions for expenses incurred in relation to income not forming part of the total income. Rule 8D prescribes the method for determining such disallowance. The Kerala High Court's decision in CIT Vs. Catholic Syrian Bank was pivotal, emphasizing that Rule 8D applies only if the Assessing Officer (AO) is dissatisfied with the assessee's claim. - Court's Interpretation and Reasoning: The Tribunal noted that the AO must record dissatisfaction with the assessee's claim before applying Rule 8D. The CIT(A) and Tribunal had previously erred by applying pre-2007 formulas to post-2007 assessment years. - Key Evidence and Findings: The Tribunal found that the AO did not follow the necessary procedure of recording dissatisfaction as required by Section 14A(2) before invoking Rule 8D. - Application of Law to Facts: The Tribunal remanded the issue back to the AO for a fresh examination, emphasizing the need for compliance with Section 14A(2) before applying Rule 8D. - Treatment of Competing Arguments: The Tribunal considered arguments regarding the classification of securities as stock-in-trade and the sufficiency of interest-free funds, referencing several Supreme Court and High Court decisions. - Conclusions: The Tribunal directed a fresh examination by the AO, ensuring compliance with the statutory requirements of Section 14A(2). Provision for Leave Encashment: - Relevant Legal Framework and Precedents: The Supreme Court in Exide Industries upheld the constitutional validity of Section 43B(f), allowing deductions for leave encashment only on a payment basis. - Court's Interpretation and Reasoning: The Tribunal dismissed the assessee's appeal for deduction based on provision, aligning with the Supreme Court's ruling. - Conclusions: The Tribunal upheld the disallowance of the claim for leave encashment provision unless actually paid. Classification of Securities as Stock-in-Trade: - Relevant Legal Framework and Precedents: The Tribunal referenced the Supreme Court's decision in Maxopp Investments, which distinguished between stock-in-trade and investment for banks. - Court's Interpretation and Reasoning: The Tribunal agreed with the assessee that securities held as stock-in-trade should not attract disallowance under Section 14A. - Conclusions: The Tribunal allowed the assessee's contention that no disallowance under Section 14A should apply to securities held as stock-in-trade. Deduction under Section 36(1)(viii): - Relevant Legal Framework and Precedents: Section 36(1)(viii) allows deductions for special reserves created by financial corporations engaged in long-term financing. - Court's Interpretation and Reasoning: The Tribunal upheld the CIT(A)'s decision that only expenses related to eligible business should be deducted from gross income to compute net income for this deduction. - Conclusions: The Tribunal dismissed the revenue's appeal, supporting the CIT(A)'s method of computation. 3. SIGNIFICANT HOLDINGS - Verbatim Quotes of Crucial Legal Reasoning: "The AO cannot blindly apply Rule 8D of the Rules without first complying with the requirements of Sec. 14A(2) of the Act." - Core Principles Established: Compliance with Section 14A(2) is mandatory before invoking Rule 8D; securities held as stock-in-trade do not attract disallowance under Section 14A; deductions for leave encashment are allowed only on a payment basis. - Final Determinations on Each Issue: The Tribunal remanded the Section 14A issue for fresh examination, upheld the disallowance of leave encashment provision, and confirmed the CIT(A)'s method for computing deductions under Section 36(1)(viii).
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