2016 (3) TMI 1069 - AT - Income Tax

Tribunal upholds CIT(A) decisions on Section 14A, Rule 8D, Section 115JB, Section 36(1)(iii), Section 43(5)(d), with legal precedents.

Dy. Commissioner of Income Tax, Asstt. Commissioner of Income Tax Versus M/s Enercon India Ltd.

The Tribunal upheld the CIT(A)'s decisions on various issues including the interpretation of Section 14A and Rule 8D, disallowance under Section 14A while ... Disallowance u/s 14A r.w.r 8D - Held that:- The facts are proved by the increase in reserve and surplus over the years which were at ₹ 414 crores as on 31.3.2008 against the investment in subsidiaries which stood ₹ 319.43 crores as on 31.3.2008. We also note that the assessee had taken loans from Financial Institutions amounting to ₹ 722.24 crores, out of which the working capital loan ₹ 258.79 crores and remaining pertains to term loans for the specific purposes. The AO took the entire interest debited to the profit and loss account amounting to ₹ 94.35 crores and worked out the disallowance accordingly. In our opinion, the ld CIT(A) had rightly deleted the disallowance on account of interest under rule 8D(2)(ii) of the Rules and rightly upheld the disallowance to the tune of ₹ 0.5% of the value of investment which comes to ₹ 1,35,14,428/- being 0.5 % of ₹ 270.28 crores by following the decisions of the earlier years in the case of the assessee wherein the similar issue came up for consideration before the Tribunal and decided in favour of the assessee. Addition u/s 36(1)(iii) - proportionate interest expenditure pertaining to interest free loans and advances given by the assessee to subsidiaries companies out of interest bearing funds raised by the assessee - CIT(A) deleted addition - Held that:- The assessee's business expediency is proved beyond doubt that the entire interest free advances were given to the subsidiary company out of commercial expediency. In the case of Reliance Utilities and Power Ltd (2009 (1) TMI 4 - BOMBAY HIGH COURT ), The Hon'ble Court has held that the assessee has its own funds and simultaneously has borrowed interest bearing funds the presumption is that the advance of money is out of own funds and not out of interest bearing funds. We, therefore, respectfully following the ratio laid down in the above decisions supra confirm the order of ld. CIT(A) on this issue. - Decided in favour of the assessee. Loss u/s 43(5)(d) on account of M to M losses - CIT(A) deleted the loss - Held that:- In view of the facts of the assessee and various judicial decisions of the coordinate benches following the decision of apex court in the case of Woolward Governor India Pvt. Ltd (2009 (4) TMI 4 - SUPREME COURT ) and special bench decision in the case of Bank of Bahrain and Kuwait (2010 (8) TMI 578 - ITAT, MUMBAI ), we are of the considered view that case of the assessee is fully covered by the decisions of the coordinate benches and we therefore respectfully following the same allow the appeal of the assessee on the issue of MTM losses by deleting the disallowance - Decided in favour of the assessee. Disallowance of repairs and maintenance - Held that:- Expenses could not be disallowed merely on the ground that they are related to the transactions pertaining to earlier years unless and until the AO is fully satisfied after proper investigation about the crystallization of the liability and also the disallowance cannot be made merely on the ground that account maintained in the system of accounting and relates to the transactions of the previous year. In our opinion the true profits and loss of the assessee could only be determined if the expenses are allowed. Moreover, if these expenses are not allowed in this year, they are liable to be set off from the profit of the year ended 31.3.2006 related to the assessment year 2006-07. We, therefore, uphold the order of the ld. CIT(A) by dismissing the appeal of the revenue on this ground.