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TMI Blog2018 (6) TMI 1177X X X X Extracts X X X X X X X X Extracts X X X X ..... funds are sufficient to meet the investments. In this case, the assessee has filed necessary evidences to prove that its interest free funds are more than its investments in partnership firm which yielded exempt income and accordingly, the AO was erred in determining disallowances by invoking Rule 8D(2)(ii) of Income-tax Rules, 1962 in respect of interest expenditure. Addition towards unpaid service tax liability u/s 43B - Held that:- Hon’ble Delhi High Court in the case of CIT vs Noble & Hewitt India Pvt Ltd [2007 (9) TMI 238 - DELHI HIGH COURT] held that when assessee did not debit the amount in the P&L account as an expenditure and nor he made the claim of deduction in respect of the said amount, the question of disallowing the deduction not claimed would not arise. In this case, on perusal of facts available on record, we find that the assessee has treated service tax collected from customers under the head ‘current liability’ based on the interim order passed by the Hon’ble jurisdictional High Court[2010 (7) TMI 461 - HIGH COURT OF BOMBAY] - there is a valid and sound reason for the assessee to keep service tax collected from its customers under the head ‘current liability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Rules, 1962 by stating that the assessee s own funds in the form of share capital, reserves, interest free unsecured loans and advances collected from customers is more than the value of investments made in partnership firm which earned exempt income. Therefore, once there is a mixed fund available with the assessee including interest bearing fund, a general presumption is drawn to the effect that the investments made in investments are out of interest free funds, therefore, no disallowance can be made. The assessee also made one more argument on the issue of determination of interest disallowance u/r 8D(2)(ii) by stating that the AO was erred in considering interest expenses of ₹ 104,20,09,566 relating to WIP as the said term loan borrowed from India Bulls was exclusively utilized for development of project and no part of funds has been used for investments in partnership firm. If interest paid on term loan borrowed from India Bulls is excluded for the purpose of determination of disallowance, then the actual disallowance works out to ₹ 25,22,600 which may be considered. Insofar as disallowance of expenditure u/r 8D(2)(iii), assessee submitted that no part of the adm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Since the AO has rightly taken total interest debited in the P L account and also applied the principles prescribed u/r 8D(2)(ii), there is no error in the quantification made by the AO towards disallowance of interest. With these observations, the CIT(A) confirmed addition made by the AO towards disallowance of expenses incurred in relation to exempt income. 6. Insofar as disallowance of service tax unpaid liability, the CIT(A) observed that service-tax charged on sale consideration is a trading receipt and such service tax is not paid to the government account within the prescribed time allowed under the Act, hence, as per the provisions of section 43B, the same has to be disallowed. Though the assessee claims that service-tax was not paid to the government account due to the operation of interim stay by the High Court, fails to prove that there was no such written agreements with the customers on refund of service tax in case the issue has been decided in favour of the customers. The CIT(A) further observed that the assessee itself admitted that the service tax collected from buyers was ultimately paid to the government in FY 2011-12; therefore, there is no merit in the argu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of Godrej Boyce Mfg Co Ltd vs ACIT 328 ITR 81(Bom). The Ld.AR further submitted that alternatively, the assessee has its own interest free funds in the form of share capital and reserves which is more than the value of investments in partnership firm which yielded exempt income. Therefore, once there is mixed funds including interest bearing funds, a general presumption is drawn that the interest free funds are utilized for making investments in securities yielding exempt income. The assessee has proved with evidence that interest free funds are more than its investments and hence, the AO was completely erred in determining disallowance of interest expenses u/r 8D(2)(ii). In this regard, he relied upon the decision of Hon ble Bombay High Court in the case of Reliance Utilities Power Ltd vs CIT 338 ITR 340 (Bom). 8. On the other hand, the Ld.DR strongly supported the order of the CIT(A) and submitted that the Ld.CIT(A) has rejected all arguments of the assessee in the light of provisions of section 14A and Rule 8D(2) to uphold the addition made by the AO in respect of disallowance of expenses. Therefore, there is no merit in the arguments of the assessee that the AO h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to earning exempt income. The assessee further contended that there is no iota of evidence in the assessment order about AOs satisfaction in respect of incorrectness of claim of the assessee. The assessee has filed relevant evidences before the AO to prove that share of profit earned from partnership firm which is claimed exempt u/s 10(2A) is made out of interest free funds and also no specific expenditure has been incurred to earn such exempt income. When the assessee claims that no part of expenditure is relatable to exempt income, then the AO has to record his satisfaction having regard to the books of account of the assessee that the assessee has incurred particular expenditure to earn such exempt income. In this case, the AO has not arrived at his satisfaction having regard to the accounts of the assessee, hence, determination of disallowance contemplated u/s 14A by invoking Rule 8D(2) is incorrect. 