2017 (2) TMI 742 - AT - Income Tax

Tribunal Partially Upheld Appeal on Income-tax Disallowance with Limits on Section 14A and 115JB

M/s. Pearl Polymers Ltd. Versus Deputy Commissioner of Income Tax, Circle-14 (1), New Delhi

M/s. Pearl Polymers Ltd. Versus Deputy Commissioner of Income Tax, Circle-14 (1), New Delhi - TMI Issues Involved:1. Disallowance under Section 40A(3) of the Income-tax Act.2. Disallowance under Section 14A read with Rule 8D of the Income-tax Act.3. Enhancement of book profits under Section 115JB by adding provisions for leave encashment and gratuity.Issue-wise Detailed Analysis:1. Disallowance under Section 40A(3) of the Income-tax Act:The assessee contested the disallowance of Rs. 4,45,076/- under Section 40A(3) of the Act, which was upheld by the Commissioner of Income Tax (Appeals). The facts revealed that the assessee made cash payments for freight charges to truckers due to the strong influence of the 'Nalagarh Truck Operators Union' in Baddi, which restricted the use of outside trucks. The assessee argued that the payments were made in cash because the truckers lacked bank accounts, and the payments were necessary for business operations. The Assessing Officer disallowed the amount, stating there was no provision to exclude these payments from the purview of Section 40A(3). The Commissioner of Income Tax (Appeals) upheld this disallowance, noting the improbability of truckers not having bank accounts. The Tribunal concluded that the assessee could not substantiate that it fell under any exceptions specified under Rule 6DD of the Income Tax Rules, thus upholding the disallowance.2. Disallowance under Section 14A read with Rule 8D of the Income-tax Act:The assessee challenged the disallowance of Rs. 33,01,445/- under Section 14A read with Rule 8D. The Assessing Officer observed investments in shares but no disallowance for expenses towards earning exempt income. The assessee claimed that no expenditure was incurred as substantial investments were made in earlier years from its own funds. The Assessing Officer, relying on the Cheminvest Ltd. case, computed the disallowance under Rule 8D. The Commissioner of Income Tax (Appeals) upheld this finding. The Tribunal noted the Delhi High Court's decision in Joint Investments Pvt. Ltd. Vs. CIT, which held that disallowance under Section 14A should be restricted to the amount of exempt income earned. Consequently, the Tribunal directed the Assessing Officer to limit the disallowance to the exempt income of Rs. 2000/- earned by the assessee.3. Enhancement of book profits under Section 115JB by adding provisions for leave encashment and gratuity:The assessee contested the enhancement of book profits by adding provisions for leave encashment and gratuity. The Assessing Officer added back these provisions, arguing they were not crystallized and were based on actuarial valuations, which involved assumptions. The Commissioner of Income Tax (Appeals) upheld this decision. The Tribunal referred to the Supreme Court's judgment in Bharat Earth Movers Vs. CIT, which held that provisions for leave encashment and gratuity, based on actuarial valuation, represent ascertained liabilities. However, due to the lack of detailed facts on how these provisions were computed, the Tribunal remanded the matter back to the Assessing Officer to examine the actuarial valuations and decide whether these liabilities were ascertained, following the Supreme Court's ratio in Bharat Earth Movers.Conclusion:The appeal was partly allowed for statistical purposes, with the Tribunal upholding the disallowance under Section 40A(3), restricting the disallowance under Section 14A to the exempt income earned, and remanding the issue of enhancement of book profits under Section 115JB for further examination.