2023 (4) TMI 936 - AT - Income Tax

Disallowance of leave encashment u/s 43B (1) - On perusing Form 3CD, AO noticed that assessee has shown leave encashment payable but had not disallowed the same in its computation of income - contention of the assessee that during the year under consideration, assessee had make provision for leave encashment but the payments have been made in subsequent years and therefore if the payment is disallowed in the year under consideration, it be allowed as deduction in the year of payment - HELD THAT - Identical issue arose in the case of group concern of the assessee in the case of TV Today Network Ltd. 2021 (12) TMI 1435 - ITAT DELHI As in view of the contentions of the assessee that the payments of leave encashment has been made in subsequent years, we direct the AO to verify and allow the deduction u/s 43B of the Act being the provision made for leave encashment on actual payment basis in the year of its payment as held in the case of Exide Industries Ltd. 2007 (6) TMI 175 - CALCUTTA HIGH COURT - Ground of assessee is allowed for statistical purposes. Disallowance u/s 14A - Suo moto disallowance - HELD THAT - Hon ble Delhi High Court in the case of Cargo Motors (P.) Ltd 2022 (10) TMI 571 - DELHI HIGH COURT has held that for purpose of making disallowance of expenses under section 14A as per Rule 8D, only those investments were to be considered for computing average value of investments which yielded exempt income during relevant year. AO was not justified in working out the disallowance on account of administrative expenses u/s 14A r.w. Rule 8D(2)(iii) by computing the average value of investments on the basis of entire investment. We therefore direct the AO and direct him to work out the disallowance u/s 14A r.w. Rule 8D(2)(iii) on considering the investments which have yielded tax free income. We accordingly restore the issue back to the file of AO to rework the disallowance u/s 14A r.w. Rule 8D in accordance with law. This ground of the assessee is partly allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance under Section 43B(f) of the Income Tax Act.
2. Disallowance under Section 14A of the Income Tax Act.

Summary:

Issue 1: Disallowance under Section 43B(f) of the Income Tax Act

Facts: The assessee, engaged in the business of publishing and trading of books and magazines, filed returns declaring losses for various assessment years. The primary issue for A.Y. 2014-15 was the disallowance of Rs. 42,44,760/- on account of leave encashment under Section 43B(f) of the Income Tax Act. The Assessing Officer (AO) disallowed the provision for leave encashment, citing the Hon'ble Supreme Court's stay on the Calcutta High Court's decision in Exide Industries Ltd., which had struck down Section 43B(f) as unconstitutional.

Tribunal's Decision: The Tribunal directed the AO to verify the assessee's claim that the leave encashment payments were made in subsequent years and to allow the deduction under Section 43B on an actual payment basis. This decision was based on the precedent set in the case of TV Today Network Ltd. The Tribunal restored the issue back to the AO for verification and appropriate action, thereby allowing the ground of the assessee for statistical purposes.

Issue 2: Disallowance under Section 14A of the Income Tax Act

Facts: For A.Y. 2012-13, the AO made a disallowance of Rs. 55,87,882/- under Section 14A, following Rule 8D of the Income Tax Rules. The assessee argued that the disallowance should be restricted to Rs. 13,03,214/- based on revised workings and judicial pronouncements. The CIT(A) upheld the AO's decision but restricted the disallowance to the assessee's suo moto disallowance of Rs. 55,87,882/-.

Tribunal's Decision: The Tribunal examined the assessee's claim that investments were made out of interest-free funds and noted that the aggregate shareholders' funds were less than the total investments. Therefore, the presumption that investments were made from interest-free funds did not apply. However, the Tribunal directed the AO to rework the disallowance under Rule 8D(2)(iii) by considering only those investments that yielded tax-free income, in line with the Delhi High Court's decision in Cargo Motors (P.) Ltd vs. DCIT. The issue was restored back to the AO for re-evaluation, allowing the ground of the assessee partly for statistical purposes.

Combined Result:

All appeals of the assessee were partly allowed, with directions to the AO for further verification and re-evaluation in accordance with the law.