2021 (2) TMI 608 - AT - Income Tax

Tribunal allows appeal, sets aside disallowance under Rule 8D(2)(iii)

The Tribunal allowed the appeal by the assessee, setting aside the disallowance under Rule 8D(2)(iii) for exempt income. The Tribunal also deleted the ... Disallowance u/ 14A - CIT(A) not granting relief on disallowance under Rule 8D(2)(iii) as relying on SINTEX INDUSTRIES LTD. [2017 (5) TMI 1160 - GUJARAT HIGH COURT] - HELD THAT:- It is crystal clear that in the instant case, the AO has not recorded any objective satisfaction as to why the computation mechanism provided in Rule 8D(2) of the Rules would come into operation, having regard to the accounts of the assessee. To follow the reasons as recorded for earlier years, as done by the AO in the impugned assessment year, is definitely not an objective satisfaction. Therefore, following the ratio laid down in the above decisions of GODREJ & BOYCE MANUFACTURING COMPANY LIMITED [2017 (5) TMI 403 - SUPREME COURT] we set aside the order of the Ld. CIT(A) in respect of disallowance u/s 14A r.w. Rule 8D(2)(iii) and allow the 1st ground of appeal. Disallowance of payment for non-compliance with RBI norms on customer service etc. u/s 37(1) - HELD THAT:- In the instant case, as recorded by the AO the assessee has claimed expenses on account of penalty of ₹ 15,00,000/- imposed by the RBI u/s 47A of the Banking Regulation Act, 1949 and ₹ 94,200/- for non-compliance of guidelines on customer service, guidelines in respect of exchange of coins and small de-nomination notes and mutilated notes. The ratio laid down in the decisions mentioned at para 12 is squarely applicable to the instant case instead of the decision in ANZ Grindlays Bank [2003 (8) TMI 174 - ITAT DELHI-Arelied on by the Ld. DR. Therefore, we delete the disallowance levied by the AO. Accordingly, the 2nd ground of appeal is allowed. MAT Computation - adding the tax on non-monetary perquisite in computing book profits u/s 115JB - whether amount paid represents employee cost and not tax in the hands of appellant - HELD THAT:- Similar issue arose before the Tribunal in Rashtriya Chemicals & Fertilizers Ltd. [2018 (3) TMI 1564 - ITAT MUMBAI]. The Tribunal held that taxes borne by the assessee on non-monetary perquisites provided to employees forms part of Employee Benefit cost and akin to Fringe Benefit Tax since they are certainly not ‘below the line’ items, since the same are expressly disallowed u/s 40(a)(v), the same do not constitute Income Tax for the assessee in terms of Explanation-2 to section 115JB ; therefore, without there being any corresponding amendment in the definition of Income Tax as provided in Explanation-2 to section 115JB, Fringe Benefit Tax was not required to be added back while arriving at Book Profits u/s 115JB of the Act. - we set aside the order of the Ld. CIT(A) and delete the addition made by the AO of tax on non-monetary perquisites provided to the employees to the book profit u/s 115JB of the Act. Thus the 3rd ground of appeal is allowed. Admission of additional ground - Whether amount of education cess and higher & secondary education cess is not tax as covered u/s 40(a)(ii) and accordingly allowable as deduction in computing the income from business or profession? - HELD THAT: -The above additional ground is squarely covered in favour of the assessee by the decision of the Hon’ble Bombay High Court in the case of Sesa Goa Ltd. [2020 (3) TMI 347 - BOMBAY HIGH COURT] and Chambal Fertilizers & Chemicals Ltd. [2018 (10) TMI 589 - RAJASTHAN HIGH COURT]. Following the above decisions, we admit and allow the additional ground of appeal filed by the assessee. Disallowance u/s 14A r.w. Rule 8D to earn dividend income in computing book profit u/s 115JB - HELD THAT:- As decided in M/S. BENGAL FINANCE & INVESTMENTS PVT. LTD. [2015 (2) TMI 1263 - BOMBAY HIGH COURT] an amount disallowed under Section 14A of the Act cannot be added to arrive at book profit for purposes of Section 115JB . Disallowance under Section 40(a)(ia) - provision for expenses under the head ‘repairs and maintenance’ on which tax was not deducted at source - TDS on contingent liability - CIT(A) deleted the additions and held that bills in respect of the provision for expenses were not received during the year - HELD THAT:- In the present case, the expenditure had already been incurred. The CIT(A) observed that the taxpayer maintained the books of accounts on the mercantile basis and shown the income and expenditure on an accrual basis - provisions which were made on the basis of properly ascertaining the liability was to be allowed