2016 (4) TMI 215 - AT - Income Tax

Tribunal allows appeal on interest & book profits, partially allows disallowance under Section 14A.

The appeal was partly allowed, with the Tribunal reversing the First Appellate Authority's decisions on the disallowance of interest on timeshare deposits ... Allowability of provision on amalgamation - accrued liability versus contingent liability - application of Accounting Standard (AS 14) - takeover of liabilities on amalgamation - disallowance under section 14A - application of Rule 8D and reasonable estimate method - computation of book profits under section 115JB - allowability of fringe benefit tax in book profit computation - remand for adjudication of new claim on meritsAllowability of provision on amalgamation - accrued liability versus contingent liability - application of Accounting Standard (AS 14) - takeover of liabilities on amalgamation - Allowability of interest provision of Rs. 1.07 crores (accrued interest on refundable timeshare deposits) taken over on amalgamation. - HELD THAT: - The Tribunal found that pursuant to the Bombay High Court approved scheme the assessee took over all assets and liabilities of the transferor company and, in accordance with AS 14 and the scheme directions, quantified and provided for the accrued interest on refundable deposits by debiting the amalgamation reserve. Applying the principle that a provision is a liability where (a) a present obligation exists from a past event, (b) an outflow is probable, and (c) a reliable estimate can be made, the Tribunal held that the liability was ascertainable on a scientific basis and therefore was not merely contingent. The Tribunal also relied on precedent recognizing trading/business liabilities of an assessee which assumed the liabilities of a predecessor, and observed that the assessee acted pursuant to the court approved scheme and applicable accounting standards. On this basis the Tribunal reversed the appellate authority and allowed the ground in favour of the assessee. [Paras 2]Ground No. 1 allowed; the provision for accrued interest taken over on amalgamation is allowable.Disallowance under section 14A - application of Rule 8D and reasonable estimate method - Validity and quantum of disallowance under section 14A (and Rule 8D) in respect of exempt dividend income. - HELD THAT: - The Tribunal considered that Rule 8D's specific machinery was held in earlier decisions to have limited or no application to years prior to 2008 09 and that, for the year under consideration, a percentage of exempt income constitutes a reasonable estimate for computing the disallowance. Having regard to precedent and the facts that the exempt dividend was minimal and that Rule 8D was not strictly applicable, the Tribunal directed the Assessing Officer to restrict the disallowance to 2% of the exempt income. [Paras 3]Ground No. 2 allowed in part; disallowance under section 14A to be restricted to 2% of the exempt income.Computation of book profits under section 115JB - allowability of fringe benefit tax in book profit computation - remand for adjudication of new claim on merits - Whether the accrued interest (taken over on amalgamation) should be considered in computing book profits under section 115JB and related treatment of additions; and whether FBT is allowable in computing book profits. - HELD THAT: - The Tribunal observed that the Assessing Officer made additions while computing book profit but did not give reasons and that the First Appellate Authority failed to adjudicate the assessee's claim regarding inclusion of the accrued interest (the same issue considered under ground No.1) for book profit computation. While appellate authorities are not barred from deciding new claims on merits, FAA had not done so; therefore the Tribunal concluded that the matter requires fresh adjudication by the FAA. Separately, the Tribunal noted CBDT clarification that fringe benefit tax is an allowable deduction in computing book profits under section 115JB and directed appropriate treatment. [Paras 4]Ground No. 3 allowed in part: matter remanded to the FAA for adjudication on the accrued interest claim for book profit computation; FBT held allowable for computing book profits.Final Conclusion: The appeal is partly allowed: the disallowance of the accrued interest provision taken over on amalgamation is reversed (ground 1 allowed); the section 14A disallowance is restricted to 2% of exempt income (ground 2 allowed in part); and the book profit computation issue is remanded to the FAA for determination of the accrued interest claim while FBT is held allowable (ground 3 allowed in part). Issues Involved:1. Disallowance of interest on timeshare deposits.2. Disallowance under Section 14A of the Income Tax Act.3. Determination of income as per the provisions of Section 115JB of the Income Tax Act.Issue-wise Detailed Analysis:1. Disallowance of Interest on Timeshare Deposits:The primary issue was the disallowance of Rs. 1.07 crores claimed as interest on timeshare deposits. The Assessing Officer (AO) disallowed the amount, stating that the liability was contingent and not an actual business expenditure. The Assessee argued that the liability was taken over from Himco under a scheme of amalgamation approved by the Bombay High Court, and the interest liability was an existing obligation. The First Appellate Authority (FAA) upheld the AO's decision, noting that the provision was notional and no actual payment had been made.Upon appeal, it was argued that the liability was quantified and provided for as per Accounting Standard 14 and approved by the High Court. The Tribunal found that the liability was ascertainable on a scientific basis and thus could not be termed contingent. Referring to the Supreme Court's principles in Rotork Controls India P. Ltd., the Tribunal concluded that the obligation arose from a past event and required an outflow of resources. The Tribunal reversed the FAA's order, allowing the interest claim as a business expenditure.2. Disallowance under Section 14A of the Income Tax Act:The AO disallowed Rs. 6.53 lakhs under Section 14A, related to the exempt dividend income of Rs. 21,509/-. The Assessee argued that the investments were made from interest-free funds and no expenditure was incurred to earn the dividend. The FAA, referencing the Godrej and Boyce Mfg. Co. Ltd. case, restricted the disallowance to Rs. 1 lakh, stating that Rule 8D was not applicable for the relevant year.The Tribunal, considering the Godrej Agrovet Ltd. case, directed the AO to restrict the disallowance to 2% of the exempt income, thus partially allowing the Assessee's appeal.3. Determination of Income as per Section 115JB:The AO made certain additions while calculating book profits under Section 115JB, which the Assessee contested, arguing that the AO overlooked the scheme of amalgamation and relevant published accounts. The FAA upheld the AO's additions, stating they fell within the provisions of Section 115JB.The Tribunal noted that the AO did not provide reasons for the additions and that the FAA did not adjudicate the issue of accrued interest on deposits for calculating book profits. The Tribunal restored the matter to the FAA for adjudication on merits, emphasizing that appellate authorities are not restricted by the requirement of a revised return for new claims. The Tribunal also referred to CBDT Circular No. 8/2005, which clarified that FBT is an allowable deduction in the computation of book profits under Section 115JB. Consequently, the Tribunal reversed the FAA's order in part, directing a fresh adjudication.Conclusion:The appeal was partly allowed, with the Tribunal reversing the FAA's decisions on the disallowance of interest on timeshare deposits and the computation of book profits under Section 115JB, while partially allowing the disallowance under Section 14A. The matter regarding book profits was remanded back to the FAA for a fresh decision.