2019 (8) TMI 288 - AT - Income Tax

Disallowance u/s. 14A as per rule 8D - HELD THAT - So far as certain facts for more than one assessment year are definitely required to be adjudicated in a uniform manner. We are saying this for the reason that though the factual assertions of the assessee having substantial own funds which are more than the investments that yielded interest free income, we are conscious of the facts that out of total investments of ₹ 132.24 crore, nearly ₹ 2.5 crore have been made during the year whereas the balance are brought forward from earlier years. So far as the earlier years are concerned, fact as to whether or not the expenses are attributable to the income earned is still open before the Assessing Officer, since such matters have been set aside to his file for adjudication afresh right from assessment years 2004-05 to 2006-07. Therefore, in the fitness of things, we deem it fit and proper to set aside the issue to the file of the AO to re-compute the disallowance out of the interest expenditure in terms of section 14A of the Act if the facts and law so warrants. Even the issue raised by the assessee with regard to absence or otherwise of the requisite satisfaction of section 14A of the Act is concerned, the same shall also be restored to the AO to be dealt afresh as per law. Disallowance of general and administrative expenses by applying Rule 8D(2)(iii) - Since it is found to be inconsistency with the position of law the disallowance is not maintainable. The learned CIT(A) has rightly set aside the same. Since the disallowance of interest u/s. 14A has been set aside to the AO as done by the CIT(A) for adjudication afresh as per law. Accordingly, the ground of appeal of the assessee is partly allowed as above and that of the Revenue is dismissed. Disallowance of inventory written off - HELD THAT - AO disallowed the inventory written off by relying on the decision of CIT vs. Herdilla Chemicals Ltd. 2017 (10) TMI 421 - BOMBAY HIGH COURT . We have further noted that the Hon ble jurisdictional High Court by considering the decision of Herdilla Chemicals Ltd. held that write off claimed is essential on the basis of obsolesces of any particular equipment that claimed as write off, which is essentially on account of deterioration of various material including raw-material over a period of time due to wear and tear and that assessee would be entitled to write off in Profit Loss Account. The assessee s similar claim for A.Y. 2010-11 and 2011-12 has been allowed by First Appellate Authority in order dated 17.11.2016 and 20.03.2017 respectively. Therefore, considering the peculiarity of fact for the year under consideration, we are of the view that the assessee is entitled for inventory written off, however for limited purpose, the issue is restored to the file of AO to verify the fact, if equivalent provision thereof had been made in the books and there is no impact on Profit Loss Account and allow the relief to the assessee in accordance with law. Disallowance on account of non-deduction of TDS - no information was provided by AO in respect of disallowance - HELD THAT - CIT(A) was not justified in confirming the action of AO, when the assessee has specifically stated that the alleged recipient i.e. Jahangir Homi Bhandara is not known to the assessee. Therefore, considering the fact that the AO neither shared the information/material evidence allegedly received by him nor brought any material to prove that assessee made any payment of expenditure attracting the provisions for disallowance u/s 40A(ia). We direct the AO to delete the disallowance of ₹ 11,78,136/-. In the result, this ground of appeal is allowed. Disallowance of service tax written off - AO and CIT(A) referred it as sales tax - assessee submits that assessee in its books of account, accounted the payment of rent net of service tax - CIT(A) confirmed the action of AO holding that assessee has not routed service tax in Profit Loss Account and hence write off cannot be permitted - HELD THAT - Assessee before us vehemently submitted that the assessee accounted the amount separately to a separate account instead of accounting the tax as a part of cost of purchase made, being service tax on rent and was to be adjusted against this output tax liability. It was also convinced that during the year, the assessee could not utilized the input tax credit on service tax paid for rent and at the end of year such amount was charged to the Profit Loss Account and it should have been included in the rental income itself. We find force in the submission of ld. AR of the assessee that the said expenses gross of service tax is allowable as deduction u/s 37(1). Thus, by accepting the submission of assessee we allowed the deduction u/s 37(1). In the result, this ground of appeal is allowed. Disallowance of interest on loan to its