2022 (3) TMI 1336 - AT - Income Tax

Disallowance of interest u/s.14A r.w.Rule 8D - disallowance to the extent of exempt income earned for the year - HELD THAT - Although, the assessee claims to have used fresh capital raised during the financial year to make investments in share application money in subsidiary company, but on perusal of financial statements filed by the assessee, we find that the assessee has availed huge borrowings from banks and paid interest. Further, the assessee failed to prove its claim that it has not utilized borrowed funds for investment purpose with necessary evidence. Therefore, we are of the considered view that there is no error in the reasons given by the Assessing Officer as well as learned CIT(A) to sustain additions towards disallowance of interest u/s.14A r.w.Rule 8D. Fact remains that the assessee has earned dividend income of ₹ 15,71,210/- whereas, the Assessing Officer has disallowed expenses relatable to exempt income at ₹ 69,29,042/- which is in excess of dividend income earned for the year. It is well settled principle of law by the decision of various courts, including decision of M/s. Redington India Ltd. 2017 (1) TMI 318 - MADRAS HIGH COURT where it has been clearly held that disallowance contemplated u/s.14A r.w. Rule 8D cannot exceed exempt income. CIT(A), after considering relevant facts has rightly directed the Assessing Officer to recompute disallowance u/s.14A but restrict disallowance to the extent of exempt income earned for the year. Hence, we are inclined to uphold findings of the learned CIT(A) and reject ground taken by the revenue as well as the assessee. Additions towards deferred income on account of change in method - AO made addition on the ground that the assessee has failed to explain reasons for change in method of accounting and further, when income has already accrued or deemed to be accrued for the relevant assessment year, question of deferral of income to subsequent year does not arise - CIT-A deleted the addition - HELD THAT - As from the impugned assessment year, the assessee has changed its method of accounting and thus, deferred AMC charges pertains to subsequent financial year, because the assessee has not rendered services to the customers and thus, question of accrual of any income to the period pertaining to subsequent assessment year does not arise. Therefore, we are of the considered view that when the assessee has explained reasons for change in method of accounting and further, disclosed effects in profit or loss for the relevant financial year in a statement of financial accounts prepared for the year, then the Assessing Officer should not have made additions towards deferred income only on the ground that the assessee does not explain reasons for change in method of accounting. AO has observed that when the assessee has deferred income to subsequent financial year, it ought to have deferred expenses pertains to deferred income. We find that the assessee does not incur expenditure relatable to income deferred to subsequent financial year. Therefore, when there is no expenditure incurred and debited into profit loss account, then question of deferral expenses to subsequent year does not arise. Therefore, we are of the considered view that reasons given by the Assessing Officer to make additions towards deferred income on account of AMC charges cannot be sustained. CIT(A), after considering relevant facts has rightly deleted additions made by the Assessing Officer. - Decided against revenue.

Summary

Issues Involved:
1. Condonation of delay in filing cross objection by the assessee.
2. Disallowance under Section 14A read with Rule 8D.
3. Additions towards deferred income on account of change in method of accounting.

Detailed Analysis:

Condonation of Delay:
The assessee filed a cross objection that was delayed by 6 days. The assessee attributed the delay to the time taken in appointing tax consultants and filed a petition for condonation of delay along with an affidavit. The Revenue opposed this petition, arguing that the reasons provided did not constitute reasonable and bona fide grounds for condonation. After hearing both sides, the Tribunal concluded that the delay was due to reasonable cause and condoned the delay, allowing the cross objection for adjudication.

Disallowance under Section 14A read with Rule 8D:
The Revenue challenged the CIT(A)'s decision to restrict the disallowance under Section 14A to the extent of exempt income earned during the year. The assessee had earned ?15,71,210 as dividend income but had not disallowed any expenses related to this exempt income. The Assessing Officer (AO) applied Rule 8D and determined a disallowance of ?69,29,042. The CIT(A) directed the AO to exclude interest on loans while computing the disallowance and restricted it to the exempt income earned. The Tribunal upheld the CIT(A)'s decision, referencing the principle established by the Madras High Court in the case of M/s. Redington India Ltd. vs. Addl. CIT, which states that disallowance under Section 14A read with Rule 8D cannot exceed the exempt income earned.

Additions towards Deferred Income:
The Revenue also contested the CIT(A)'s decision to delete the addition of ?2,56,21,324 made by the AO on account of deferred income from Annual Maintenance Contracts (AMC). The assessee had changed its method of accounting from cash to mercantile, deferring part of the AMC charges to the subsequent financial year. The AO argued that the income had accrued and should be taxed in the relevant assessment year, also noting that the assessee did not defer related expenses. The Tribunal found that the change in accounting method was permissible and that the assessee had properly disclosed the change and its effects. The Tribunal also noted that the assessee did not incur expenses related to the deferred income in the current year. Consequently, the Tribunal upheld the CIT(A)'s decision to delete the additions.

Conclusion:
The Tribunal dismissed both the Revenue's appeal and the assessee's cross objection, upholding the CIT(A)'s decisions on all contested issues. The order was pronounced in the open court on 28th March, 2022.