11. The provisions of section 14A provides for disallowance of expenditure incurred in relation to exempt income which does not form part of total income under this Act. Sub section (2) of section 14A makes it clear that the AO shall determine the amount of expenditure incurr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x Act, 1962 , filed to record a satisfaction having regard to the accounts of the assessee that the assessee has incurred particular expense in relation to earn exempt income. Since the AO has not recorded his satisfaction in the assessment order before determining disallowance contemplated u/s 14A of the Act, invoking Rule 8D(2) to compute such disallowance is not in accordance with law. 12. Coming to the alternative argument of the assessee, the assessee made an alternative argument that its own interest free funds in the form of share capital and reserves, interest free unsecured loans and advances received from customers is more than value of investments made in partnership firm which yielded exempt income and hence, once the assessee has proved that its own funds are more or it is having a mixed fund, including interest bearing funds, then a general presumption is drawn that investment in tax exempt securities / share or investments is out of interest free funds. Therefore, no disallowance can be made u/s 14A r.w.r. 8D(2)(iii). We find that the Hon ble Bombay High Court in the case of CIT vs Reliance Utilities Power Ltd (supra) has taken a view that if there are funds ava ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rim stay from recovery of taxes, the assessee has treated service tax collected from customers as current liability; however, the same has been paid in the subsequent financial year as soon as the Hon ble High Court has decided the issue of constitutional validity of levy of service. The assessee further submitted that it has treated service tax collected from its customers as liability without claiming it as expenditure in the P L Account, therefore, the same cannot be disallowed u/s 43B. 15. The AO, after considering relevant submissions of the assessee and also relying upon the decision of Hon ble Supreme Court in the case of Chouringhee Sales Bureau Pvt Ltd vs CIT 87 ITR 542 (SC) observed that service tax collected from customer is a trading receipt which needs to be treated as part of its business receipts and also to be routed through P L account. Mere treatment of such receipts in its books of account under the head current liability is not a ground for the assessee to take shelter from payment of service tax to the government. Though the jurisdictional High Court gave interim stay from coercive collection of taxes, did not specifically asked assesses not to pay collect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /s 43B and his order should be upheld. 18. We have heard both the parties and perused the material available on record. There is no dispute with regard to the fact that the assessee has not paid service tax collected from few customers. The assessee claims that it has collected service tax from its customers under protest on the pretext of return of such service tax to the customers, if the jurisdictional High Court has decided the issue of constitutional validity of service tax liability on builders in favour of the builders association. The assessee further claimed that it has treated service tax collected from customers under the head current liability because the Hon ble High Court has granted interim stay for coercive collection of tax till disposal of the regular appeal filed by the association challenging constitutional validity of levy of service tax. The assessee further claimed that it has paid service tax collected from customers in the next financial years as soon as the Bombay High Court has decided the issue on levy of service tax on builders, therefore, argued that there is a valid and sound reason for treating service tax collected from customers as current l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions of section 43B of the Income-tax Act, 1961. This legal proposition is supported by the decision of Hon ble Bombay High Court in the case of CIT vs Ovira Logistics Pvt Ltd (supra) wherein the Hon ble High Court, after considering the judgement of the Hon ble Delhi High Court in the case of CIT vs Noble Hewitt India Pvt Ltd (supra) held that section 43B does not contemplate liability to pay service tax before actual receipt of the funds in the accounts of the assessee. The Hon ble Delhi High Court in the case of CIT vs Noble Hewitt India Pvt Ltd (supra) held that when assessee did not debit the amount in the P L account as an expenditure and nor he made the claim of deduction in respect of the said amount, the question of disallowing the deduction not claimed would not arise. In this case, on perusal of facts available on record, we find that the assessee has treated service tax collected from customers under the head current liability and such treatment is based on the interim order passed by the Hon ble jurisdictional High Court in Writ Petition No.1456 of 2010. Therefore, we are of the considered view that there is a valid and sound reason for the assessee to keep se ..... X X X X Extracts X X X X X X X X Extracts X X X X
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