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2017 (11) TMI 1069 - AT - Income TaxAllowability of provision made under the head late delivery charges - Held that - Provision has been recognized by the assessee on the basis of obligation stipulated in the contract which ranges from 1 to 10% and assessee has given a detailed working for making the provision @ 2% which also gets ratified by the actual payments in the subsequent year. Here the obligation of the assessee is a result of an event which is probably outflow of resources required to settle the obligation and based on this, a reasonable estimate has been made. Thus, it cannot be held that provision made by the assessee is not proper and it is some kind of unascertained liability. In any case, actual event happening in the subsequent year that assessee did incur expenditure of approximately ₹ 19.47 lakhs and also offered the income of excess provision of ₹ 5.54 lakhs, such disallowance of provision is uncalled for. Accordingly, the ground raised by the assessee is allowed. Disallowance under section 14A - Held that - Assessing Officer, without examining the accounts maintained by the assessee and also nature of expenditure debited, held that employee who is looking after the investment must have incurred transport, telephone and other administrative expenses and, therefore, he justified application of Rule 8D. Section 14A(2) read with Rule 8D(1)(a) requires that the Assessing Officer before invoking the provision of Rule 8D having regard to the account of the assessee about correctness of the claim of expenditure made by the assessee has to record his satisfaction that such a claim made by the assessee is not correct and such a satisfaction can only be discernible once he has examined the nature of accounts and expenditure debited qua earning of exempt income. If the Assessing Officer does not apply with the mandatory requirement of section 14A(2) and Rule 8D(1), then disallowance under section 14A cannot be triggered and thereby proceed with disallowance in accordance with formula laid down in Rule 8D(2). The mandatory requirement of proceedings under section 8D(2) has to rout through provisions enshrined in rule 8D(1) and section 14A(2). Once that is not so, then he cannot proceed with the disallowance. Accordingly, the ground raised by the assessee is allowed.
Issues Involved:
1. Disallowance of Late Delivery Charges amounting to ? 25,00,000/- 2. Disallowance of expenses amounting to ? 1,57,566/- under section 14A of the Income Tax Act, 1961 Issue-wise Detailed Analysis: 1. Disallowance of Late Delivery Charges amounting to ? 25,00,000/- The primary issue revolves around whether the provision for late delivery charges amounting to ? 25,00,000/- made by the assessee is allowable as an expenditure for the assessment year 2008-09. The assessee, engaged in the business of manufacturing and trading electronic/electric equipment, had entered into a purchase order with Reliance Telecom Ltd. which included a clause for late delivery charges. The assessee made a provision for these charges, which was partially utilized and the remaining amount was written back as income in the subsequent year. The Assessing Officer (AO) disallowed the provision, treating it as a contingent liability, not allowable for deduction. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this decision, stating that the liability was unascertained and contingent in nature. Upon appeal, it was argued that the provision was based on a contractual obligation and was a reasonable estimate of the liability. The actual payment of ? 19,46,519/- towards the late delivery charges and the subsequent write-back of the excess provision supported the claim. The Tribunal referred to the Supreme Court's decision in Bharat Earth Movers vs. CIT, which established that a business liability that has definitely arisen in the accounting year should be allowed as a deduction, even if it is to be quantified and discharged in the future. The Tribunal concluded that the provision made by the assessee was a reasonable estimate based on a contractual obligation and was not contingent. Therefore, the disallowance of ? 25,00,000/- was deemed uncalled for, and the assessee's appeal on this ground was allowed. 2. Disallowance of expenses amounting to ? 1,57,566/- under section 14A The second issue concerns the disallowance of ? 1,57,566/- under section 14A of the Income Tax Act, 1961, which pertains to expenses incurred in relation to earning exempt income. The assessee had earned dividend income of ? 30,66,500/- and had apportioned ? 50,000/- as indirect expenditure for earning this income. The AO, however, applied Rule 8D and worked out a higher disallowance. The CIT(A) partially upheld the AO's decision but scaled down the disallowance to ? 1,57,566/-. The assessee argued that the disallowance of ? 50,000/- was reasonable, considering only three investments were made during the year, and the AO had not properly examined the accounts before applying Rule 8D. The Tribunal noted that the AO failed to record satisfaction regarding the correctness of the assessee’s claim as required under section 14A(2) read with Rule 8D(1). The Tribunal referred to the Delhi High Court's decision in H.T. Media Limited vs. Pr. CIT, which emphasized that the AO must record satisfaction after examining the accounts before invoking Rule 8D. Given the failure of the AO to comply with this mandatory requirement, the Tribunal held that no disallowance over and above the ? 50,000/- offered by the assessee could be made. Consequently, the addition of ? 1,57,566/- was directed to be deleted, and the assessee's appeal on this ground was allowed. Conclusion The appeal of the assessee was allowed on both grounds. The provision for late delivery charges was deemed allowable as it was based on a contractual obligation and was a reasonable estimate. The disallowance under section 14A was deleted due to the AO's failure to record the necessary satisfaction before applying Rule 8D.
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