2025 (1) TMI 645 - AT - Income Tax

Disallowance of expenditure u/s 14A - HELD THAT - Investment made by an assessee may result in both type of income exempt, as well as taxable. The expenditure incurred for earning such income may be either separately accounted for or may be mixed. The onus is on the assessee to identify expenditure which relates to exempt income. AO can reject such suo-moto disallowance only after recording satisfaction that claim of disallowance made by the assessee as per accounts maintained by him are not correct. The finding that the disallowance is to be restricted to exempt income means that the disallowance cannot be done if there is no exempt income. Admittedly, there was NO EXEMPT INCOME. We are of the considered view that if there is no exempt income, no disallowance u/s 14A of the Act can be made upto AY 2021-22. However, after insertion of Explanation to section 14A of the Act from AY 2022-23, the disallowance u/s 14A of the Act relating to exempt income can be made even though no exempt income was earned during the relevant year. Revised computation of income furnished by it during the assessment proceedings - payment of the GST as Input Credit on asset side of the Balance Sheet (not routed through the Profit Loss Account), has decided to claim the same (GST Input Credit) as expenditure against the Income (to route through the Profit Loss Account) - HELD THAT - The claim of GST Input Credit is held allowable if the effect of such GST Input Credit is resulting revenue receipts chargeable to tax; otherwise not. The corollary of the same is that the said GST input credit is not embedded in the cost of goods and or services constituting the stock-in-trade and or similar entries on the credit side of the Profit Loss Account of the appellant/assessee. Undisputedly, the income has to be charged to tax; not a single penny more not a single penny less. The GST paid by the appellant/assessee has to be allowed subject to the above and in accordance with the provisions of section 30 to 43D of the Act. Since the GST of INR 28,979,544 was not routed through the Profit Loss Account of the appellant/assessee; therefore, it cannot be ruled out that the effect of the GST of INR 28,979,544 is reflected/embedded in the cost of goods and or services constituting the stock-in-trade and or services or similar entries on the credit side of the Profit Loss Account of the appellant/assessee. We are therefore, direct the AO to verify the same. In case the GST was not claimed as expenditure in the Profit Loss Account with corresponding contra entries duly reflected/embedded in the cost of goods and or services constituting the stock-in-trade and or services or similar entries on the credit side of the Profit Loss Account of the appellant/assessee, the effect of the GST will become revenue neutral if corresponding cost of goods and or services constituting the stock-in-trade and or services or similar entries are on the credit side of the Profit Loss Account of the appellant/assessee. Subject to the above and decisions of the Hon ble Supreme Court in the cases of Wipro Ltd. 2022 (7) TMI 560 - SUPREME COURT and Shri ram Investments 2024 (10) TMI 313 - SUPREME COURT we hereby direct the AO to allow the deduction of GST subject to the verification and observations as above. For this limited purpose, this issue is restored back to the AO. Appeal of the assessee is allowed.

1. ISSUES PRESENTED and CONSIDERED

The legal judgment addresses the following core issues:

Whether the addition on account of Arm's Length Price (ALP) adjustment for Advertising, Marketing, and Sales Promotion (AMP) expenses was justified.
Whether the disallowance of expenses under Section 14A of the Income Tax Act, read with Rule 8D of the Income Tax Rules, was appropriate.
Whether the rejection of the revised computation of income submitted by the assessee was valid.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: ALP Adjustment for AMP Expenses

Relevant legal framework and precedents: The primary legal framework involves the provisions of the Income Tax Act concerning transfer pricing and ALP adjustments. The Hon'ble Delhi High Court's decision in the assessee's own case was a significant precedent.
Court's interpretation and reasoning: The court noted that the issue of ALP adjustment for AMP expenses had been previously decided in favor of the assessee by the Delhi High Court. Therefore, no addition on this score was warranted.
Key evidence and findings: The court relied on the precedent set by the Delhi High Court, which had already adjudicated the matter in the assessee's favor.
Application of law to facts: The court applied the legal precedent to the current facts, concluding that the protective and substantive additions proposed by the AO were unjustified.
Treatment of competing arguments: The court favored the arguments presented by the assessee's representative, who cited the Delhi High Court's decision and requested the deletion of the additions.
Conclusions: The court deleted the protective addition of INR 146,700,000 and the substantive addition of INR 157,440,000, allowing the ground Nos. 1 to 8 in favor of the assessee.

Issue 2: Disallowance of Expenses under Section 14A

Relevant legal framework and precedents: Section 14A of the Income Tax Act and Rule 8D of the Income Tax Rules govern the disallowance of expenses related to exempt income. The court referenced several Supreme Court decisions, including those in the cases of Godrej & Boyce Manufacturing Co. Ltd. and Maxopp Investment Ltd.
Court's interpretation and reasoning: The court emphasized that disallowance under Section 14A should only occur if there is exempt income. Since the assessee had no exempt income, the court found no basis for disallowance.
Key evidence and findings: The court noted that the assessee did not have any exempt income for the relevant assessment year, thus negating the basis for disallowance under Section 14A.
Application of law to facts: The court applied the principle that disallowance is restricted to exempt income, concluding that no disallowance was warranted in the absence of exempt income.
Treatment of competing arguments: The court agreed with the assessee's argument that the disallowance under Section 14A was not applicable due to the lack of exempt income.
Conclusions: The court deleted the disallowance of INR 37,034,806 made under Section 14A, allowing ground Nos. 9 and 9.2 in favor of the assessee.

Issue 3: Rejection of Revised Computation of Income

Relevant legal framework and precedents: The principles governing the acceptance of revised computations and adjustments during assessment proceedings were considered, with references to Supreme Court decisions in Wipro Ltd. and Shri Ram Investments.
Court's interpretation and reasoning: The court found merit in the assessee's claim for revised computation, subject to verification that the GST input credit resulted in revenue receipts chargeable to tax.
Key evidence and findings: The court required verification that the GST input credit was not embedded in the cost of goods or services, ensuring it was not already accounted for in the Profit & Loss Account.
Application of law to facts: The court directed the AO to verify the claim and allow the deduction if the conditions were met, thus restoring the issue back to the AO for verification.
Treatment of competing arguments: The court balanced the arguments by allowing the claim subject to verification, ensuring compliance with legal standards.
Conclusions: The court directed the AO to allow the deduction of GST input credit of INR 28,979,544, subject to verification, and restored the issue for further examination.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "The finding that 'the disallowance is to be restricted to exempt income' means that the disallowance cannot be done if there is no exempt income."
Core principles established: Disallowance under Section 14A is contingent upon the presence of exempt income; ALP adjustments must adhere to established precedents; revised computations can be accepted subject to verification.
Final determinations on each issue: The court allowed the appeal concerning ALP adjustments and disallowance under Section 14A, while directing further verification for the revised computation of income.

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