2016 (12) TMI 1141 - AT - Income Tax

Accrual of income - Sale of DEPB licenses - Held that - The entire revenue has been stated to be offered for taxation by the assessee voluntarily of its own , albeit in the subsequent year when the DEPB licenses were sold. Thus we are of considered view no prejudice has been caused to the Revenue as the said gross sale proceeds on transfer of DEPB licenses by the assessee in its entirety is stated to be offered for taxation in the next year and tax rate remained the same in the next year. However , these claims as made by the assessee needs verification by the authorities below and therefore, we are inclined to set aside and restore this matter back to the file of the A.O. to verify that the total income in its entirety from sale of the afore-stated DEPB licenses is subjected to tax in the subsequent assessment year and the Revenue has got all the due taxes on total income chargeable to tax albeit in the subsequent assessment year as in that case revenue effect shall be tax neutral. The assessee is directed to appear before the AO and produce all necessary evidences and explanations in support of its contentions that no prejudice is caused to Revenue by making payment of taxes on the total income arising in its entirety from sale of DEPB licenses in the subsequent assessment year. Addition u/s 14A of the Act read with Rule 8D - Held that - The assessee has earned exempt income and offered disallowance to the tune of ₹ 3,32,482/- under Rule 8D(2)(iii) of 1962 Rules as administrative and indirect expenses @ 0.5% of average investment held by the assessee. There are sufficient own funds available with the assessee for the investment and no borrowed funds were stated to be utilized by the assessee for making investments in shares and mutual funds capable of earning tax-free income. The assessee has also filed financial statements which reveal that the assessee has own funds available in its hand which are far in excess of investments made in the shares, mutual funds and other securities yielding tax-exempt income. Perusal of audited financial statements for the financial year 2009-10 will reveal that the assessee s own funds are to the tune of ₹ 12.47 crores as at 31-03-2010 and ₹ 12.37 crores as at 31-03-2009, while investments capable of yielding exempt income are to the tune of ₹ 4.65 crores as at 31- 3-2010 and ₹ 8.65 crores as at 31-03-2009. We agree with the proposition and contentions of the assessee that presumption will apply unless contrary is brought on record by the Revenue , that the assessee has made investment in shares , mutual funds and other securities capable of yielding exempt income out of its own surplus funds unless contrary is brought on record by the AO. Thus u/s 14A of the Act r.w.r. 8D(2)(ii) of 1962 Rules is not sustainable - Decided in favour of assessee.

Summary

Issues Involved:
1. Taxability of DEPB license receipts.
2. Disallowance under Section 14A read with Rule 8D.

Issue-wise Detailed Analysis:

1. Taxability of DEPB License Receipts:

The core issue was whether the receipt from the sale of DEPB licenses amounting to ?8,74,936 should be taxed in the year of accrual or in the subsequent year when the licenses were sold. The assessee argued that the income should be taxed in the year of sale, following their consistent practice. The AO, however, taxed the amount in the year of accrual, citing the Supreme Court's decision in Topman Exports v. CIT, which states that income accrues when DEPB licenses are granted.

The CIT(A) upheld the AO's decision, emphasizing that DEPB licenses are taxable upon accrual, not sale. The Tribunal, however, considered the Supreme Court's decision in Excel Industries Ltd., which held that income should be taxed when it becomes due and realizable, not merely on accrual. The Tribunal noted that the assessee had offered the income for taxation in the subsequent year and directed the AO to verify this claim. If verified, the tax effect would be neutral, and no prejudice would be caused to the Revenue.

2. Disallowance under Section 14A Read with Rule 8D:

The second issue was the disallowance of ?9,12,886 under Section 14A read with Rule 8D, over and above the assessee's suo-moto disallowance of ?3,32,482. The AO applied Rule 8D, arguing that the assessee's method was unsatisfactory. The assessee contended that investments were made from owned funds, not borrowed funds, and thus no further disallowance was warranted.

The CIT(A) upheld the AO's disallowance, stating that Rule 8D applies if the assessee's method is unsatisfactory. The Tribunal, however, observed that the assessee had sufficient own funds exceeding the investments made. Citing decisions from the Bombay High Court, the Tribunal held that the presumption is that investments were made from own funds unless proven otherwise by the Revenue. Therefore, the additional disallowance of ?9,12,886 was deleted.

Conclusion:

The Tribunal partly allowed the appeal, directing the AO to verify the taxability of DEPB license receipts in the subsequent year and deleting the additional disallowance under Section 14A read with Rule 8D. The order was pronounced on 24th October 2016.