2019 (4) TMI 414 - AT - Income Tax

Disallowance u/s 14A r.w. Rule 8D - HELD THAT - Disallowance of expenditure in terms of Section 14A r.w. Rule 8D cannot exceed the exempt income itself. AO is accordingly directed to restrict the disallowance under s.14A of the Act to the extent of exempt income. See CIT vs. Corrtech Energy Pvt. Ltd. 2014 (3) TMI 856 - GUJARAT HIGH COURT MAT - book profit computed for the purposes of Section 115JB of the Act on account of disallowance under s.14A - HELD THAT - In view of the long line of judicial precedents including the decision of Special bench in ACIT vs. Vireet Investments Ltd. 2017 (6) TMI 1124 - ITAT DELHI , we find merit in the plea of the assessee. The AO is accordingly directed to delete adjustments made to the book profit on this score. Disallowance of provision for leave encashment and provision for gratuity u/s 43B - HELD THAT - We find that identical issue came up for consideration by the co ordinate bench of Tribunal in Integrated Coal Mining Ltd. vs. DCIT (2015 (12) TMI 1326 - ITAT KOLKATA) wherein the issue was set aside to the file of the AO to pass appropriate order based on the outcome of the main appeal on merits by the Supreme Court in Exide Industries Ltd. 2009 (5) TMI 894 - SUPREME COURT . In parity, the grievance of the assessee as per Ground no.3 is set aside to the file of the AO. Payments of employees contribution towards provident fund - HELD THAT - This issue has been decided against the assessee by the Hon ble Gujarat High Court in the case of CIT vs. Gujarat State Road Transport Corporation 2014 (1) TMI 502 - GUJARAT HIGH COURT . Therefore, the grievance of the assessee is answered in negative and against the assessee. Adjustment of provision of wealth tax for Book profit u/s 115JB - HELD THAT - The assessee seeks to claim that wealth tax is not a tax defined under Explanation 2 to Clause (a) of Explanation 1 to Section 115JA of the Act. In parity with the decision of the co-ordinate bench in ASB International (P.) Ltd 2012 (8) TMI 335 - ITAT MUMBAI and CIT vs. Echjay Forgings (P.) Ltd. 2001 (2) TMI 56 - BOMBAY HIGH COURT AO is directed to exclude the provision for wealth tax for the purposes of computation of book profit. Excess interest payment under s.40A(2)(a) - Treatment to interest as business expenditure - HELD THAT - we are in agreement with the plea of the assessee that merely because the assessee company is paying huge interest on outstanding credit balance to Sun Pharma while no interest is being charged by the assessee from its debtors cannot be the justifiable reason for resorting to the disallowance of interest. See CIT vs. Aditya Medisales Ltd. 2010 (5) TMI 823 - GUJARAT HIGH COURT towards deletion of disallowance made on account of excess interest payment under s.40A(2)(a) of the Act. Thus, the issue stands concluded in favour of the assessee Allowability of Discount payment to customers C&F agents u/s 37 - HELD THAT - The assessee in the instant case demonstrated on facts that payment of such discounts are integrally connected to the sales/turn over achieved or has potential to achieve. The discount expenses have thus been incurred with the object of furthering the trade or business interest of the assessee. Therefore, such expense falls within the expression wholly and exclusively referred to in Section 37 - no hesitation to concur with the conclusion drawn by the CIT(A) for allowability of discounts given to stockiests/distributors etc. We are unable to understand the reasoning of the CIT(A) for discarding the claim of discount expenditure paid to the Doctors. When the test of commercial expediency applied in its natural perspective, there is no reason to exclude Doctors purchasing medicines from C&F agents for the purpose of eligibility of discount payments. We thus set aside the action of the CIT(A) to this extent and direct the AO to allow the trade discount paid to all parties including Doctors as ordinary business expenditure. Thus, Ground No.2 of the Revenue s appeal is dismissed Eligible for deduction u/s 80G - donation to to Vision Foundation of India - HELD THAT - The payment made on instruction of Shir Dilip Sanghvi, receipt of thanks by Shri Dilip Sanghvi and receipt sent to Shri Dilip Sanghvi are wholly irrelevant considerations as rightly observed by the CIT(A). It is the assessee company which is entitled to deduction under s.80G for which conditions laid down therein are not shown to be not fulfilled. Therefore, we decline to interfere of the order of the CIT(A). - Decided against revenue. Disallowance of discount paid to Doctors - HELD THAT - No merit in the disallowance made by the AO towards discount paid to the Doctors as discussed in relation to AY 2009-10. We thus agree with the conclusion drawn by the CIT(A) despite wrong reasoning. The Ground no.2 of Revenue s appeal is thus dismissed. Disallowance u/s 14A for interest - HELD THAT - CIT(A) has rightly approached the issue and deleted the proportionate disallowance of interest expenditure under Rule 8D(2)(ii) on the ground that investment in shares giving rise to exempt income is far lower than the corresponding interest free funds available with the assessee by way of capital and reserves. Therefore, a presumption would naturally arise in favour of the assessee for deemed utilization of interest free funds for investments yielding tax free income in preference to the borrowed funds. Therefore, we do not see any infirmity in the order of the CIT(A). Suo motu disallowance for earning of exempt income - The Revenue authorities, in our view, have also rightly invoked formula under Rule 8D(2)(iii) for disallowance of management and general expenses deemed to be attributable to tax free income. However, the disallowance is required to be computed having regard to the investments which has actually yielded exempt income instead of gross investments in consonance with the decision of the Special Bench in Vireet Investments 2017 (6) TMI 1124 - ITAT DELHI as placed on behalf of the assessee. The issue is therefore remitted back to the file of the AO for re-computation of disallowance under Rule 8D(2)(iii) of the Rules. AY 2009-10 - In view of sufficient own funds available (Rs.30.35 Crores) in excess of corresponding investment (Rs.12.54 Crores) giving rise to exempt income, there is no warrant to make disallowance under Rule 8D(2)(ii) in view of the decision in CIT vs. HDFC Bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT . Disallowance under Rule 8D(2)(iii), the AO shall re compute the disallowance with reference to investments which have actually given rise to tax free income instead of gross investments

