2017 (11) TMI 710 - AT - Income Tax

Income recognition - Addition in respect of Current Liabilities in computation of taxable profits - Held that - The amounts, which are appearing under the head current liabilities , cannot be taxed as income in this year, as the advance money cannot partake the character of an income, because the assessee was entrusted with the money for discharging of various legal obligations on behalf of its clients and held the money in fiduciary capacity and the money was recognised as client s money in its accounts. Accordingly, the addition is deleted. Disallowance under section 14A - the assessee has earned dividend income and income from mutual funds which were claimed as exempt from tax under section 10(34) and 10(35) - Held that - In view of the principle laid down in the case of H.T. Media Ltd. Vs. Pr. CIT reported in (2017 (8) TMI 962 - DELHI HIGH COURT), AO cannot proceed to make disallowance under section 14A. The Hon ble Jurisdictional High Court has once again reiterated that it is mandatory and incumbent upon the Assessing Officer to record such satisfaction and in the absence of such satisfaction no disallowance can be made under section 14A. The Hon ble High Court concluded that; firstly, where there was a failure by Assessing Officer to comply with mandatory requirement of section 14A(2) read with rule 8D(1)(a) to record his satisfaction as required thereunder, then question of applying rule 8D(2)(iii) does not arise; and secondly, where Assessing Officer had failed to establish any direct nexus between investments made by assessee and interest expenditure incurred, then it not correct to remand the matter concerning deletion of disallowance of interest under clause (ii) of rule 8D(2) to Assessing Officer for fresh determination.

Issues Involved:
1. Addition of ?35,02,689 under "Current Liabilities."
2. Disallowance of ?71,122 under Section 14A of the Income Tax Act, 1961.
3. Deletion of addition of ?33,57,275 under Section 54EC of the Income Tax Act, 1961.

Detailed Analysis:

1. Addition of ?35,02,689 under "Current Liabilities":
The assessee, a partnership firm engaged in legal services, had shown a sum of ?42,91,289 under "current liabilities" in its balance sheet. The Assessing Officer (AO) accepted the explanation for ?5 lakhs and ?2,88,680 but added the remaining ?35,02,609 to the income, arguing that under the cash system of accounting, any income received in a particular year should be considered as income of that year. The assessee contended that these were advance payments from clients for fees to Senior Advocates and other expenses, held in a fiduciary capacity. The CIT(A) sustained the addition, pointing out defects in the evidence provided by the assessee.

Before the Tribunal, the assessee argued that the money received was held in trust and should not be recognized as income until services were rendered. The Tribunal, referencing various judicial precedents, agreed with the assessee, stating that money received in a fiduciary capacity cannot be taxed as income until it is recognized as such. The addition of ?35,02,609 was deleted.

2. Disallowance of ?71,122 under Section 14A:
The assessee earned dividend income of ?38,057 and income from mutual funds of ?8,59,847, which were claimed as exempt. The AO made a disallowance of ?71,122 under Section 14A, applying Rule 8D, without examining the nature of expenses or the assessee's claim that no expenditure was incurred to earn the exempt income. The CIT(A) upheld the disallowance.

The Tribunal held that the AO failed to satisfy himself about the correctness of the assessee's claim before applying Rule 8D. Citing the Delhi High Court's rulings, the Tribunal emphasized that the AO must record satisfaction about the incorrectness of the assessee's claim before making a disallowance under Section 14A. The disallowance of ?71,122 was deleted.

3. Deletion of addition of ?33,57,275 under Section 54EC:
The Revenue appealed against the CIT(A)'s decision to delete the addition of ?33,57,275, arguing that the assessee was not eligible for deduction under Section 54EC as the investment was not in the assessee's name. The assessee countered that the tax effect of the disputed amount was only ?6,91,599, which is below the revised limit of ?10 lakhs as per CBDT Circular No.21/2015.

The Tribunal noted that the tax effect was indeed below the prescribed monetary limit and dismissed the Revenue's appeal in limine, holding it as not maintainable.

Conclusion:
The Tribunal allowed the assessee's appeal, deleting the addition of ?35,02,609 under "current liabilities" and the disallowance of ?71,122 under Section 14A. The Revenue's appeal was dismissed due to the low tax effect, affirming the deletion of the addition of ?33,57,275 under Section 54EC.

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