2019 (2) TMI 1721 - AT - Income Tax

Tribunal Decision: Disallowances Limited, Book Profit Upheld, Interest Disallowed.

The Tribunal allowed the assessee's appeal in part and dismissed the revenue's appeal. The disallowance under Section 14A was restricted to the exempt ... Disallowance under Section 14A read with Rule 8D - deductibility of education cess - treatment of provisions for non performing assets as diminution in value of assets for computation of book profit under section 115JB - transfer to special reserve as appropriation and not an allowable deduction - interest free loans to subsidiaries - source of funds test and applicability of Munjal Sales principle - remand for de novo adjudication of leave encashment in light of subsequent Supreme Court authorityDisallowance under Section 14A read with Rule 8D - Validity of disallowance made under section 14A invoking Rule 8D and the requirement for the Assessing Officer to record satisfaction before applying Rule 8D - HELD THAT: - The Tribunal found that the Assessing Officer had recorded satisfaction by rejecting the assessee's explanation that no expenditure was incurred for earning exempt income; this satisfaction sufficed prior to invocation of Rule 8D. The CIT(A) had accepted the assessee's detailed computations and restricted disallowance to the exempt dividend amount; the assessee did not produce particulars to establish availability of interest free funds or other prima facie facts to warrant restoration to the file of the AO. Absent such material, there was no infirmity in the CIT(A)'s order restricting the disallowance to the exempt dividend amount. [Paras 10, 11]Assessee's challenge to the disallowance under section 14A/Rule 8D dismissed; CIT(A)'s restriction of disallowance to the exempt dividend sustained.Deductibility of education cess - Whether education cess is an allowable deduction for computing business income - HELD THAT: - The Tribunal admitted the additional legal ground and considered competing authorities. Relying on the view that the education cess is a surcharge on income tax (a charge linked to tax computation) and following precedents of benches which have held it not to be an allowable business expenditure, the Tribunal agreed with the revenue that the cess is not deductible as an expense and dismissed the assessee's claim. [Paras 7]Claim for deduction of education cess rejected; education cess held not to be an allowable business deduction.Applicability of Part II & Part III of Schedule VI and applicability of section 115JB where RBI directions affect account presentation - Whether accounts prepared applying RBI prudential norms fall outside section 115JB because final accounts are not drawn up under Part II & III of Schedule VI - HELD THAT: - The Tribunal refused to admit the additional ground that challenged conformity with Part II & III of Schedule VI because auditors had certified that the accounts were prepared in accordance with the Companies Act and there was no qualification. The Tribunal observed that compliance with RBI prudential suggestions by a non banking finance company in preparing accounts does not conflict with the Companies Act or exclude applicability of section 115JB. The ground was dismissed as factually untenable and devoid of merit. [Paras 8]Additional ground alleging non compliance with Schedule VI and inapplicability of section 115JB dismissed.Provisions for non performing assets and treatment under income tax - Validity of disallowance of provisions for NPAs made in accordance with RBI prudential norms for computation of income under normal provisions - HELD THAT: - After examining competing authorities, the Tribunal agreed with the reasoning that where provisions are made under RBI directions and the question involves recognition of income or provisioning in relation to NPAs, the line of authority culminating in the cited High Court and Tribunal decisions supports the view adopted by the CIT(A). The Tribunal found no infirmity in the CIT(A)'s order on this issue. [Paras 12]Assessee's ground challenging the disallowance of NPA provisions dismissed; CIT(A)'s approach upheld.Remand for de novo adjudication of leave encashment in light of subsequent Supreme Court authority - Adjudication of allowability of provision for leave encashment - HELD THAT: - The Tribunal set aside the issue to the file of the Assessing Officer for fresh decision, directing de novo adjudication after considering the final judgment of the Supreme Court in Exide Industries and related authorities, indicating that the matter requires fresh consideration in light of that law. [Paras 13]Issue of provision for leave encashment remitted to the Assessing Officer for fresh adjudication.Inclusion of profit on sale of fixed assets/investments in computation of book profit under section 115JB - Legality of adding profit on sale of fixed assets/investments while computing book profit under section 115JB - HELD THAT: - The Tribunal held the issue to be covered against the assessee by the decision of the Special Bench in Rain Commodities Ltd. and accordingly rejected the assessee's ground. [Paras 14]Addition of profit on sale of fixed assets/investments in book profit sustained; assessee's ground dismissed.Treatment of provision for NPA in computation of book profit under section 115JB - Whether provision for NPA is to be treated as diminution in value of assets and included while computing book profits under section 115JB - HELD THAT: - The Tribunal agreed with the assessee's submission that the provision was not for meeting liabilities but concluded that the amount was set aside as a provision for diminution in value of assets and thus falls within Explanation 1(i) to section 115JB; the retrospective amendment and its effect on asset value supported inclusion. The CIT(A)'s order on this point was affirmed. [Paras 15]Addition of NPA provision while computing book profit under section 115JB upheld; assessee's ground dismissed.Interest free loans to subsidiaries - source of funds test and applicability of Munjal Sales principle - Deletion of disallowance of interest