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2019 (12) TMI 958 - AT - Income TaxDisallowance u/s 14A read with rule 8D(2)(ii) and 8D(2)(iii) - assessee-company has suo motu offered an amount as disallowance under the said section - HELD THAT - If there were funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption was established considering the finding of fact both by the Commissioner (Appeals) and the Tribunal. The interest was deductible. Therefore, considering the factual position and position in law explained above, we delete the disallowance under rule 8D(2)(ii) of the Income-tax Rules. Disallowance under rule 8D(2)(iii) - We note that in its computation of income, the assessee suo motu disallowed a sum under section 14A of the Act read with rule 8D(2)(iii), being 0.5 per cent. of the average investments yielding exempt income. The said computation is reproduced in the assessment order, page 3, point 5. We direct the Assessing Officer to restrict the disallowance to the tune of ₹ 91,07,352 under section 14A of the Act read with rule 8D(2)(iii), being 0.5 per cent. of the average investments yielding exempt income. In a nut shell we confirm the disallowance under rule 8D(2)(i) at ₹ 56,181 and under rule 8D(2)(iii) at ₹ 91,07,352. The same principles for computation of disallowance under section 14A read with rule 8D will be applicable to the assessee's appeal in I. T. A. No. 937/Kolkata/2018, therefore, the Assessing Officer is directed to compute the disallowance as per the precedents cited above and discussion made Disallowance of prior period expenses - CIT(Appeals) rejected the claim of the assessee holding that since the assessee followed the mercantile system of accounting and as such the impugned expenditure can only be allowed in the year to which it pertains - HELD THAT - Since the bills were not received, it was not possible to make provisions for such expenses in the accounts of the preceding year ending on March 31, 2009. On receipt of these bills relating to earlier year, these payments were made in the current year. These prior period expenses, which were claimed in the current year, were not debited in the books of the preceding year and accordingly were not claimed by the assessee in the assessment year 2009-10. The said expenses of ₹ 4,06,487 was claimed by the assessee in the assessment year 2010-11, hence we allow the claim of the assessee. Therefore, we delete the addition Addition of notional interest - HELD THAT - Keeping in view all these facts of the case and applying the rule of consistency, we uphold the impugned order of the learned Commis sioner of Income-tax (Appeals) deleting the disallowance made by the Assessing Officer on account of interest allegedly attributable to the interest-free loans given by the assessee-company to its subsidiary companies and dismiss ground No. 3 of the Revenue's appeal Disallowance of compensation paid to M/s. Conforms Pvt. Ltd, a related company under section 40A(2)(b) - HELD THAT - The payment was made in respect of vacation of the property so occupied by such company. We find substance in the learned counsel's argument that the payment was made by the assessee after much negotiation and it was a separate entity and correspondences had occurred between the assessee and the said company to settle the amount. Even if the agreement was not there but the relevant correspondences duly prove that the payment was for the vacation of the impugned premises which was vacated by the said company. Hence, it is in accordance with the business of the assessee and the same is allowable. That being so, we decline to interfere with the order of the learned Commissioner of Income-tax (Appeals) in deleting the aforesaid addition. His order on this issue is, therefore, upheld and the grounds of appeal of the Revenue is dismissed. Treating the Government securities within the meaning of 'bonds' for the purpose of the third proviso to section 48 of the Act and erred in dismissing the assessee's claim for indexed loss - HELD THAT - as per section 2(42A) expression security shall have meaning assigned to clause II of the Securities Contracts Regulation Act, 1956 which includes Government securities. The facts of this case are squarely applicable to the present case of the assessee. Therefore, respectfully following the judgment of the co-ordinate Bench in the case of Sundaram Finance Limited 2017 (7) TMI 661 - ITAT CHENNAI we note that it is abundantly clear that the Government securities are entitled to indexation benefits. Therefore, we note that the Government securities are different from bond and debenture for the purpose of the third proviso to section 48 of the Act (4th proviso after amendment) and therefore the benefit of indexation should be granted to the assessee on the redemption of these Government securities. Deduction u/s 37(1) on account of education cesses paid by the assessee - HELD THAT - Education cess being not Income-tax is allowable as deduction under section 37(1) of the Act. For this, we rely on the judgment of ITC Ltd. 2018 (11) TMI 1611 - ITAT KOLKATA wherein it was held that education cess is an allowable expenditure under section 37(1) of the Act. Therefore, we direct the Assessing Officer to verify all the relevant facts and allow education cess as deduction under section 37(1) of the Act.
