2014 (3) TMI 399 - AT - Income Tax

Wrong claim of credit of TDS - Addition of closing balance of customer advance Held that - The receipt of the amount being advance for mobilization would not change the work actually completed by the assessee till the end of the financial year relevant to the assessment year under consideration - The advance is not for the work completed but it is only the advance to be adjusted over the period of term of contract as per the terms and conditions agree between the parties - the receipt of amount does not effect the income recognize on mercantile system of accounting and as per AS-7 - the addition made by the authorities were purely on the ground that the assessee has claimed credit of TDS in respect of advance receipt is highly arbitrary and unjustified when the assessee has withdrawn the said claim though, it was not allowed by the AO thus, the AO is directed to delete the addition made on account of wrong TDS claim and disallowed the credit of TDS claimed by the assessee. Disallowance u/s14A of the Act Held that - The Assessing Officer has not given specific finding that the assessee has utilized the borrowed fund for the purpose of investment in the mutual fund yielding the exempt dividend income - Thus, the disallowance of interest u/s 14A is set aside and the matter remitted back to the AO for a limited purpose of verification - Rule 8D is applicable for the year under consideration therefore, the disallowance of administrative expenses has to be computed as per the formula provided in Rule 8D - the disallowance work out under Rule 8D cannot exceed the total expenditure claimed by the assessee which can be apportioned to the exempt income thus, the AO is directed to recompute the disallowance. Disallowance of community development expenditure Held that - The AO has shown total disregard and defiance to the orders of the FAA by picking and choosing the particular words instead of the finding of the Appellate Authority - the AO has acted in a most irresponsible manner - When the Assessing Officer did not choose to challenge the order of the CIT(A) then it is highly inappropriate to not give effect to the same thus, the AO is directed to allow the claim of the assesse - Decided partly in favour of Assessee.

Summary

Issues Involved:
1. Addition of closing balance of customer advances.
2. Disallowance under section 14A of the Income-tax Act.
3. Community development expenses.
4. Levy of interest under section 234B.
5. Provision for warranties.
6. Computation of book profits under section 115JB.

Detailed Analysis:

1. Addition of Closing Balance of Customer Advances:
The assessee, engaged in executing turnkey projects, received mobilization advances from customers. The AO noticed a discrepancy where the assessee claimed TDS credit of Rs. 35.94 lakhs without corresponding income of Rs. 22.93 crores. The AO added this amount to the income, which the CIT(A) reduced to Rs. 22.58 crores after verification. The Tribunal noted that the assessee followed the percentage completion method consistently and recognized revenue based on project completion. The Tribunal directed the AO to delete the addition and disallow the TDS credit claimed by the assessee.

2. Disallowance Under Section 14A of the Income-tax Act:
The assessee received dividend income and disallowed Rs. 10.17 lakhs suo-moto under section 14A. The AO disallowed an additional Rs. 1.73 crores under Rule 8D, which the CIT(A) confirmed. The Tribunal noted that the AO did not provide specific findings on the use of borrowed funds for investments. The issue was set aside to the AO for verification. The Tribunal also directed the AO to recompute administrative expenses disallowance under Rule 8D, ensuring it does not exceed the total expenditure claimed by the assessee.

3. Community Development Expenses:
The assessee incurred Rs. 36.34 lakhs on community development, disallowed by the AO but allowed by the CIT(A). The Tribunal noted that the CIT(A) allowed similar claims in previous years and directed the AO to allow the deduction as per the CIT(A)'s order.

4. Levy of Interest Under Section 234B:
The Tribunal noted that the levy of interest under section 234B is mandatory and consequential, requiring no specific finding.

5. Provision for Warranties:
The CIT(A) allowed Rs. 2.56 crores for warranty provisions, following the Supreme Court decision in Rotork Controls India (P) Ltd. The Tribunal noted the assessee's reversal of the provision in the subsequent year and directed the AO to disallow the provision for the current year but not tax the reversal in the subsequent year.

6. Computation of Book Profits Under Section 115JB:
The Tribunal directed the AO to recompute book profits under section 115JB after considering the outcome of disallowance under section 14A.

Conclusion:
The Tribunal provided detailed directions for each issue, emphasizing consistency in accounting methods, proper verification of facts, and adherence to legal provisions. The appeals and cross-objections were partly allowed, with specific remands to the AO for further action.