2017 (8) TMI 1692 - AT - Income Tax

Tribunal rules in favor of assessee on deductions and disallowances, emphasizes legal compliance and scientific methods

M/s. FLSmidth Minerals P Ltd., Versus Deputy Commissioner of Income Tax, Company Circle –II (1), Chennai and Assistant Commissioner of Income Tax, Company Circle –II (1), Chennai Versus M/s. FLSmidth Minerals P Ltd.,

The Tribunal partly allowed the assessee's appeals for the assessment years 2005-06 and 2007-08, emphasizing adherence to legal provisions and scientific ... Disallowance of expenses u/s. 14A r.w.r. 8D - CIT(A) erred in confirming the disallowance to the extent of 5% u/s. 14A(1) relying on the decision in the matter of Celebrity Fashions Ltd. which is wholly inapplicable in the circumstances of the present case - HELD THAT:- DR relied on the orders of the CIT(A). We heard the rival contentions. We hold that even prior to assessment year 2008-09 (Pre Rule 8D era), the nature of disallowances specified u/s. 14A(1) has to be made on a rational basis. This tribunal held in large number of its decisions that the reasonable basis for the disallowance u/s. 14A should be 2% of the exempt income earned in the year 2007 and before. AO is directed to determine the expenses attributable to the exempt income, at the rate 2% of the total exempt income for the assessment years 2005-06 & 07-08 respectively. Disallowance of provision for warranty - assessee had made provision for warranty in the books of account and the AO refused to allow it for the reason that this provision for warranty was credited without any scientific reasons - HELD THAT:- Thus, the contention of the assessee is that the provision is an ascertained liability, whereas, the revenue observed it as contingent liability. It is clear from the assessment order that the assessee could not explain the methodology and calculation of the provisions on the basis of the satisfactory aspects in the case of Rotork Controls India Ltd. [2009 (5) TMI 16 - SUPREME COURT] - we are of the opinion that the matter has to be reexamined as to whether the methodology adopted for creating provision is in the light of the observations made by the Supreme Court. Therefore, we set aside the order of the CIT(A) and remit this issue to the file of the AO for re-examination after affording adequate opportunity for being heard to the assessee. Thus, the Revenue’s cross appeal is treated as allowed for statistical purposes. TDS u/s 194C - Disallowances of provision of sub-contract expenses and provision of labour charges u/s. 40(a)(ia) - HELD THAT:- It is clear that the assessee had made provision for subcontract and provision of labour/their contractors in the books of accounts. As per section 40(a)(ia) r.w.s. 194C, it is clear that the TDS has to be made at the time of credit of such sum to the account of the contractor or at the time of payments thereof in cash or by issue of cheque or draft or by any other mode, whichever is earlier. It is clear that when the assesse has made the provisions i.e., when it has credited such sum to the account of the subcontractors/labour/their contractors, it should have deducted TDS but failed to do so. In view of that, the findings recorded by the CIT(A) do not require any interfere on these grounds. We find merit in the decision of the CIT (A) in allowing the alternate claim by directing the AO to examine as to whether the impugned amounts were subsequently directly credited to the respective sub-contractors account/respective persons account, necessary TDS was deducted and remitted to the Government in the subsequent year and if so to allow necessary deduction in the financial year(s), wherein the assessee has actually has deducted and remitted the TDS into Government account subject to verification and the assessee furnishing of necessary evidence. Disallowance u/s. 40(a)(ia) - commission paid to Mehrtash Trading Enterprises (LLC) and the royalty paid to FFE Minerals Corporate, USA, without deducting the TDS - HELD THAT:- We find that, though the assessee has raised substantive appeal grounds before the CIT(A), the CIT(A) has not adjudicated them. In view of that these issues are remitted back to the CIT(A). The CIT(A) after affording due opportunity to the assessee, shall pass a speaking order on these issues. Issues Involved:- Disallowance of expenses u/s. 14A r.w.r. 8D- Disallowance of provision for warranty- Disallowances of provision of sub-contract expenses and provision of labour charges u/s. 40(a)(ia)- Disallowance made u/s. 40(a)(ia)Analysis:1. Disallowance of expenses u/s. 14A r.w.r. 8D:The Appellate Tribunal held that even before the Rule 8D era, disallowances under section 14A(1) must be rational. The tribunal determined the reasonable disallowance to be 2% of the total exempt income for the assessment years 2005-06 & 07-08.2. Disallowance of provision for warranty:Regarding the provision for warranty in the assessment year 2005-06, the Tribunal remitted the issue back to the Assessing Officer for reexamination. The Tribunal emphasized that the provision must be scientifically arrived at, meeting specific criteria as per Supreme Court observations.3. Disallowances of provision of sub-contract expenses and provision of labour charges u/s. 40(a)(ia):The Tribunal noted that the provisions for sub-contract and labour charges were made without deducting TDS as required by law. The Tribunal upheld the disallowance under section 40(a)(ia) but directed the Assessing Officer to allow deduction if TDS was subsequently deducted and remitted in the following years.4. Disallowance made u/s. 40(a)(ia):The Tribunal remitted back the issues of disallowances made under section 40(a)(ia) on commission and royalty payments for further adjudication by the CIT(A) after affording due opportunity to the assessee.In conclusion, the Tribunal partly allowed the assessee's appeals for the assessment years 2005-06 and 2007-08, while treating the revenue's cross-appeal for the assessment year 2005-06 as allowed for statistical purposes. The Tribunal emphasized the importance of adhering to legal provisions and scientific methodologies in determining provisions and disallowances.