- Decided in favour of the assessee. Addition on account of repair and maintenance of furniture - Held that:- The bill dated 25.10.2005 is in respect of repairs and maintenance of the furniture, POP, painting etc were settled and finalised during the year. We further observed from the said records that the said bill could not be accounted for in the year to which it pertained as it was received late and at the year end it could not be possible to estimate the liability with reasonable degree of accurancy. The bill was received in the subsequent year and the CIT(A) has recorded the finding of facts that the crystallisation had taken placed during the year and pertained to the current year and AO had wrongly disallowed the same. - Decided in favour of the assessee. Issues Involved:1. Interpretation of Section 14A of the Income Tax Act, 1961, and Rule 8D.2. Disallowance under Section 14A while computing book profits under Section 115JB.3. Disallowance under Section 36(1)(iii) for interest-free loans to subsidiaries.4. Disallowance of contingent liability under Section 43(5)(d) for Marked to Market (MTM) losses.5. Deletion of prior period expenses.6. Deletion of repair and maintenance expenses.7. Disallowance under Section 14A.8. Disallowance under Section 36(1)(iii).Detailed Analysis:1. Interpretation of Section 14A and Rule 8D:The Tribunal upheld the CIT(A)'s decision that Section 14A read with Rule 8D applies to the assessee. However, the CIT(A) disagreed with the AO on prorating interest disallowance between investments and total assets. The CIT(A) found that the assessee's own funds were sufficient to cover investments in subsidiaries, relying on precedents like CIT v. Reliance Utilities and Power Ltd. Consequently, the Tribunal upheld the CIT(A)'s decision to restrict disallowance to 0.5% of the average value of investments, amounting to Rs. 1,35,14,428.2. Disallowance under Section 14A while computing book profits under Section 115JB:The AO had added Rs. 11,24,17,511 under Section 14A while computing book profits under Section 115JB, which the CIT(A) reduced to Rs. 1,35,14,428. The Tribunal upheld this reduction, noting that the CIT(A)'s decision was consistent with previous Tribunal decisions and the assessee's own case in earlier years.3. Disallowance under Section 36(1)(iii) for interest-free loans to subsidiaries:The AO disallowed Rs. 2,42,24,011, arguing that interest-free loans to subsidiaries were not for commercial expediency. The CIT(A) deleted this disallowance, finding that the loans were for business purposes, such as installing windmills for power transmission. The Tribunal upheld this deletion, citing the Supreme Court's decision in S.A. Builders Ltd. v. CIT, which allows interest deductions if loans are given for commercial expediency.4. Disallowance of contingent liability under Section 43(5)(d) for MTM losses:The AO disallowed Rs. 27,92,46,564 as MTM losses, treating them as speculative and contingent. The CIT(A) deleted this disallowance, noting that the assessee followed a consistent accounting method (AS-11) for recognizing forex gains and losses. The Tribunal upheld this deletion, referencing the Special Bench decision in DCIT v. Bank of Bahrain and Kuwait, which allows MTM losses as business losses.5. Deletion of prior period expenses:The AO disallowed Rs. 18,87,320 as prior period expenses. The CIT(A) deleted this disallowance, noting that the expenses crystallized during the current year. The Tribunal upheld this deletion, citing the Gujarat High Court's decision in Saurashtra Cement and Chemicals Ltd. v. CIT, which allows expenses that crystallize in the current year.6. Deletion of repair and maintenance expenses:The AO disallowed Rs. 12,83,864 as prior period expenses. The CIT(A) deleted this disallowance, finding that the expenses crystallized during the current year. The Tribunal upheld this deletion, noting that the expenses were necessary for business operations and were settled during the current year.7. Disallowance under Section 14A:The AO had disallowed Rs. 23,47,67,605 under Section 14A, which the CIT(A) reduced to Rs. 10,00,000. The Tribunal upheld this reduction, applying the same rationale as in the first issue.8. Disallowance under Section 36(1)(iii):The AO disallowed interest expenses under Section 36(1)(iii), which the CIT(A) deleted. The Tribunal upheld this deletion, applying the same rationale as in the third issue.Conclusion:The Tribunal dismissed both appeals by the revenue, upholding the CIT(A)'s decisions on all issues. The Tribunal's decisions were consistent with established legal precedents and the specific facts of the case.