Issues Involved:
1. Disallowance under section 14A read with rule 8D(2)(ii) and 8D(2)(iii) of the Income-tax Rules. 2. Disallowance of ?4,06,847 as prior period expenses. 3. Deletion of notional interest addition of ?82,78,301. 4. Disallowance of ?11,00,000 compensation paid under section 40A(2)(b) of the Act. 5. Treatment of Government securities as "bonds" for the purpose of the third proviso to section 48 and disallowance of indexed loss of ?31,49,09,561. 6. Deduction of education cess under section 37(1) of the Income-tax Act. Detailed Analysis: 1. Disallowance under section 14A read with rule 8D(2)(ii) and 8D(2)(iii) of the Income-tax Rules: The core issue was the disallowance under section 14A for exempt income from tax-free bonds and dividend income. The Assessing Officer (AO) calculated the disallowance strictly as per rule 8D, resulting in a higher disallowance than what the assessee had offered. The Tribunal noted that the assessee had sufficient own funds to make the investments and followed the precedent set by the Kolkata Tribunal in REI Agro Ltd., which was affirmed by the Calcutta High Court. The Tribunal directed the AO to restrict the disallowance to the amount offered by the assessee, confirming disallowance under rule 8D(2)(i) at ?56,181 and under rule 8D(2)(iii) at ?91,07,352. 2. Disallowance of ?4,06,847 as prior period expenses: The AO disallowed the amount as it pertained to prior period expenses. The assessee explained that these expenses were crystallized in the current year due to late receipt of bills. The Tribunal, relying on the Gujarat High Court decision in Saurashtra Cement and Chemical Industries Ltd., allowed the expenses as they were crystallized and paid in the current year, thus deleting the addition. 3. Deletion of notional interest addition of ?82,78,301: The AO disallowed notional interest on interest-free loans given to a subsidiary, treating it as a diversion of funds. The Tribunal, following the Supreme Court decision in S. A. Builders Ltd., held that the loan was for business purposes and given out of the assessee’s own funds. The Tribunal upheld the deletion of the notional interest addition as the facts were consistent with the previous year where similar disallowance was deleted. 4. Disallowance of ?11,00,000 compensation paid under section 40A(2)(b) of the Act: The AO disallowed the compensation paid to a related party for vacating premises due to lack of supporting agreement. The Tribunal found that the compensation was justified based on negotiations and correspondences, and the AO failed to prove excess payment. The Tribunal upheld the deletion of the disallowance by the Commissioner of Income-tax (Appeals). 5. Treatment of Government securities as "bonds" for the purpose of the third proviso to section 48 and disallowance of indexed loss of ?31,49,09,561: The AO treated Government securities as bonds, disallowing the indexed loss. The Tribunal differentiated between bonds and Government securities, noting that Government securities are not bonds or debentures and are thus eligible for indexation. The Tribunal relied on the Chennai Tribunal decision in Sundaram Finance Limited, which allowed indexation on Government securities. The Tribunal allowed the indexed loss claim of ?31,49,09,561. 6. Deduction of education cess under section 37(1) of the Income-tax Act: The Tribunal noted that education cess is not "Income-tax" and is thus allowable as a deduction under section 37(1). The Tribunal directed the AO to verify and allow the deduction of education cess, following the precedent set in ITC Ltd. Conclusion: The Tribunal allowed the appeals in favor of the assessee on the issues of disallowance under section 14A, prior period expenses, notional interest, compensation paid, indexed loss on Government securities, and deduction of education cess. The Tribunal emphasized the need to follow judicial precedents and proper application of legal principles in tax assessments.
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