2024 (6) TMI 355 - AT - Income Tax

Disallowance u/s 14A r.w.r.8D - CIT(A) granted part relief - Revenue is aggrieved by the deletion of disallowance made by as per the provisions of Rule 8D(2)(i) and 8D(2)(ii) of the Rules. While the Assessee, not being satisfied with the partial relief granted by the CIT(A) -.HELD THAT - Revenue has failed to dislodge the factual findings returned by the CIT(A) while deleting the disallowance in terms of Rule 8D(2)(i) and 8D(2)(ii) of the Rules. The CIT(A) has returned a findings that the Assessing Officer had incorrectly treated the indirect expenses of INR 3.22 Crores stated in the report, dated 27/11/2014, issued by the Tax Auditor as direct expenses. On perusal of the aforesaid report issued by the Tax Auditor, we find that the Tax Auditor had quantified INR 3.22 Crores as the expenses that could, at best, be disallowed as indirect expenses incurred in relation to exempt income. AO moved on the premise that INR 3.22 Crores represented direct expenses and proceeded to disallow the same as per Rule 8D(2)(i) of the Rules without identifying any direct expenses related to earning of exempt income. Thus, we do not find any infirmity in order passed by the CIT(A) deleting the disallowance of INR 3.22 Crore made by the AO as per the provisions of Rule 8D(2)(i) of the Rules. As per the judgment of HDFC Bank Limited 2016 (3) TMI 755 - BOMBAY HIGH COURT CIT(A) was correct in drawing presumption that the investments were made by the Assessee out of the interest-free own funds. In absence of any material placed before us by the Revenue to rebut the aforesaid presumption, we are not inclined to interfere with the order passed by the CIT(A) in this regard. Accordingly, we do not find any infirmity in the order passed by the CIT(A) deleting the addition made by the AO invoking the provisions of Rule 8D(2)(i) and Rule 8D(2)(ii) of the Rules, respectively. In view of the aforesaid, Ground No. 3 and 2 raised by the Revenue are dismissed. CIT(A) has directed the AO to recomputed the quantum of disallowance by taking into consideration only the investments yielding exempt income - As before CIT(A) it was contended by the Assessee that the disallowance under Section 14A of the Act should be restricted to the suo motu disallowance offered by the Assessee and that the AO was not correct in rejecting the computation of suo motu disallowance offered by the Assessee without assigning any reasons. However, without dealing with the aforesaid contentions, the CIT(A) accepting the alternative contention of the Assessee, directed the Assessing Officer to recomputed disallowance by taking into consideration only the investments yielding exempt income. We note that no reference to any administrative/other expenditure debited to the profit and loss account has been made by the Assessing Officer to support rejection of the aforesaid computation. On the other hand, we note that the computation made by the Assessee is based upon report given by the Tax Auditor. Further, we note that the CIT(A) has in appeal preferred by the Assessee for the preceding assessment years (i.e. Assessment Years 2010-11 to 2013-14) has also accepted similar computation supported by the report of the tax auditor. In view of the aforesaid facts and circumstances, we conclude that the Assessing Officer erred in not accepting the computation of suo motu disallowance and failed to record proper reasoning and/or dissatisfaction before invoking, inter alia, provisions contained in Rule 8D(2)(iii) of the Rules. Accordingly, we delete the disallowance u/s 14A of the Act read with Rule 8D(2)(iii) of the Rules sustained by the CIT(A). Assessee appeal allowed. Fresh claim for deduction u/s 37(1) of the Act is respect of the loss arising due to Exchange Rate Variation (for Short ERV ) on Foreign Loans used for creating indigenous assets - HELD THAT - We admit the Additional Ground No. 1 raised by the Assessee in view of the judgment of the Hon ble Supreme Court in the case of National Thermal Power Co. Ltd. 1996 (12) TMI 7 - SUPREME COURT However, we find merit in the contention advanced in behalf of the Learned Departmental Representative that the factual basis on which the Assessee has set up his claim for deduction would require examination of underlying facts. The utilization of ECBs for the purchase of assets from India would need to be verified from the assessment records. Therefore, we remand the issue back to the file of Assessing Officer for adjudication after verification of facts as averred on behalf of the Assessee and after taking into consideration the decision of Cooper Corporation Pvt. Ltd. Vs. Deputy Commissioner of Income Tax, Satara 2016 (5) TMI 809 - ITAT PUNE Additional Ground No. 1 raised by the Assessee is allowed for statistical purposes. Nature of expenditure - expenses incurred on Projects Department which oversaw the execution of various Projects undertaken by the Assessee - capital or revenue expenditure - HELD THAT - As relying on assessee own case 2016 (11) TMI 1751 - ITAT MUMBAI decided by way of common order, no infirmity in the order passed by the the CIT(A) accepting Assessee s claim for deduction of establishment expenses holding the same to be revenue in nature. Inclusion of foreign exchange losses or the Exchange Rate Variation (ERV) in the value of inventory - HELD THAT - We concur with the conclusion reached by the CIT(A) that the adjustment in the valuation of inventories as made by the AO cannot be sustained on account of the following reasons. Firstly, the methodology adopted by the AO is flawed. It does not take into account the fact that in addition to imports, the crude oil is also purchased by the Assessee from the domestic market. The inventories may include crude oil imported as well as crude oil procured from domestic market - the methodology adopted by the Assessing Officer proceeds on the understanding that the inventories are to be valued at cost without taking into consideration the Fair Market Value, or the Net Realizable Value, as the case may be. Secondly, the Revenue has failed to controvert the finding returned by the CIT(A) that IND AS 23, on which reliance has been placed by the AO, comes into effect with effect from 01/04/2016, Thirdly, Section 43 of the Act provides definition of terms used in Section 28 to 41 of the Act. On perusal of the aforesaid sections it becomes clear that the expression actual cost has been used therein in relation to asset used by an assessee for the purpose of business and not in the context of an asset held as inventory for trade. Accordingly, we are in agreement with the CIT(A) that the reliance placed by the Assessing Officer on Explanation 8 to Section 43(1) of the Act is clearly misplaced. In view of the aforesaid, we do not find any infirmity in the order passed by the CIT(A) on this issue and decline to interfere with the same. Accordingly, Ground No. 5 raised by the Revenue is dismissed. Computation of Book Profits u/s 115JB for disallowance u/s 14A r.w.r. 8D - HELD THAT - No iinfirmity in the order passed by the CIT(A) since the CIT(A) has followed the binding decision of the Special Bench of Tribunal Vireet Investment Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI wherein it has been held that computation in terms of Clause (f) of Explanation 1 to Section 115JB(2) is to be made without resorting to computation as contemplated under Section 14A of the Act read with Rule 8D of the Rules. We note that the CIT(A) has restricted the amount of disallowance to the amount of suo-motu disallowance under Section 14A of the Act offered to tax by the Assessee. Revenue has failed to point out any infirmity in the computation furnished by the Assessee which is supported by the report issued by the Tax Audit. Accordingly, we decline to interfere with the order passed by the CIT(A) on this issue. Ground No. 6 raised by the Revenue is, therefore, dismissed. Allowance of provision for Leave Encashment u/s 43B(f) - contribution made by the Assessee to LIC would constitute payment as it not disputed that on making such contribution to LIC, the Assessee would not have any control over the funds so contributed; and that the amount of leave encashment would be paid by LIC to the employee when the same becomes payable to the employees - HELD THAT - As before the CIT(A) the Assessee relied upon statement wherein payment as reflected. The submission of the Assessee before the Assessing Officer that the fund maintained with LIC already had a balance in excess of Rs. 577.36 Crore, i.e. Rs. 637.19 Crore, and therefore, the provision of INR 48.26 Crores was not separately funded was not taken into consideration by the CIT(A). Accordingly, in the facts and circumstances of the case we remit this issue back to the file of the AO with the directions to allow deduction for INR 48.26 Crores, being provisions for leave encashment, to the Assessee during the relevant previous year in terms of Section 37(1) read with Section 43B(f) of the Act provided the Assessee is able to establish before the Assessing Officer that the payment of INR 48.38 Crores made by the Assessee to LIC during the relevant previous year (i.e., on 26/09/2013) corresponds to the provision created during the relevant previous year. In terms of the aforesaid. Additional claim for deduction is respect of the loss arising due to ERV on Foreign Loans stated to have been used for creating indigenous assets could not have been raised in the revised return - HELD THAT - The finding returned by the CIT(A) that the Assessing Officer had accepted the revised return as a valid return and has, thereafter, issued notice u/s 143(2) of the Act. Therefore, we concur with the CIT(A) that, having accepted the revised return as a valid return, the Assessing Officer fell in error in rejecting the claim for deduction for ERV loss Assessee by holding that the claim for ERV loss could not have formed a valid basis of filing the revised return. We do not find any infirmity in the order passed by the CIT(A) on this issue.

