2020 (1) TMI 819 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - HELD THAT - We have observed that authorities below have not dissected the various investments vis- -vis dividend income received by the assessee and the matter need to be remanded back to the file of AO for fresh adjudication after considering and analyzing various investments made by the assessee vis-a-vis dividend income received which was claimed as an exempt income. We are agreeable with contentions of the assessee that dividend income received from foreign companies are chargeable to income-tax in India and if that be so in the case of the assessee having offered for tax such dividend income received from foreign companies , then no disallowance of expenses u/s 14A is warranted so far as such investments in foreign companies as dividend income is already subjected to tax in India. AO shall verify this aspect and shall then not include such foreign investments for the purpose of making disallowances of expenses u/s.14A the dividend income of which has already been subjected to tax in India for the year under consideration . So far as claim of the assessee having made strategic investments or investments in subsidiary companies or group /associated companies in India or companies promoted by it and on that short ground seeking exclusion from invocation of Section 14A o the issue is no more res integra as Hon ble Supreme Court has settled this controversy in its judgment in the case of Maxopp Investment Limited v. CIT 2018 (3) TMI 805 - SUPREME COURT wherein this issue is decided in favour of Revenue and such investments are to be considered/included for making disallowance of expenses u/s.14A - AO is directed to include such investments for making disallowance of expensed incurred in relation to earning of an exempt income by invoking provisions of Section 14A - Thirdly, in the case of ACIT v. M/s.Vireet Investment Pvt. Ltd. vs. ACIT, 2017 (6) TMI 1124 - ITAT DELHI has held that investments which yielded dividend income during the year under consideration are only to be considered for the purposes of making disallowance of expenses u/s 14A. We are bound by aforesaid decision of Special Bench of the tribunal. The AO shall verify those investments which yielded dividend income during the year under consideration and then made disallowance u/s 14A by including such investments which yielded dividend during the year under consideration Hon ble Delhi High Court in the case of Joint Investments Private Limited v. CIT 2015 (3) TMI 155 - DELHI HIGH COURT has held that disallowance of expenses u/s 14A cannot exceed exempt income. The AO is directed to follow the aforesaid decision of Hon ble Delhi High Court. We are of the considered view that this matter needs to be remanded to the file of the AO for fresh adjudication Deduction of expenses u/s.37(1) - Expenses on pooja in temples located outside the factory premises and towards local area expenses claimed to be for social contribution for welfare of the residents of the locality where the factory of the assessee is situated - AO observed that the assessee has incurred these expenses towards Corporate Social Responsibility but was not incurred wholly and exclusively for the purposes of the assessee s business - HELD THAT - Assessee has not filed any justification/explanation as to how these expenses are incurred wholly and exclusively in connection with the business of the assessee as is mandated u/s.37(1) of the 1961 Act. The onus is on the assessee to prove that these expenses are incurred wholly and exclusively for the purpose of business of the assessee as is required u/s 37(1) as it is the assessee who is claiming these expenses as deduction while computing income chargeable to tax under provisions of the 1961 Act. The principles of res-judicata are not applicable to Income-tax proceedings although we agree with the proposition that principles of consistency is required to be maintained in tax proceedings. But, however, every assessment year is a separate unit and the assessee has to prove that expenses incurred in a particular year are incurred wholly and exclusively for the purposes of the business of the assessee and has a direct nexus with the business of the assessee, satisfying mandate of provisions of Section 37(1) Assessee having failed to prove that in the year under consideration, these expenses were incurred wholly and exclusively for the purposes of business of the assessee as no evidence is produced to justify the same , these expenses cannot be allowed as business deductions and disallowances as were made by the authorities below are hereby confirmed. More over, the assessee is relying on the orders of the authorities for ay(s) 2007-08 and 2008-09, while we are presently concerned with ay 2012-13 which is a distant ay and onus was on assessee to prove business nexus and expenses being incurred in the year under consideration wholly and exclusively for the purposes of business of the assessee as is mandated u/s 37(1) - Decided against assessee Disallowance of business deduction being provision for profit incentive payable to its employees which was debited to P L A/c but was not paid during the previous year - HELD THAT - Provisions of Section 36(1)(ii) read with Section 43B(c) cannot be applied , as these payments are not towards bonus but are governed by commercial expediency to have smooth operations and to avert strike. However, Memorandum of Settlement produced before us is dated 04.09.1977 which is in operation only till 31.12.1980 , while we are presently seized of ay 2012-13. There is no finding of lower authorities as to whether this Memorandum of Settlement is still operative even in impugned ay. There is no finding/evidence on record to come to the said conclusion that the said memorandum of settlement still hold the field and these payments were made under the said memorandum of settlement . We are of considered view that the matter need to be restored to the file of the AO for fresh adjudication and the assessee is directed to produce agreement/settlement with the employees which is valid and effective for year under consideration and based on that the AO shall adjudicate the matter afresh keeping in view the provisions of Sec.37(1), 36(1)(ii) and 43B and also ratio of decision of CIT v. Lakshmi Mills Co. Ltd 1997 (3) TMI 17 - MADRAS HIGH COURT and CIT v. Sivanandha Mills Ltd. 1984 (12) TMI 60 - MADRAS HIGH COURT - The assessee is directed to appear before AO and furnish relevant agreements/settlement which is applicable/relevant for previous year relevant to impugned ay and to justify that the provisions as aforesaid were made by it as per settlement arrived at with its employees as applicable to the impugned ay.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income-tax Act, 1961.
2. Deduction of expenses claimed under Section 37(1) of the Income-tax Act, 1961.
3. Disallowance of provision for profit incentive payable to employees.

