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2020 (9) TMI 910 - AT - Income TaxAddition u/s 14A read with rule 8D - assessee during the year has earned dividend income which was claimed as exempted from tax under section 10(34) - AO disagreed the contention of the assessee and invoked the provisions of section 14A read with rule 8D of Rules for making the disallowance against such exempted income - whether the disallowances made under section 14A r.w rule 8D can exceed the amount of exempted income earned during the year under consideration? - HELD THAT - Disallowance of the expenses in relation to the income which does not form part of the total income under this Act. The term used under section 14A of the Act amount of expenditure incurred in relation to such income implies that the expenditure cannot exceed the amount of exempted income. So we find support and guidance from the judgment in the case of Joint investments Private Ltd versus CIT 2015 (3) TMI 155 - DELHI HIGH COURT . Identical facts and circumstances has decided that the amount of disallowance of the expenditure cannot exceed the amount of exempted income in the case of CIT versus Vision Finstock Stock Ltd. 2017 (7) TMI 1277 - GUJARAT HIGH COURT . We hold that the disallowance of the expenses under section 14A read with rule 8D cannot exceed the amount of exempted income. Addition on account of prior period expenses - HELD THAT - There is no ambiguity to the fact that such item of prior period expenses represents the excise duty paid by the assessee in the year under consideration. Similarly, the provisions of section 43B, being overriding section, provides to allow the deduction to the assessee on payment basis with respect to certain items including the excise duty. As the assessee has paid the excise duty, pertaining to the earlier year, in the year under consideration, we are of the view that such payment of excise duty is eligible for deduction in the current year. The case law referred by the AO i.e. Saurashtra Cement and chemicals industries Ltd 1994 (10) TMI 30 - GUJARAT HIGH COURT the principles of it are not applicable to the present facts and circumstances as the issue therein was in relation to the expenses other than the expenses covered under section 43B of the Act whereas the issue on hand relates to the deduction of excise duty which is an allowable deduction under the provisions of section 43B - No infirmity in the order of the learned CIT (A) and accordingly we decline to interfere in his order. Thus the ground of appeal of the revenue is dismissed. Addition u/s 41(1) - trading receivable as income under the provisions of section 41(1) - HELD THAT - As referring the provisions of section 41(1) reveals that it is applicable with respect to the trading liabilities and not with respect to the trading receivable. Thus the trading receivable shown by the assessee along with the sundry creditors cannot be treated as trading liabilities. Thus the question of treating such trading receivable as income under the provisions of section 41(1) of the Act does not arise. DR at the time of hearing has also not brought anything on record contrary to the finding of the learned CIT (A). We also note that even if we assume that such amount represents the trading liability, then also it cannot be treated as income of the assessee under the provisions of section 41(1) of the Act as the same has not ceased to exist in the books of accounts. Addition on account of professional fees - HELD THAT - We find that impugned professional expenses represents the expenditure incurred in relation to the market survey of the existing product. Furthermore, no new assets or benefit of enduring nature has come into existence. The purpose of the survey report was to ascertain the market share of the assessee in the existing products in which it was already dealing. Accordingly we are of the view that such expenditure was incurred in the normal course of business and without generating any benefit of enduring nature. No infirmity in the order of learned CIT (A). Accordingly we dismiss the ground of appeal raised by the revenue. Disallowance on account of employees PF contribution - HELD THAT - The deduction for the delayed 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 . Disallowance u/s 14A read with rule 8D determining the income under section 115 JB - HELD THAT - Adhoc 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 - 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. Thus the ground of appeal of the the assessee is partly allowed.
Issues Involved:
1. Deletion of addition under section 14A read with rule 8D. 2. Deletion of addition on account of disallowance of prior period expenses. 3. Deletion of addition under section 41(1) on account of cessation of liability. 4. Deletion of addition considering professional fees as revenue expenditure. 5. Disallowance of employees' contribution to Provident Fund. 6. Disallowance under section 14A read with rule 8D while determining income under section 115JB. Detailed Analysis: 1. Deletion of Addition under Section 14A read with Rule 8D: The Revenue contended that the CIT(A) erred in deleting the addition of ?2,11,98,182 made under section 14A read with rule 8D. The assessee, a limited company engaged in manufacturing and trading, claimed exempt dividend income of ?11,37,500. The AO made a disallowance under section 14A read with rule 8D, which was deleted by the CIT(A). The Tribunal upheld the CIT(A)'s decision, citing that disallowance under section 14A cannot exceed the exempt income, referencing the Delhi High Court's judgment in Joint Investments Pvt. Ltd. v. CIT and the jurisdictional High Court's decision in CIT v. Vision Finstock Ltd. The Tribunal directed the AO to restrict the disallowance to ?11,37,500. 2. Deletion of Addition on Account of Disallowance of Prior Period Expenses: The Revenue argued that the CIT(A) erred in deleting the addition of ?8,35,560 on account of prior period expenses. The assessee claimed this expense as excise duty paid on waste generated during manufacturing. The AO disallowed the claim, stating it should have been claimed in the year it was incurred. The CIT(A) allowed the deduction under section 43B, which allows for deduction on a payment basis. The Tribunal upheld the CIT(A)'s decision, noting that section 43B overrides other provisions and allows deduction in the year of payment. 3. Deletion of Addition under Section 41(1) on Account of Cessation of Liability: The Revenue contended that the CIT(A) erred in deleting the addition of ?2,36,63,532 under section 41(1) on account of cessation of liability. The AO treated certain sundry creditors as ceased liabilities and added them as income. The CIT(A) reversed this, stating the amount represented trade advances and not trading liabilities. The Tribunal upheld this, referencing the Gujarat High Court's decision in PCIT v. Babul Products (P.) Ltd. and CIT v. Nitin S. Garg, which held that liabilities not written off in the books cannot be treated as ceased. 4. Deletion of Addition Considering Professional Fees as Revenue Expenditure: The Revenue argued that the CIT(A) erred in deleting the addition of ?46,98,154, considering professional fees as revenue expenditure. The AO treated these fees as capital expenditure, stating they provided an enduring benefit. The CIT(A) reversed this, stating the fees were for market share analysis of existing products and did not create any new asset or enduring benefit. The Tribunal upheld the CIT(A)'s decision, concluding the expenditure was incurred in the normal course of business. 5. Disallowance of Employees' Contribution to Provident Fund: The assessee's cross-objection included the disallowance of ?77,826 on account of employees' PF contribution. The Tribunal noted the issue was covered against the assessee by the Gujarat High Court's decision in CIT v. GSRTC, which held that delayed deposits to employees' PF are not deductible. The Tribunal upheld the disallowance. 6. Disallowance under Section 14A read with Rule 8D While Determining Income under Section 115JB: The assessee's cross-objection also included the disallowance of ?11,37,500 under section 14A read with rule 8D while determining income under section 115JB. The Tribunal noted the Special Bench of the Delhi Tribunal's decision in ACIT v. Vireet Investment Pvt. Ltd., which held that disallowances under section 14A cannot be imported into section 115JB calculations. The Tribunal directed an ad-hoc disallowance of 1% of the exempt income under clause (f) to Explanation-1 of section 115JB, partly allowing the assessee's cross-objection. Conclusion: The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's cross-objection, providing detailed reasoning for each issue based on relevant legal precedents and statutory provisions.
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