2018 (5) TMI 57 - AT - Income Tax

Tribunal Decision: AO's Disallowances Overturned, Emphasis on Rule 8D, CSR Expenses, Excise Duty, and Sales-Tax Written Off

DCIT, Circle 11 (2), New Delhi Versus M/s. Hindustan Tin Works Ltd.

The Tribunal upheld the CIT(A)'s deletions of disallowances and additions made by the AO. The Tribunal emphasized that the AO must record dissatisfaction ... Disallowance u/ s 14A r.w.r. 8D - Held that:- AO has failed to point out the defect in the computation made by the assessee to make suo motu disallowance of ₹ 10,86,161/-. So, when the AO has not brought on record any cogent reasons to reject the suo motu disallowance made by the assessee, further disallowance made by the AO is merely on the basis of surmises by giving mechanical interpretation to the provisions contained u/s 14A read with Rule 8D - Disallowance u/s 14A cannot exceed the amount of exempt income as has been held in CIT vs. Holcim India Pvt. Ltd. (2014 (9) TMI 434 - DELHI HIGH COURT) so we are of the considered view that the CIT (A) has rightly deleted the disallowance made by the AO u/s 14A. - Decided in favour of assessee. Disallowance on account of CSR expenses - Held that:- Hon’ble Karnataka High Court in case cited as CIT & Anr. Vs. Infosys Technologies Ltd. [2013 (7) TMI 451 - KARNATAKA HIGH COURT] allowed the expenditure incurred by Infosys Technologies Ltd. on account of CSR by installing traffic signal near the establishment to ease the traffic congestion u/s 37(1) of the Act by holding that such expenses can be held to be expanded wholly and exclusively for the purpose of business u/s 37(1) of the Act. Addition u/s 145A - Held that:- Hon’ble Supreme Court in CIT vs. Hindustan Zinc Ltd. [2007 (5) TMI 195 - SUPREME Court] and CIT vs. Loknete Balasaheb Desai SSK Ltd. (2011 (6) TMI 48 - BOMBAY HIGH COURT), we are of the considered view that the ld. CIT (A) has rightly deleted the addition u/s 145A of the Act made by the AO as the central excise duty on the stock lying in the goddown is not to be incurred unless the stock is removed. So, we find no illegality or perversity in the findings returned by the dl. CIT (A). Ground no.3 is determined against the Revenue. Addition of expenses on account of sales-tax written off made u/s 37(1) - Held that:- CIT (A) by following the decision rendered by the Sales-tax Tribunal as well as Hon’ble Allahabad High Court in assessee’s own case held that transfer of goods from Sahibabad, UP to Murthal, Haryana, was in the nature of central sale and as such liable to pay Central Sales-tax and is not a penalty for violation of Sales-tax Act as has been held by the AO. Moreover, items/goods transferred by the assessee from Sahibabad, UP to Murthal, Haryana were not semi-finished goods rather it were final and finished products. So, we find no illegality or perversity in the impugned order passed by ld. CIT (A), hence ground no.4 is determined against the Revenue. Issues Involved:1. Deletion of disallowance under Section 14A read with Rule 8D.2. Deletion of disallowance of Corporate Social Responsibility (CSR) expenses under Section 37(1).3. Deletion of addition under Section 145A regarding excise duty on closing stock.4. Deletion of disallowance of expenses under Section 37(1) on account of sales-tax written off.Issue-wise Detailed Analysis:1. Deletion of Disallowance under Section 14A read with Rule 8D:The Assessing Officer (AO) made a disallowance of Rs. 4,07,852 under Section 14A read with Rule 8D without recording dissatisfaction with the assessee's computation. The assessee had already made a suo motu disallowance of Rs. 10,86,161. The Tribunal referred to the judgments in Maxopp Investment Ltd. vs. CIT and Godrej & Boyce Manufacturing Company Ltd. vs. DCIT, which mandate that the AO must record dissatisfaction with the assessee's claim before invoking Rule 8D. The Tribunal found that the AO had failed to provide cogent reasons for dissatisfaction and had mechanically applied Rule 8D. Consequently, the Tribunal upheld the CIT(A)'s deletion of the disallowance, emphasizing that disallowance under Section 14A cannot exceed the exempt income, as held in CIT vs. Holcim India Pvt. Ltd.2. Deletion of Disallowance of CSR Expenses under Section 37(1):The AO disallowed Rs. 14,85,571 claimed as CSR expenses, arguing that such expenses should be incurred from post-tax surplus and not claimed as business expenditure. The CIT(A) deleted the disallowance, following the decision in the assessee's own case for AY 2011-12. The Tribunal supported this view, referencing the Karnataka High Court's decision in CIT & Anr. Vs. Infosys Technologies Ltd., which allowed CSR expenses as business expenditure under Section 37(1). The Tribunal noted that the expenses were incurred for activities like health check-ups and organizing environmental programs, which were deemed wholly and exclusively for business purposes.3. Deletion of Addition under Section 145A Regarding Excise Duty on Closing Stock:The AO added Rs. 24,10,639 under Section 145A, citing an increase in closing stock due to excise duty. The CIT(A) deleted this addition, referencing the Supreme Court's decision in CIT vs. Hindustan Zinc Ltd., which held that excise duty should be excluded from the valuation of closing stock. The Tribunal agreed, noting that excise duty liability crystallizes upon clearance of goods, not while they are in stock. This view was further supported by the Bombay High Court's decision in CIT vs. Loknete Balasaheb Desai SSK Ltd., which clarified that excise duty liability is not incurred until goods are cleared from the factory.4. Deletion of Disallowance of Expenses under Section 37(1) on Account of Sales-Tax Written Off:The AO disallowed Rs. 11,52,000, arguing that the transfer of goods from Sahibabad, UP to Murthal, Haryana violated the Sales-tax Act. The CIT(A) deleted this disallowance, citing decisions by the Sales-tax Tribunal and Allahabad High Court in the assessee's favor, which determined the transfer as a central sale liable to Central Sales-tax, not a penalty. The Tribunal found no illegality in the CIT(A)'s decision, noting that the goods transferred were finished products, not semi-finished, and thus the disallowance was unwarranted.Conclusion:The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s deletions of the disallowances and additions made by the AO. The Tribunal's decision rested on established legal precedents and the lack of substantiation by the AO for the disallowances and additions. The order was pronounced on April 27, 2018.