2016 (4) TMI 960 - AT - Income Tax

Assessee's Appeal Partially Allowed on Disallowance Issues

The assessee's appeal on disallowance under Section 14A was partly allowed, with the Tribunal deleting the interest disallowance but partially upholding ... Disallowance of expenditure in relation to exempt income (section 14A and Rule 8D) - Application of Rule 8D - allocation of interest and indirect expenses to tax-exempt income - Deduction of employer's provident fund contributions - scope of section 43B - Business deduction for compensation on premature termination of lease - section 37(1) - Allowability of write off of reassigned book debts following slump sale - section 36(1)(vi) - Monetary threshold for Revenue appeals under CBDT Circular No.21/2015Disallowance of expenditure in relation to exempt income (section 14A and Rule 8D) - Application of Rule 8D - allocation of interest and indirect expenses to tax-exempt income - Validity and quantum of disallowance under section 14A as computed under Rule 8D for investments yielding exempt dividend. - HELD THAT: - For AY 2008-09 the Tribunal found that the assessee had sufficient own funds (share capital and reserves) to finance investments, and the borrowings were for specific purposes; accordingly interest disallowance under Rule 8D(2)(ii) was deleted. As to indirect expenses computed under Rule 8D(2)(iii), the Tribunal accepted that most administrative and personnel costs had no indirect nexus with dividend income and that investments were placed through portfolio management; accordingly it held that blind application of Rule 8D was not warranted and reduced the Rule 8D(2)(iii) disallowance by allowing relief on a substantial part of the claim. For the subsequent year (appeal ITA No.6518/Mum/2012) on identical facts the Tribunal applied the same reasoning, deleting the interest component and restricting the indirect expenses component by allowing a rounded relief, treating the reduction as fair and reasonable. [Paras 4, 13]Interest disallowance under Rule 8D(2)(ii) deleted; indirect expenses disallowance under Rule 8D(2)(iii) reduced (net disallowance sustained in AY 2008-09 and restricted in the later year).Deduction of employer's provident fund contributions - scope of section 43B - Allowability of provident fund contribution deduction where payment was made after statutory grace period but before filing due date. - HELD THAT: - The Tribunal followed the jurisdictional High Court precedent holding that employers' and employees' provident fund contributions fall within the scope of section 43B and are allowable if paid before the due date of filing return. On the facts the assessee paid after the statutory grace period under the Provident Fund regime but before the return filing due date; applying the cited ratio, the Tribunal deleted the addition made under section 36(1)(va)/section 2(24)(x). [Paras 5]Addition for late PF payment deleted; deduction allowed as the payment was made before return filing due date.Business deduction for compensation on premature termination of lease - section 37(1) - Allowability of amount deducted by licensor on premature termination of lease as business expenditure under section 37(1). - HELD THAT: - On sale of the general cargo division some leases were transferred to the purchaser while two leases were terminated and the licensor deducted compensation. The Tribunal held that the compensation for premature termination of the two leases was a deductible business expense under section 37(1) because the leases were not required after the slump sale and termination was commercially expedient to avoid further expenses. Consequently that portion of the write offs was allowed while the remainder relating to transferred leases remained disallowed. [Paras 6]Deduction of the compensation for premature termination of two leases allowed under section 37(1); balance of write offs sustained as disallowance.Allowability of write off of reassigned book debts following slump sale - section 36(1)(vi) - Whether write off of book debts reassigned to the vendor pursuant to 'Adjustment to Purchase Price' in slump sale is allowable under section 36(1)(vi). - HELD THAT: - The slump sale agreement permitted the purchaser to re assign certain current assets to the vendor and reduce the purchase price accordingly. The Tribunal found that the purchaser had in fact re assigned specific book debts to the assessee and reduced the purchase consideration by the reassigned amount; those reassigned debts were subsequently written off by the assessee. The AO and CIT(A) erred in treating the debts as transferred to the purchaser and denying the write off on double benefit grounds. Applying the contractual adjustment