2019 (12) TMI 747 - AT - Income Tax

Addition u/s 14A r.w.r. 8D - suo-moto disallowance made by the assessee - computing the income under normal computation as well as MAT computation under section 115JB - HELD THAT - As own fund of the assessee exceeds the investment. Therefore in our considered view there cannot be any disallowance of interest expenses. See GUJARAT STATE FERTILIZERS CHEMICALS LTD. 2013 (7) TMI 701 - GUJARAT HIGH COURT We further hold that the disallowances on account of interest expenses in the case on hand cannot be made in view of the fact that the own fund of the assessee exceeds the impugned investments. As already held that there cannot be made any disallowance of any interest as well as administrative expenses in the given facts and circumstances due to the fact that the AO has not pointed out any defect in the disallowances made by the assessee as well as no satisfaction was recorded as mandated under section 14A r.w.r. 8D of Income Tax Rules. Addition in the book profit under section 115JB - HELD THAT - Disallowances made under the provisions of Sec. 14A r.w.r. 8D of the IT Rules, cannot be applied to the provision of Sec. 115JB of the Act as per the direction of the Hon'ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. . 2014 (11) TMI 1169 - CALCUTTA HIGH COURT Disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently - HELD THAT - ad-hoc disallowance will serve the justice to the Revenue and assessee to avoid the multiplicity of the proceedings and unnecessary litigation. Thus we direct the AO to make the disallowance of 1% of the exempted income as discussed above under clause (f) to Explanation-1 of Sec. 115JB of the Act. We also feel to bring this fact on record that we have restored other cases involving identical issues to the file of AO for making the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. But now we note that there is no mechanism provided under the clause (f) to Explanation-1 of Sec. 115JB of the Act to make the disallowance independently. Therefore our action for restoring back the issue to the file of AO would unnecessarily cause further litigation. Thus we limit the disallowance on an ad-hoc basis @ 1 % of the exempted income as per the clause (f) to Explanation-1 of Sec. 115JB of the Act subject to the condition that the disallowance shall not exceed the amount of disallowance determined by the authorities below. Disallowance on account of late payment of employees contribution to Provident fund - HELD THAT - The delay in deposit made to the employees Provident fund and ESIC is not eligible for deduction by virtue of the decision of Hon ble Gujarat High Court in the case of CIT versus GSRTC 2014 (1) TMI 502 - GUJARAT HIGH COURT

Summary

Issues Involved:
1. Addition under Section 14A read with Rule 8D of the Income Tax Rules.
2. Disallowance under Section 14A of the Act to the Book Profit under Section 115JB of the Act.
3. Disallowance under Section 36(1)(va) of the Act on account of late payment of Employee's contribution to PF.

Issue-wise Detailed Analysis:

1. Addition under Section 14A read with Rule 8D:
The assessee, a private limited company engaged in construction and development, had investments in various partnership firms and shares. The assessee claimed that it had not incurred any expenditure for earning exempt income but made a suo-moto disallowance of ?18,47,497/- to avoid litigation. The Assessing Officer (AO) rejected this and made a disallowance of ?26,81,085/- under Section 14A read with Rule 8D, resulting in a net addition of ?8,33,606/-.

The Tribunal held that the AO did not record any dissatisfaction with the assessee's suo-moto disallowance, which is a prerequisite under Section 14A. The Tribunal referenced the Mumbai Tribunal's decision in DCIT v/s Pidilite Industries Ltd., emphasizing that the AO must specify reasons for dissatisfaction before invoking Section 14A read with Rule 8D. The Tribunal also noted that only investments yielding exempt income should be considered for disallowance, as per the Ahmedabad Tribunal's decision in Gateway Technolabs (P) Ltd. v/s DCIT.

The Tribunal concluded that the assessee's own funds exceeded the investments, negating any interest disallowance, referencing the Gujarat High Court's decision in CIT v/s Gujarat State Fertilizers and Chemicals Limited. Thus, the Tribunal held that no disallowance of interest expenses was warranted.

2. Disallowance under Section 14A of the Act to the Book Profit under Section 115JB:
The AO added the disallowance under Section 14A read with Rule 8D to the book profit under Section 115JB. The Tribunal, referencing the Special Bench of the Delhi Tribunal in ACIT vs. Vireet Investment Pvt. Ltd., held that disallowances under Section 14A read with Rule 8D cannot be applied to book profit calculations under Section 115JB. However, the Tribunal acknowledged that some disallowance for exempt income is necessary under clause (f) to Explanation-1 of Section 115JB, referencing the Calcutta High Court's decision in CIT Vs. Jayshree Tea Industries Ltd.

To avoid further litigation, the Tribunal directed an ad-hoc disallowance of 1% of the exempted income under clause (f) to Explanation-1 of Section 115JB, ensuring it does not exceed the amount determined by the authorities below.

3. Disallowance under Section 36(1)(va) on account of late payment of Employee's contribution to PF:
The AO disallowed ?9,26,942/- for late deposit of employees' PF and ESIC contributions, which was upheld by the CIT(A). The Tribunal referenced the Gujarat High Court's decision in CIT versus GSRTC, which held that contributions not credited by the due date specified under the relevant Act are not eligible for deduction under Section 36(1)(va). Consequently, the Tribunal upheld the disallowance.

Conclusion:
The Tribunal partly allowed the appeals, providing relief on the disallowance under Section 14A read with Rule 8D and its application to book profit under Section 115JB, but upheld the disallowance for late payment of employees' PF contributions. The decisions were based on established precedents and legal provisions, ensuring a fair and just outcome.