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2017 (8) TMI 114 - AT - Income TaxLease Equalization Amount - claim as allowable expenditure - difference in the actual lease amount that is accrued and the amount debited/credited to the P &L A/c due to the following of AS-19 - Held that - Accepting the lease equalization charges adjustment in respect of the property taken on rent and rejecting the same in respect of the property given on rent does not fit it into any logic and it is not permissible for the Revenue to follow the rule of convenience i.e. wherever the amount is added back it is accepted and wherever the amount is reduced it is rejected. - Claim allowed. Disallowance u/s 14A - Held that - We are of the considered opinion that insofar as the finding of the AO is that offering of 10% expenditure has no basis and cannot be accepted is concerned it does not admit of any interference inasmuch as admittedly no separate accounts are being maintained in respect of the expenditure incurred in respect of the income exempt from tax. The Hon ble jurisdictional High Court in CIT VS. Holcim India P Ltd 2014 (9) TMI 434 - DELHI HIGH COURT and Cheminvest Ltd Vs. CIT (2015 (9) TMI 238 - DELHI HIGH COURT) held that where no exempted income was earned by the assessee in the relevant assessment year no disallowance could be made under section 14A of the Act. Further at the same time in view of the decision of the jurisdictional High Court in Joint Investments P. Ltd. vs. CIT (2015 (3) TMI 155 - DELHI HIGH COURT) disallowance of expenditure u/s 14A of the Act cannot exceed the amount of tax exempt income as such disallowance of expenditure as against the exempt income cannot be sustained. We therefore direct the AO to limit the disallowance to the tax exempt income.
Issues Involved:
1. Lease Equalization Charges 2. Disallowance under Section 14A of the Income Tax Act Detailed Analysis: Lease Equalization Charges: The primary issue revolves around the treatment of lease equalization charges, which arise due to the adoption of Accounting Standard-19 (AS-19) by the assessee. The assessee, a passive infrastructure service provider, follows the mercantile system of accounting and adjusts lease payments on a straight-line basis, resulting in lease equalization charges. For the Assessment Year (AY) 2008-09, the assessee added back ?8,60,42,238/- to the computation of income as it represented notional rent debited as per AS-19, which was accepted by the Assessing Officer (AO). However, the AO rejected a similar adjustment for lease income amounting to ?28,59,91,766/-. The CIT (A) upheld the AO's decision for AY 2008-09 but allowed the reduction of lease equalization charges for AY 2009-10. The Tribunal found that the AO's acceptance of the adjustment for property taken on lease while rejecting it for property given on lease was illogical. It was held that the AO should have consistently applied the principle that notional adjustments should be recognized both ways. Consequently, the Tribunal upheld the CIT (A)'s decision for AY 2009-10 and allowed the appeal for AY 2008-09, thereby dismissing the Revenue's appeal for AY 2009-10 and allowing the assessee's appeal for AY 2008-09. Disallowance under Section 14A: The second issue concerns the disallowance of expenditure under Section 14A read with Rule 8D of the Income Tax Rules. For AY 2008-09, the AO disallowed ?7,98,28,582/- against the assessee's claim of ?5,21,510/- as expenditure related to earning tax-exempt income of ?52,15,095/-. The CIT (A) found the AO's application of Rule 8D arbitrary, noting that the total personnel and administrative expenses were only ?2.99 crores. The Tribunal observed that the AO had recorded sufficient reasons to reject the assessee's claim of 10% expenditure. However, it also noted that disallowance under Section 14A cannot exceed the exempt income, as per the jurisdictional High Court's rulings in CIT vs. Holcim India P Ltd and Joint Investments P. Ltd. vs. CIT. Thus, the Tribunal directed the AO to limit the disallowance to the amount of tax-exempt income, i.e., ?52,15,095/-. Conclusion: - Lease Equalization Charges: The Tribunal allowed the assessee's appeal for AY 2008-09 and dismissed the Revenue's appeal for AY 2009-10, holding that the AO's inconsistent treatment of lease equalization charges was illogical. - Disallowance under Section 14A: The Tribunal partially allowed the Revenue's appeal, directing the AO to limit the disallowance to the amount of tax-exempt income, thereby aligning with the jurisdictional High Court's precedents. Final Orders: 1. ITA No. 4941/Del/2012: Allowed 2. ITA No. 2823/Del/2013: Dismissed 3. ITA No. 4736/Del/2012: Allowed in part
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