Detailed Analysis:

1. Disallowance under Section 14A:
The assessee invested in various corporate entities, including foreign and Indian companies, subsidiaries, and group companies. The Assessing Officer (AO) invoked Section 14A of the Income-tax Act, 1961, read with Rule 8D(2)(iii) of the Income-tax Rules, 1962, disallowing ?63,53,585/- as expenses incurred in relation to earning exempt income. The CIT(A) confirmed this disallowance. The Tribunal observed that the authorities did not analyze the investments vis-à-vis dividend income received. It was noted that dividend income from foreign companies is taxable in India, and hence, Section 14A should not apply to such investments. The Tribunal directed the AO to verify the investments and exclude those yielding taxable dividends from foreign companies. For Indian investments, only those yielding dividend income during the year should be considered for disallowance, and the disallowance should not exceed the exempt income, following the decisions of the Hon’ble Delhi High Court and Madras High Court. The matter was remanded back to the AO for fresh adjudication.

2. Deduction of Expenses under Section 37(1):
The assessee claimed expenses of ?1,21,53,963/- under Section 37(1), including ?25,60,574/- for pooja expenses and ?95,93,389/- for local area expenses. The AO disallowed these expenses, stating they were not incurred wholly and exclusively for business purposes. The CIT(A) upheld this disallowance, rejecting the assessee's claim for at least 50% deduction as allowed in earlier years. The Tribunal confirmed the disallowance, emphasizing that the assessee failed to prove the expenses were incurred wholly and exclusively for business purposes for the year under consideration, as required under Section 37(1).

3. Disallowance of Provision for Profit Incentive:
The assessee claimed a deduction of ?15,52,00,000/- as a provision for profit incentive payable to employees, which was debited to the Profit and Loss Account but not paid during the relevant year. The AO disallowed this provision, stating it should be allowed only when actually incurred. The CIT(A) upheld this view. The Tribunal noted that the provision was based on a settlement with employees, but the relevant agreement for the year under consideration was not produced. The Tribunal directed the AO to verify the agreement applicable for the relevant year and ensure compliance with Sections 37(1), 36(1)(ii), and 43B of the Income-tax Act, 1961. The matter was remanded back to the AO for fresh adjudication, with directions to verify the payment and ensure no double deduction in subsequent years.

Conclusion:
The appeal was partly allowed for statistical purposes, with directions for fresh adjudication on the disallowance under Section 14A and the provision for profit incentive payable to employees. The disallowance of expenses under Section 37(1) was confirmed. The order was pronounced on January 20, 2020, in Chennai.