attributable to interest free loans advanced to subsidiaries - HELD THAT: - The CIT(A) found on facts that the assessee had sufficient own funds and profits to have advanced the loans and applied the Munjal Sales principle to conclude that presumption of deployment of borrowed funds could not be made. The Department did not controvert the factual finding; the Tribunal upheld the deletion. [Paras 18]Disallowance deleted; revenue's ground dismissed.Disallowance under Section 14A in computing book profit under section 115JB - Revenue's challenge to CIT(A)'s restriction of section 14A disallowance while computing book profit - HELD THAT: - The CIT(A) had limited disallowance to the exempt dividend income following applicable precedents. The Tribunal found no infirmity in that conclusion and dismissed the revenue's appeal on this point. [Paras 19]Revenue's challenge rejected; CIT(A)'s order restricting disallowance sustained.Transfer to special reserve - not a deductible expenditure but appropriation of profit - Validity of deletion by CIT(A) of addition made by AO for transfer to special reserve in computation of book profit - HELD THAT: - The Tribunal followed the decision of the Delhi High Court in the assessee's earlier case and observed that a transfer to a specific reserve is an appropriation of profit and not an expenditure deductible for computing income; accordingly it dismissed the revenue's ground. [Paras 20]Deletion of addition for transfer to special reserve upheld; revenue's ground dismissed.Final Conclusion: For Assessment Year 2008-09, the Tribunal upheld the CIT(A)'s adjustments in substantial part: it sustained the restriction of section 14A disallowance to the exempt dividend, rejected the assessee's claim for deduction of education cess, affirmed treatment of NPA provisions for both normal assessment and book profit computation, remitted the leave encashment issue to the Assessing Officer for fresh adjudication, and dismissed the revenue's appeals; the assessee's appeals were allowed in part and the revenue's appeals dismissed. Issues Involved:1. Disallowance under Section 14A of the Income Tax Act.2. Disallowance of provision for Non-Performing Assets (NPA).3. Disallowance of provision for Leave Encashment.4. Addition of profit on sale of fixed assets/investments in computing Book Profit under Section 115JB.5. Addition of provision for Non-Performing Assets (NPA) in computing Book Profit under Section 115JB.6. Deductibility of education cess.7. Maintenance of books of accounts under Part II & III of Schedule VI of the Companies Act.8. Interest disallowance on loans given to subsidiaries.9. Amount transferred to special reserve in computing total income.10. Disallowance under Section 14A while computing Book Profit under Section 115JB.Issue-wise Detailed Analysis:1. Disallowance under Section 14A:The assessee contended that the Assessing Officer (AO) did not record reasons for applying Rule 8D and claimed no expenditure was incurred for earning exempt income. The Tribunal held that the AO had sufficiently recorded satisfaction that the claim was incorrect before invoking Rule 8D. The CIT(A) restricted the disallowance to the exempt income earned, which was upheld as the assessee did not provide sufficient details to prove interest-free funds were used for investments.2. Disallowance of provision for Non-Performing Assets (NPA):The assessee argued that provisions made in compliance with RBI norms should not be disallowed under the Income Tax Act. The Tribunal referred to the Supreme Court’s judgment in Southern Technologies and the Delhi High Court’s decision in Vasisth Chay Vyapar Ltd., concluding that the provision for NPA is not allowable as it pertains to a capital asset and not as an expenditure.3. Disallowance of provision for Leave Encashment:This issue was set aside to the AO for fresh adjudication in light of the Supreme Court’s judgment in Exide Industries Limited.4. Addition of profit on sale of fixed assets/investments in computing Book Profit under Section 115JB:The Tribunal noted that this issue was covered against the assessee by the Special Bench decision in Rain Commodities Ltd. and upheld the addition.5. Addition of provision for Non-Performing Assets (NPA) in computing Book Profit under Section 115JB:The Tribunal agreed that the provision for NPA is a provision for diminution in the value of assets and is covered by Explanation 1(i) to Section 115JB, which was held to be retrospective. Thus, the addition was upheld.6. Deductibility of education cess:The Tribunal dismissed the assessee's claim, agreeing with the Departmental Representative that education cess is a surcharge on income tax and not allowable as a deduction, following ITAT Mumbai’s decision in Kalimati Investment Company Limited and Panaji Bench’s decision in Sesa Goa Ltd.7. Maintenance of books of accounts under Part II & III of Schedule VI of the Companies Act:The Tribunal found that the auditors had certified the accounts as per the Companies Act, and there was no indication that the accounts were not maintained as per Part II & III of Schedule VI. Thus, this additional ground was dismissed.8. Interest disallowance on loans given to subsidiaries:The CIT(A) found that the assessee had sufficient own funds to cover the interest-free loans to subsidiaries and that the loans were given out of commercial expediency. This finding was upheld as the Department could not provide contrary evidence.9. Amount transferred to special reserve in computing total income:This ground was dismissed as withdrawn by the assessee, and it was noted that the issue had been adjudicated against the assessee by the Delhi High Court in the assessee’s own case.10. Disallowance under Section 14A while computing Book Profit under Section 115JB:The Tribunal followed the Special Bench decision in ACIT vs. Vireet Investment (P) Ltd., holding that disallowance under Section 14A should not be added back while computing Book Profit under Section 115JB. Thus, this ground was dismissed.Conclusion:The appeal of the assessee was allowed in part, and the appeal of the revenue was dismissed.