Summary

Issues Involved:

1. Disallowance under Section 14A read with Rule 8D.
2. Deduction of Exchange Rate Variation (ERV) losses under Section 37(1).
3. Classification of establishment expenses as capital or revenue expenditure.
4. Inclusion of ERV in the valuation of inventory.
5. Disallowance of provision for leave encashment under Section 43B(f).
6. Computation of Book Profits under Section 115JB.
7. Validity of revised return under Section 139(5).

Summary:

Issue 1: Disallowance under Section 14A read with Rule 8D
The Tribunal addressed cross-appeals concerning disallowances made under Section 14A read with Rule 8D. The Assessee contended that the CIT(A) erred in applying Rule 8D without providing grounds for rejecting the Assessee's own disallowance. The Tribunal found merit in the Assessee's arguments, noting that the Assessing Officer (AO) did not record proper dissatisfaction before invoking Rule 8D. Consequently, the Tribunal deleted the disallowance under Rule 8D(2)(iii) sustained by the CIT(A) and dismissed the Revenue's grounds on this issue.

Issue 2: Deduction of Exchange Rate Variation (ERV) losses under Section 37(1)
The Assessee raised additional grounds for the deduction of ERV losses on foreign loans used for creating indigenous assets. The Tribunal admitted these grounds and remanded the issue back to the AO for verification of facts and adjudication, directing the AO to consider the Tribunal's decision in Cooper Corporation Pvt. Ltd. vs. DCIT.

Issue 3: Classification of establishment expenses as capital or revenue expenditure
The Tribunal upheld the CIT(A)'s decision to treat establishment expenses incurred for supervising and monitoring projects as revenue expenditure, following the Tribunal's earlier decisions in the Assessee's own case for previous years.

Issue 4: Inclusion of ERV in the valuation of inventory
The Tribunal dismissed the Revenue's grounds for including ERV in the valuation of inventory, agreeing with the CIT(A) that the methodology adopted by the AO was flawed and that IND AS 23 was not applicable for the relevant years.

Issue 5: Disallowance of provision for leave encashment under Section 43B(f)
The Tribunal remanded the issue of disallowance of provision for leave encashment back to the AO, directing verification of whether the payment made to LIC corresponded to the provision created during the relevant year. The Tribunal noted that the Supreme Court upheld the constitutional validity of Section 43B(f), which attaches conditionality of actual payment to deductions.

Issue 6: Computation of Book Profits under Section 115JB
The Tribunal upheld the CIT(A)'s decision to restrict the addition to book profits under Section 115JB to the amount of suo-motu disallowance under Section 14A offered by the Assessee, following the Special Bench decision in ACIT vs. Vireet Investment Pvt. Ltd.

Issue 7: Validity of revised return under Section 139(5)
The Tribunal found no merit in the Revenue's contention that the Assessee's additional claim for ERV loss could not be raised in the revised return. The Tribunal upheld the CIT(A)'s finding that the AO had accepted the revised return as valid and had issued notice under Section 143(2).

Conclusion:
The Tribunal allowed the Assessee's appeals for the Assessment Years 2014-15, 2015-16, and 2016-17, dismissed the Revenue's appeals for the same years, and partly allowed the Revenue's appeal for the Assessment Year 2014-15, remanding specific issues back to the AO for verification and adjudication.