2020 (10) TMI 974 - AT - Income Tax

Addition u/s 40A - Whether expenditure incurred was neither in connection with setting up or formation of nor was it a contribution to any fund, referred to in section 40A (9) but was merely expenditure incurred on employee welfare through an external agency? - whether expenditure in question was incurred wholly and exclusively in the ordinary course of the business of the Appellant and as such is deductible u/s 37? - HELD THAT - We find that the amount in question was paid for the welfare of the employees of the assessee and not as contribution to any fund, trust, etc., and therefore, in our humble understanding, provisions of sub-section 9 of section 40A are not applicable in the present case and the amount in question is allowable under section 37 and accordingly, this disallowance is deleted and this ground is allowed. MAT Computation - Disallowance u/s 14A r.w.r. 8D(ii) for the purpose of computing book profit under section 115JB - HELD THAT - Respectfully following this judgment of Vireet Investment (P.) Ltd 2017 (6) TMI 1124 - ITAT DELHI this issue is decided in favour of the assessee. Reversal of provision for bad debts in the present year to be reduced from book profit for the purpose of computing book profit u/s 115JB - Assessee argued that, revenue cannot insist in the present year that for this reason alone that there was no addition to book profit in the year of creation of provision, the deduction cannot be allowed in the present year on account of write back of provision but we do not find any merit in this argument because as per the proviso below clause (i) below explanation 1 to sub-section 2 of section 115JB as reproduced above, this is not the requirement that if book profit was computed in the year of creation of the reserve of provision and addition was not made in that year for computing book profit then only the benefit of clause (i) in Explanation 1 to section 115JB (2) will not be available. In our humble understanding, as per this proviso, the benefit of clause (i) of Explanation 1 to section 115JB (2) will not be available to the assessee if the book profit was not increased by the amount of provision made in the year of making the provision for whatever reason. Hence, we hold that there is no infirmity in the order of CIT(A) on this issue.

Summary

Issues:
1. Appeal of the Revenue dismissed due to low tax effect.
2. Disallowance under section 40A(9) of the Income-tax Act, 1961.
3. Additions in the computation of Book Profits under section 115JB.

Issue 1:
The appeal of the Revenue, ITA No. 1334/Bang/2017, was dismissed by the Appellate Tribunal due to the tax effect being below the threshold set by the CBDT. The learned DR of the Revenue acknowledged the low tax effect and conceded that the appeal was not maintainable under the latest CBDT instructions.

Issue 2:
The appeal of the assessee challenged the disallowance under section 40A(9) of the Income-tax Act, 1961. The disallowance was made by the AO based on the provisions of sub-section 9 of section 40A. The assessee argued that the amount in question was paid for the welfare of its employees and not as a contribution to any fund, trust, etc. The Appellate Tribunal agreed with the assessee, ruling that the disallowance was not applicable in this case as the amount was spent on employee welfare and was allowable under section 37.

Issue 3:
Regarding the additions in the computation of Book Profits under section 115JB, the Appellate Tribunal considered various grounds raised by the assessee. Ground 3(d) involved the disallowance made by the AO under section 14A r.w.r. 8D(ii) for computing book profit under section 115JB. The Tribunal referred to a judgment in a similar case and ruled in favor of the assessee, allowing ground 3(d).

For grounds 3(a) to 3(c), the Tribunal examined the provisions of the proviso below clause (i) of explanation 1 to sub-section 2 of section 115JB. The Tribunal found that the provisions required the reduction of book profit by the amount of provisions written back only if the book profit of the year of creation of provision was increased by those reserves or provisions. As the book profit was not increased in the year of creation of provision for Bad Debts, the Tribunal rejected grounds 3(a) to 3(c).

In conclusion, the appeal of the assessee was partly allowed, and the appeal of the Revenue was dismissed based on the detailed analysis and rulings provided for each issue raised in the judgment.