under Section 37(1) - taxpayer had only made the provisions in the account but had not credited the same in the accounts of concerned parties and, therefore, the provisions of Section 40(a)(ia) of the Act would not be applicable. The Tribunal upheld the order of the CIT(A). Aggrieved, the tax department filed an appeal before the High Court. The Hon’ble Gujarat High Court observed that the tax was not deducted on the aforesaid expenses since the same were a contingent liability and for which bills were not issued. Subsequently, as and when the final bills were received/issued, the tax was deducted. Accordingly, the High Court deleted the disallowance under Section 40(a)(ia) of the Act and upheld the orders of the Tribunal as well as the CIT(A). As relying on SANGHI INFRASTRUCTURE LTD. [2018 (7) TMI 2072 - GUJARAT HIGH COURT] we affirm the order of the Ld. CIT(A) and dismiss the 2nd ground of appeal of revenue. Issues Involved:1. Disallowance under Rule 8D(2)(iii) for exempt income.2. Disallowance of payment for non-compliance with RBI norms.3. Addition of tax on non-monetary perquisites in computing book profits under Section 115JB.4. Disallowance towards year-end provision for expenses on which TDS was not deducted.Issue-wise Detailed Analysis:1. Disallowance under Rule 8D(2)(iii) for Exempt Income:The first ground of appeal by the assessee concerns the disallowance of Rs. 19,82,71,777/- under Rule 8D(2)(iii). The assessee had received exempt income and had suo motu disallowed Rs. 2,22,63,226/- as expenses incurred towards earning this income. The Assessing Officer (AO) was not satisfied with the basis of this disallowance and invoked Rule 8D, resulting in a higher disallowance. The CIT(A) partially agreed with the AO but directed a revised computation, considering only those investments that generated exempt income during the year.The Tribunal found that the AO did not record any objective satisfaction as to why the computation mechanism provided in Rule 8D(2) would come into operation, having regard to the accounts of the assessee. The Tribunal allowed the appeal by the assessee, setting aside the disallowance under Rule 8D(2)(iii).2. Disallowance of Payment for Non-compliance with RBI Norms:The second ground of appeal by the assessee relates to a disallowance of Rs. 15,94,200/- for penalties imposed by the RBI for non-compliance with certain guidelines. The AO treated these payments as penal in nature and disallowed them under Explanation-1 to Section 37(1). The CIT(A) upheld this disallowance.The Tribunal, however, referred to various judicial precedents, including decisions by the Hon'ble Bombay High Court and other Tribunals, which held that such payments are compensatory and not penal in nature. Therefore, the Tribunal deleted the disallowance of Rs. 15,94,200/- and allowed the appeal on this ground.3. Addition of Tax on Non-monetary Perquisites in Computing Book Profits under Section 115JB:The third ground of appeal by the assessee concerns the addition of Rs. 12,16,10,651/- to the book profits under Section 115JB for tax on non-monetary perquisites provided to employees. The AO added this amount to the MAT income, stating that it represents income tax paid by the employer.The CIT(A) upheld the AO's decision, but the Tribunal referred to a similar case decided by the ITAT Mumbai, which held that such taxes form part of employee benefit costs and are not to be added back while computing book profits under Section 115JB. The Tribunal set aside the order of the CIT(A) and deleted the addition, allowing the appeal on this ground.4. Disallowance Towards Year-end Provision for Expenses on which TDS was not Deducted:The first ground of appeal by the Revenue concerns the deletion of a disallowance of Rs. 99,30,30,984/- towards year-end provisions for expenses on which TDS was not deducted. The AO made this disallowance based on the provisions of Chapter XVII-B, which require TDS on amounts credited to any account, including provisions.The CIT(A) deleted the disallowance, relying on judicial precedents that allowed such provisions if the liability could be estimated with a fair degree of certainty. The Tribunal affirmed the CIT(A)'s decision, referring to a judgment by the Hon'ble Gujarat High Court, which held that provisions for expenses are allowable if the actual amounts paid are subjected to TDS when the liability crystallizes. The Tribunal directed the AO to verify that TDS was deducted when the final bills were received.Conclusion:- The appeal filed by the assessee is allowed.- The appeal filed by the Revenue is dismissed.