2018 (2) TMI 498 - AT - Income Tax

Addition u/s 14A - Held that - No disallowance out of interest expenditure is called for when own funds available with the assessee exceeds value of investment. The learned CIT(A) has further observed that the disallowance as per Rule 8D(2)(ii) works out to ₹ 1,86,773/-, while the assessee itself has disallowed a sum of ₹ 5,90,507/-. It is also pertinent to note that the actual amount of exempt income earned by the assessee was lower than the amount disallowed by the assessee u/s 14A of the Act. Hence, the decision rendered by the Coordinate Bench in the case of Morgan Stanly Co. Pvt. Ltd. (2018 (2) TMI 428 - ITAT MUMBAI) squarely applies to the facts of the present case. In view of the forgoing discussions, we are of the view that the order passed by the learned CIT(A) on this issue does not call for any interference. Disallowance made u/s. 40(a)(ia) - reimbursed amounts towards advertisement and general expenses - Held that - CIT(A) correctly deleted the disallowance made by the AO u/s 40(a)(ia). Hon ble Kolkata High Court in the case of S.K. Tekriwal 2012 (12) TMI 873 - CALCUTTA HIGH COURT Addition made for computing profit u/s. 115JB in respect of expenditure relatable to exempt income - Held that - Revenue by Hon ble Bombay High Court in the case of Bangalore Finance and Investments Pvt. Ltd. (2015 (2) TMI 1263 - BOMBAY HIGH COURT). AO was not justified in adopting the disallowance made by him u/s. 14A of the Act for the purpose of computing book profit under section 115JB of the Act. Hence, the learned CIT(A) was justified in deleting the addition so made by the Assessing Officer. Rejection of claim for deduction of Service tax liability - Held that - There appears to be no dispute with regard to the fact that the input tax credit relatable to exempt services are not eligible for input tax credit, since the AO himself has observed so in the assessment order. In the instant case, the assessee has provided both taxable and exempt services. Since the input tax credit relatable to exempted services are not eligible for input credit, the same has been charged to the Profit and Loss account. We have observed earlier that the service tax paid by the assessee is otherwise eligible for deduction. Hence the input tax credit relatable to exempted services is also eligible for deduction, since it cannot be availed as credit by the assessee. We agree with the submission of Ld A.R that the method of accounting Service tax liability, i.e., exclusive method or inclusive method does not have revenue implications. We notice that the tax authorities have taken adverse view against the assessee without verifying the relevant documents, even though they were furnished before them. Since there is no dispute with regard to the fact that the input tax credit relatable to the exempted services cannot be availed by the assessee, we are of the view that the assessee has rightly claimed the same as deductible expenditure. Accordingly we set aside the orders passed by the Ld CIT(A) on this issue in both the years under consideration and direct the AO to allow them as deduction. - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Disallowance under Section 40(a)(ia) of the Income Tax Act.
3. Addition under Section 115JB of the Income Tax Act.
4. Deduction of Service Tax liability.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The first issue pertains to the disallowance made under Section 14A of the Income Tax Act. The assessee had received dividend income and had suo-moto disallowed a certain amount under this section. The Assessing Officer (AO) computed the disallowance by applying Rule 8D, which resulted in a higher disallowance. The CIT(A) deleted the enhancement made by the AO, noting that the assessee's own funds exceeded the value of investments, and the disallowance made by the assessee was more than the exempt income. The Tribunal upheld the CIT(A)’s decision, citing the decisions of the Hon'ble Bombay High Court and other Coordinate Benches which held that disallowance under Section 14A should not exceed the exempt income.

2. Disallowance under Section 40(a)(ia) of the Income Tax Act:
The second issue involves the disallowance under Section 40(a)(ia) for short deduction of tax at source. The AO disallowed the reimbursement amounts towards advertisement and general expenses paid to group companies, arguing that tax should have been deducted under Section 194J instead of Section 194C. The CIT(A) deleted the disallowance, following the decision of the Hon'ble Calcutta High Court in the case of S.K. Tekriwal, which held that disallowance cannot be made for shortfall in tax deduction. The Tribunal confirmed the CIT(A)’s order, referencing similar decisions from the Hon'ble Gujarat High Court and the Coordinate Bench.

3. Addition under Section 115JB of the Income Tax Act:
The third issue is related to the addition made for computing profit under Section 115JB concerning expenditure relatable to exempt income. The AO added the disallowance computed under Section 14A to the book profit, while the CIT(A) restricted it to the amount disallowed by the assessee. The Tribunal upheld the CIT(A)’s decision, referring to the Hon'ble Bombay High Court’s ruling that the disallowance under Section 14A cannot be added to the book profit for Section 115JB purposes.

4. Deduction of Service Tax liability:
The final issue pertains to the rejection of the claim for deduction of Service Tax liability. The assessee, following the exclusive method of accounting for Service Tax, claimed deduction for the input tax credit related to exempt services, which was charged to the Profit and Loss account. The AO rejected this claim, stating that it was not routed through the Profit and Loss account and the assessee failed to provide relevant workings. The CIT(A) confirmed the disallowance. However, the Tribunal found that the assessee had furnished all relevant details and that the input tax credit related to exempt services is eligible for deduction since it cannot be availed as credit. The Tribunal set aside the CIT(A)’s orders and directed the AO to allow the deduction.

Conclusion:
The Tribunal upheld the CIT(A)’s decisions on disallowances under Sections 14A and 40(a)(ia), and the addition under Section 115JB, while it reversed the CIT(A)’s decision on the Service Tax liability deduction, allowing the assessee’s appeals and dismissing the revenue’s appeals.