2016 (12) TMI 1891 - AT - Income Tax

Tribunal lowers disallowance, confirms revenue addition, orders TDS verification & upholds interest levy

The Tribunal partly allowed the appeal by directing a reduction in the disallowance under Section 14A to 2% of the total exempt income. It confirmed the ... Disallowance u/s 14A r.w.r. 8D - HELD THAT:- The same rule is not retrospective as it was notified on 24/03/2008 and would be applicable only from AY 2008-09. In Godrej & Boyce Mfg. Co. Ltd. [2010 (8) TMI 77 - BOMBAY HIGH COURT] it has been held that Rule 8 D is not retrospective. In CIT vs. M/s. Godrej Agrovet Ltd [2014 (8) TMI 457 - BOMBAY HIGH COURT] has held that percentage of the exempt income can constitute a reasonable estimate for making disallowance in the years earlier to the assessment year 2008-09. In the above case it upheld the disallowance to the extent to 2% of the total exempt income. Respectfully following the above decision, we direct the AO to restrict the disallowance to 2% of the total exempt income. Thus the first and second ground are partly allowed. Treating advance / unearned revenues as the income of the year under consideration - Whether no right to receive the said revenues had accrued to the assessee during the year under consideration and also without appreciating that the method of accounting adopted by the assessee in recognizing revenues was in consonance with AS – 1 read with AS-9 issued by ICAI and notified by the Central Government? - HELD THAT:-There is no merit in the contention of the ld. counsel that the aforesaid advance/unearned revenue has been duly disclosed and offered to tax in the subsequent year. The assessee is free to take remedial measures permissible in law in the A.Y. 2008-09 where it has claimed to have offered the said income. Hon'ble Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd [1997 (7) TMI 4 - SUPREME COURT] has held 'It is true that this court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of a company. But when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override section 56 or any other provision of the Act. The order of the ld. CIT(A) upholding the addition made by the AO is confirmed. Therefore, the third ground of appeal filed by the assessee is dismissed. TDS credit - HELD THAT:- We direct the AO to give TDS credit after proper verification and as per the provisions of the Act. The assessee is directed to furnish the details before the AO and the assessee shall be given a reasonable opportunity of being heard on this point. Thus ground number 5.1 is allowed for statistical purpose. Issues Involved:1. Disallowance of expenses under Section 14A of the Income Tax Act.2. Treatment of advance/unearned revenues as income for the assessment year 2007-08.3. Credit for Tax Deducted at Source (TDS) and related rectification application.4. Levy of interest under Sections 234B and 234C of the Income Tax Act.Issue-wise Detailed Analysis:1. Disallowance of Expenses under Section 14A:The assessee challenged the disallowance of Rs. 1,00,554/- made by the Assessing Officer (AO) under Section 14A of the Income Tax Act, which was confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)]. The Tribunal noted that Rule 8D, which the AO used to calculate the disallowance, is not retrospective and only applies from the assessment year 2008-09, as held in Godrej & Boyce Mfg. Co. Ltd. vs. DCIT (2010) 328 ITR 81 (Bom). The Bombay High Court in CIT vs. M/s. Godrej Agrovet Ltd. also held that a reasonable estimate for disallowance in earlier years could be a percentage of the exempt income. Following this precedent, the Tribunal directed the AO to restrict the disallowance to 2% of the total exempt income, thus partly allowing the first and second grounds of appeal.2. Treatment of Advance/Unearned Revenues:The assessee disputed the AO's addition of Rs. 1,02,33,944/- as income for the year under consideration, arguing that no right to receive the said revenues had accrued during the year and that the method of accounting adopted was in line with AS-1 and AS-9 issued by ICAI. The AO added the amount to the business income because the invoices were raised, and the entire TDS credit was claimed in the year under consideration. The CIT(A) upheld this addition, reasoning that the assessee followed the mercantile system of accounting and had raised invoices during the relevant year.The Tribunal examined various case laws and accounting standards, including the principles of mercantile accounting and revenue recognition under AS-9. It was noted that revenue is recognized when the invoice is raised, and the income should be taxed in the year the invoice is raised. The Tribunal also considered Section 199 of the Act, which relates to the credit for TDS and concluded that the assessee's case was distinguishable from other cited cases because the TDS credit was claimed in the year under consideration. Consequently, the Tribunal confirmed the addition of Rs. 1,02,33,944/- made by the AO, dismissing the third ground of appeal.3. Credit for TDS and Rectification Application:The assessee raised an issue regarding the AO allowing only Rs. 12,75,430/- as against the total TDS credit of Rs. 40,26,876/- claimed. The Tribunal directed the AO to verify the details and give the correct TDS credit as per the provisions of the Act, allowing this ground for statistical purposes.4. Levy of Interest under Sections 234B and 234C:The assessee contested the levy of interest under Sections 234B and 234C. The Tribunal noted that the levy of interest is mandatory though consequential, thus ordering accordingly.Conclusion:The appeal was partly allowed. The Tribunal directed a reduction in the disallowance under Section 14A, confirmed the addition of unearned revenue as income for the assessment year 2007-08, directed proper verification and correction of TDS credit, and upheld the mandatory levy of interest under Sections 234B and 234C.