subsidiary company - HELD THAT - As relying on assessee own for A.Y. 2006-07 case assessee stated that loans and advances which are under consideration have already been considered by the Tribunal in earlier years and decided the issue in favour of assessee allowing the claim of the assessee. The assessee stated that the issue now stands covered in favour of assessee. On the other hand, the learned Sr. DR fairly conceded that there is reduction in loans and advances what was in earlier years. We find that this issue is squarely covered in favour of assessee and against Revenue by the decision of the Tribunal in assessee s own case. Hence, respectfully following the same we allow the claim of the assessee. The orders of the lower authorities are set aside and this issue of assessee s appeal is allowed. Disallowance of capital advance and depreciation - AO disallowed written off capital advances given to vendors for purchase of enterprises resources planning (ERP) software - HELD THAT - lower authorities have not given any finding on the explanation furnished by assessee about the submission of assessee that implementation was ERP software was not materialized and was scrapped. The lower authorities simply concluded that the advances paid for ERP software was capital in nature. In our considered view, it is settled legal position that the expenses incurred by assessee on software are revenue in nature. Moreover, the implementation of software was not materialized. Thus, it is purely a business loss and is allowable expenses. So far as disallowance on account of depreciation on accelerated basis of ₹ 19,23,421/- is concerned. Assessee vehemently submitted that accelerated depreciation of ₹ 19,23,421/- was offered to tax by assessee on account of disallowance of entire amount of book depreciation and disallowance by AO resulted in disallowing the accelerated depreciation twice and it should be deleted. We have noted that the lower authority has not examined the clam related to the factual explanation furnished by assessee on depreciation on accelerated basis. Therefore, this part of disallowance is restored to the Assessing Officer to verify the fact as explained by assessee before ld. CIT(A) as well as before us and grant relief to the assessee in accordance with law. Disallowance of prior period expenditure - HELD THAT - Hon ble Bombay High Court in CIT vs. Nagri Mills Co. Ltd. 1957 (9) TMI 30 - BOMBAY HIGH COURT while considering the question of law held that actual payment is not necessary for purpose of deduction and it is sufficient if liability to bonus is incurred according to method of accounting upon basis of which profits or gains are computed. Considering the decision of jurisdictional High Court, we are of the view that the assessee is entitled for claiming prior period expenses. However, the lower authority has not examined the expenses. Therefore, we restore this issue to the file of AO to verify fact and expenses and allow the same in the year to which is pertains. In the result, this ground of appeal is allowed for statistical purpose. Provision for contingencies and recoveries for calculation of books profit - HELD THAT - As we have noted above the assessee is now pressing only provisions for contingencies and provisions of recoveries. For provisions of contingencies, the assessee vehemently submitted that due inadvertence in computing book profit and a wrong figure due to typographical mistake was taken. We have noted that despite bringing the fact in the notice of CIT(A), CIT(A) not examined furnished by assessee. Similarly for provisions of recoveries, the lower authority has not examined the explanation furnished by assessee. Therefore, both the components of this issue are restored to the Assessing Officer to verify the fact as per the contention/explanation furnished by assessee before ld. CIT(A) as well as before the Tribunal and to pass the order afresh. In the result, this ground of appeal is allowed for statistical purpose. Addition u/s 50C - AO invoked the provision of section 50C and increased the sale consideration by 10%, which resulted in difference in the capital gain - HELD THAT - Before the CIT(A), the assessee furnished detail submission and specifically stated that valuation considered by assessee on transfer of land, is the same as that considered by stamp duty authority. CIT(A) instead of giving any finding over the explanation/submission furnished by assessee confirmed the action of AO. Therefore, considering the submission of the assessee, this ground of appeal is also restored the file of AO to verify the fact, if the assessee adopted same value as considered by stamp duty authority for the purpose of computation of capital gain and pass the order afresh in accordance with law. In this result, this ground of appeal is allowed for statistical purpose.