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Addition in book profit under Section 115JB.
3. Disallowance of provision for leave encashment and gratuity under Section 43B.
4. Disallowance on account of delayed payments of employees' contribution towards provident fund.
5. Adjustment to book profit towards provision of wealth tax.
6. Allowance of interest as business expenditure.
7. Allowance of discount claims.
8. Allowance of donation as business expenditure.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
- The assessee argued that the disallowance under Section 14A cannot exceed the exempt income, which was ?4000. The Tribunal agreed, referencing multiple precedents, and directed the AO to restrict the disallowance to the exempt income. Consequently, the ground was allowed in part.
- For AY 2010-11, the CIT(A) deleted the proportionate interest expenditure disallowance under Rule 8D(2)(ii) due to sufficient interest-free funds. However, the Tribunal remitted the issue back to the AO for re-computation under Rule 8D(2)(iii) based on investments yielding exempt income.
- For AY 2011-12, the CIT(A)'s deletion of disallowance under Rule 8D(2)(ii) was upheld, but the issue was remitted back for re-computation under Rule 8D(2)(iii).

2. Addition in Book Profit under Section 115JB:
- The Tribunal found merit in the assessee's plea, directing the AO to delete adjustments made to the book profit due to disallowance under Section 14A. This ground was allowed.

3. Disallowance of Provision for Leave Encashment and Gratuity under Section 43B:
- The Tribunal noted that similar issues were set aside to the AO in the Integrated Coal Mining Ltd. case pending the Supreme Court's decision in Exide Industries Ltd. The grievance was set aside to the AO, allowing the ground for statistical purposes.

4. Disallowance on Account of Delayed Payments of Employees' Contribution towards Provident Fund:
- The Tribunal upheld the disallowance, referencing the Gujarat High Court's decision in CIT vs. Gujarat State Road Transport Corporation, dismissing the ground.

5. Adjustment to Book Profit towards Provision of Wealth Tax:
- The Tribunal directed the AO to exclude the provision for wealth tax from the computation of book profit, aligning with the decisions in ASB International (P.) Ltd. and CIT vs. Echjay Forgings (P.) Ltd. The ground was allowed.

6. Allowance of Interest as Business Expenditure:
- The AO disallowed interest paid to Sun Pharma, alleging it was an arrangement to claim deductions. The CIT(A) reversed this, finding the interest reasonable and for business purposes. The Tribunal upheld the CIT(A)'s decision, referencing consistent decisions in the assessee's favor in previous years and the Gujarat High Court's approval.

7. Allowance of Discount Claims:
- The AO disallowed discounts given to ultimate purchasers, not directly transacting with the assessee. The CIT(A) allowed the discounts except for payments to doctors. The Tribunal found the discounts to stockiests, distributors, dealers, and retailers justifiable but also allowed discounts to doctors, noting the commercial expediency and business connection. The ground was allowed for AY 2009-10, 2010-11, and 2011-12.

8. Allowance of Donation as Business Expenditure:
- The AO disallowed a donation of ?11 lakhs, claiming it was made on behalf of an individual. The CIT(A) reversed this, noting the donation was made from the assessee's account, and the receipt was in the assessee's name. The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal.

Conclusion:
- The Tribunal allowed the assessee's appeals in part and dismissed the Revenue's appeals, providing detailed directions for re-computation and adherence to judicial precedents.