Court allows partial appeal on deduction claims, disallowance, book profits, interest disallowance, penalty proceedings; assessment order validity upheld.

DCIT, Circle 10 (1) Versus  DCM Ltd.,  DCM Ltd., Vice Versa

DCIT, Circle 10 (1) Versus  DCM Ltd.,  DCM Ltd., Vice Versa - TMI Issues Involved:

1. Deduction claims on actual payment basis for flyover cost, flyover interest, and expenditure on approvals and permissions.
2. Disallowance under Section 14A of the Income Tax Act.
3. Addition to book profits under Section 115JB of the Income Tax Act.
4. Deletion of disallowance on notional interest on interest-free loans.
5. Initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act.
6. Validity of the assessment order upheld by CIT (A).

Detailed Analysis:

1. Deduction Claims on Actual Payment Basis for Flyover Cost, Flyover Interest, and Expenditure on Approvals and Permissions:

The assessee company claimed deductions for the liabilities on account of flyover cost and interest payable to MCD on an accrual basis in AY 2004-05. This claim was disallowed by the AO, observing that the deduction would be allowable on a payment basis. However, the CIT (A) and ITAT allowed the claim on an accrual basis. The Department disputed this allowability before the Hon’ble High Court. Due to the Department's dispute, the assessee raised alternate claims on a payment basis in subsequent years, which were also disallowed by the AO, CIT (A), and ITAT. The ITAT's order in AY 2004-05, which allowed the deduction on an accrual basis, was followed for consistency. Similarly, expenditure for obtaining approvals and permissions was allowed by the CIT (A) in AY 2006-07, and the ITAT upheld this decision. Consequently, the ground was dismissed, adhering to the principle of consistency.

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

The assessee company received dividend income of Rs. 70,088 during the year and made a suo moto disallowance of Rs. 21.87 lacs. The AO made a further disallowance of Rs. 143.39 lacs by applying Rule 8D without examining the assessee's calculation or recording any satisfaction that the disallowance was incorrect. The ITAT found that the AO did not establish any nexus between the investment and the expenditure incurred. The Hon’ble Delhi High Court's decisions in CIT vs. Holcim India P. Limited and Joint Investment P. Ltd. vs. CIT were cited, which held that disallowance under Section 14A cannot exceed the amount of exempt income. Thus, the ITAT directed the AO to restrict the disallowance to Rs. 70,088, the amount of exempt income received during the year.

3. Addition to Book Profits under Section 115JB of the Income Tax Act:

Ground no. 3 of the assessee’s appeal and ground no. 3 of the Department’s appeal were identical. The ITAT directed the AO to recompute the book profits under Section 115JB, following the adjudication on the additional ground of the assessee’s appeal and the dismissal of ground no. 2 of the Department’s appeal.

4. Deletion of Disallowance on Notional Interest on Interest-Free Loans:

The AO had made a notional disallowance for loans given to DCM Employees Welfare Trust in earlier years, which was subsequently deleted by CIT (A) and ITAT. The ITAT upheld the deletion, citing its decision in the assessee’s own case for AY 2006-07, where it was held that the disallowance of interest on loans to DCM Employees Welfare Trust was not justified. Consequently, this ground of the Department’s appeal was dismissed.

5. Initiation of Penalty Proceedings under Section 271(1)(c) of the Income Tax Act:

Ground no. 4 of the assessee’s appeal regarding the initiation of penalty proceedings under Section 271(1)(c) was deemed premature and was dismissed as such.

6. Validity of the Assessment Order Upheld by CIT (A):

Ground nos. 5 and 6 of the assessee’s appeal, which questioned the validity of the assessment order upheld by CIT (A), did not require adjudication and were dismissed.

Final Result:

The appeal of the assessee was partly allowed, while the appeal of the Department was dismissed. The order was pronounced in the open court on 29.07.2016.