Summary

Issues Involved:
1. Disallowance of expenses under Section 14A of the Income Tax Act, 1961.
2. Disallowance of inventory written off.
3. Disallowance on account of non-deduction of TDS.
4. Disallowance of service tax written off.
5. Disallowance of interest on loans to subsidiary.
6. Disallowance of capital advance and depreciation.
7. Disallowance of prior period expenditure.
8. Provision for contingencies and recoveries for calculation of book profits.
9. Addition under Section 50C of the Income Tax Act, 1961.

Issue-Wise Analysis:

1. Disallowance of Expenses under Section 14A:
The assessee and Revenue both challenged the disallowance made by the Assessing Officer (AO) under Section 14A. The AO disallowed ?6,31,84,887/- based on Rule 8D, which was not applicable for the assessment year 2007-08 as per the Bombay High Court judgment in Godrej & Boyce Mfg. Co. Ltd. vs. DCIT. The CIT(A) restored the matter to the AO for fresh computation. The Tribunal confirmed the CIT(A)'s decision, noting that Rule 8D is applicable prospectively from A.Y. 2008-09. The Tribunal also directed the AO to re-compute the disallowance and verify the satisfaction requirement under Section 14A.

2. Disallowance of Inventory Written Off:
The AO disallowed ?23,480,619/- for inventory written off, stating it was still with the assessee. The assessee argued there was no impact on the Profit & Loss account as an equivalent provision was made. The Tribunal restored the issue to the AO for verification, directing to allow the relief if the provision was made and there was no impact on Profit & Loss.

3. Disallowance on Account of Non-Deduction of TDS:
The AO disallowed ?1,178,136/- for non-deduction of TDS on payments to Mr. Bhandara without providing details to the assessee. The Tribunal found that the AO did not share the information or provide an opportunity to the assessee to explain. The Tribunal directed the AO to delete the disallowance.

4. Disallowance of Service Tax Written Off:
The AO disallowed ?1,214,420/- for service tax written off, stating the assessee follows the exclusive system of accounting. The Tribunal accepted the assessee's argument that if the service tax was included in rental expenses, it would be allowable under Section 37(1). The Tribunal allowed the deduction.

5. Disallowance of Interest on Loans to Subsidiary:
The AO disallowed ?25,865,668/- for interest on loans to subsidiaries, stating the assessee could not explain the commercial expediency. The Tribunal noted that the issue was covered in favor of the assessee by earlier Tribunal decisions and the Supreme Court's decision in CIT vs. Reliance Industries. The Tribunal allowed the claim.

6. Disallowance of Capital Advance and Depreciation:
The AO disallowed ?3,477,261/- for capital advance and depreciation on ERP software. The Tribunal found that the ERP system was scrapped, making it a business loss and allowable as an expense. The Tribunal restored the issue of accelerated depreciation to the AO for verification.

7. Disallowance of Prior Period Expenditure:
The AO disallowed ?13,175,381/- for prior period expenses. The Tribunal noted that the expenses pertained to raw-material consumption and were allowable irrespective of the year. The Tribunal restored the issue to the AO to verify the expenses and allow them in the respective years.

8. Provision for Contingencies and Recoveries for Calculation of Book Profits:
The AO added back provisions for contingencies and recoveries. The Tribunal restored the issue to the AO to verify the facts and explanations provided by the assessee and pass a fresh order.

9. Addition under Section 50C:
The AO made an addition of ?16,355,585/- under Section 50C, stating the sale consideration was lower than the stamp duty value. The Tribunal restored the issue to the AO to verify if the assessee adopted the same value as the stamp duty authority and pass a fresh order.

Conclusion:
The Tribunal partly allowed the assessee's appeal and dismissed the Revenue's appeal, directing the AO to re-examine and verify various issues as per the Tribunal's guidelines.