evidence, the Tribunal held the write off was genuine and allowable under section 36(1)(vi). [Paras 7]Write off of reassigned book debts allowed under section 36(1)(vi); corresponding addition deleted.Monetary threshold for Revenue appeals under CBDT Circular No.21/2015 - Maintainability of Revenue's appeal where tax effect is below the monetary limit prescribed by CBDT Circular No.21/2015. - HELD THAT: - The Tribunal noted that the tax effect in the Revenue's appeal was below Rs.10 lakhs. Applying CBDT Circular No.21/2015, which prescribes a Rs.10 lakh monetary limit for Revenue appeals to the Tribunal and is retrospective, the Tribunal held that the Revenue was precluded from pursuing the appeal and dismissed it accordingly. [Paras 11]Revenue's appeal dismissed as not maintainable in view of CBDT Circular No.21/2015 (tax effect below Rs.10 lakhs).Final Conclusion: The Tribunal partly allowed the assessee's appeals: Rule 8D interest disallowances were deleted and indirect expense disallowances were substantially reduced; provident fund payment disallowance deleted; compensation for premature lease termination partly allowed; write off of reassigned book debts allowed. The Revenue's appeal was dismissed as not maintainable under the CBDT monetary threshold. Issues Involved:1. Disallowance under Section 14A of the Income-tax Act.2. Disallowance under Section 36(1)(va) for late payment of Provident Fund (PF).3. Addition of sundry balances written off.4. Disallowance of loss on account of write-off of receivables.5. Revenue's appeal regarding disallowance under Section 40(a)(ia).Issue-wise Detailed Analysis:1. Disallowance under Section 14A:The assessee challenged the confirmation of an addition of Rs. 20,12,208/- under Section 14A of the Income-tax Act, which included Rs. 5,50,586/- for interest charges and Rs. 14,61,622/- for indirect expenses. The assessee argued that the investments yielding exempt dividend were made from its own funds and managed by portfolio management companies, hence no expenses were incurred. The Tribunal found merit in the assessee's claim that it had sufficient own funds to make the investments and ordered the deletion of the interest disallowance of Rs. 5,50,586/-. However, it partially upheld the disallowance of Rs. 14,61,622/- by allowing a relief of Rs. 8,00,000/-, thereby sustaining an addition of Rs. 6,61,622/-.2. Disallowance under Section 36(1)(va) for Late Payment of PF:The assessee contested the disallowance of Rs. 3,64,975/- for late payment of PF. The Tribunal found that the PF was paid before the due date for filing the return of income under Section 139(1) and referenced the jurisdictional High Court decision in CIT Vs Ghatge Patil Transport Ltd, which held that both employer's and employee's contributions are subject to Section 43B. Consequently, the Tribunal deleted the addition.3. Addition of Sundry Balances Written Off:The assessee appealed against the addition of Rs. 56,94,748/- for sundry balances written off. The Tribunal noted that the assessee had prematurely terminated leases for two warehouses and incurred a compensation of Rs. 45,16,000/-, which was written off. The Tribunal found merit in the assessee's claim that the termination was for commercial expediency and allowed the deduction of Rs. 45,16,000/-, sustaining an addition of Rs. 11,78,748/-.4. Disallowance of Loss on Account of Write-off of Receivables:The assessee challenged the addition of Rs. 1,76,70,049/- for write-off of receivables reassigned in the slump sale of its general cargo division. The Tribunal found that the reassigned debts were reduced from the purchase price and written off lawfully under Section 36(1)(vi). It concluded that the lower authorities' view of double benefit was unfounded and directed the AO to allow the write-off.5. Revenue's Appeal Regarding Disallowance under Section 40(a)(ia):The Revenue's appeal contested the deletion of an addition under Section 40(a)(ia) for leased line charges to VSNL. The Tribunal noted that the tax effect was below Rs. 10 lakhs and referenced the CBDT Circular No.21/2015, which precludes the Revenue from pursuing such appeals. Consequently, the appeal was dismissed.Summary of Outcomes:- The assessee's appeal on disallowance under Section 14A was partly allowed.- The disallowance under Section 36(1)(va) for late payment of PF was deleted.- The addition for sundry balances written off was partly allowed.- The disallowance of loss on account of write-off of receivables was allowed.- The Revenue's appeal was dismissed due to the low tax effect.Final Order:The appeals of the assessee were partly allowed, and the appeal of the Revenue was dismissed. The order was pronounced in the open court on 29.2.2016.