2021 (5) TMI 237 - AT - Income Tax

Tribunal adjusts disallowances in appeal, stresses Section 14A limits, corrects errors in accounting standards.

The appeal was partly allowed by the Tribunal. Disallowances and additions were adjusted or deleted based on findings. The Tribunal emphasized that ... Disallowance u/s 14A r.w.r. 8D(2)(ii) - HELD THAT:- Disallowance under section 14A r.w.r. 8D cannot go beyond the extent of exempted income itself. This view is fortified by the judgment of CIT Vs. Chettinad Logistics (P.) Ltd., [2017 (4) TMI 298 - MADRAS HIGH COURT] and Joint Investments (P) Ltd [2015 (3) TMI 155 - DELHI HIGH COURT]. Following the aforesaid decision of the Madras High Court in the case of Envestor Ventures Ltd.[2021 (1) TMI 922 - MADRAS HIGH COURT] deleted the disallowance made under section 14A r.w.r. 8D. Same view was taken by Co-ordinate Bench in the case of Global Teck Park Pvt. Ltd. Being so, taking a consistent view, we are inclined to hold that disallowance in the case of assessee cannot exceed the exempted income to the tune of ₹ 4,180/- only. Thus, ground Nos.2 and 3 of appeal of the assessee are partly allowed. Disallowance of claim of assessee on account of reduction of closing stock of work in progress - Return filed under section 153A of the Act based on AS 9 - HELD THAT:- The assessee furnished the details of claim of deduction under section 80IB(10) in earlier years - AR submitted that the disallowance on account of reduction in value of closing stock of work in progress in the Assessment Year under consideration due to change of applicability of accounting standing from AS 7 to AS 9 to be restricted to only to the extent of ₹ 27,80,57,341/- on which the assessee has claimed deduction under section 80IB(10) of the Act in earlier years and the balance of ₹ 1,18,83,207/- on which the assessee has not claimed deduction under section 80IB(10) in earlier years. Hence, the disallowance in this Assessment Year shall be restricted to ₹ 27,80,57,341/- only account of change in following of accounting standard from AS 7 to AS 9. Otherwise, it will not reflect the true and correct state of affairs of the company and cost of work in progress is to be valued at cost or market price whichever is lower. Unexplained reduction in closing work in progress - HELD THAT:- As there was a difference on account of change in following of accounting standard from AS 7 to AS 9 in the valuation of closing work in progress and that was already disallowed by AO in his order by observing as follows and once again disallowing this difference amounting to double disallowance, which should be disallowed - Hence, the total addition made by the AO is deleted -This ground of assessee is allowed. Issues Involved:1. Validity of the order passed under Section 144 of the Income Tax Act, 1961.2. Disallowance under Section 14A read with Rule 8D(2)(ii) and (iii) of the Income Tax Act, 1961.3. Disallowance of Rs. 28,99,40,548/- debited to the Profit and Loss Account.4. Addition of Rs. 13,90,45,559/- under the caption unexplained reduction in closing work in progress.5. Liability to pay interest.Detailed Analysis:1. Validity of the Order Passed Under Section 144:The first ground raised by the assessee pertains to the validity of the order passed under Section 144 of the Income Tax Act, 1961, without the participation of the assessee. No arguments were presented by the assessee's representative on this issue during the hearing. Consequently, this ground was dismissed as not pressed.2. Disallowance Under Section 14A Read with Rule 8D(2)(ii) and (iii):The assessee received a dividend of Rs. 4,180/- claimed as exempt under Section 10(38) of the Act. The Assessing Officer (AO) disallowed Rs. 13,31,120/- under Section 14A read with Rule 8D. The CIT(A) confirmed Rs. 6,18,080/- under Rule 8D(2)(ii) and provided partial relief under Rule 8D(2)(iii). The assessee argued that the disallowance under Section 14A read with Rule 8D cannot exceed the exempted income, citing judgments from the Madras High Court and Delhi High Court. The Tribunal agreed, stating that the disallowance should not exceed Rs. 4,180/-, the exempted income. Thus, grounds 2 and 3 of the appeal were partly allowed.3. Disallowance of Rs. 28,99,40,548/- Debited to the Profit and Loss Account:The assessee had been maintaining books under the percentage completion method (AS 7) until the Assessment Year 2007-08. Post a search action, the assessee changed to AS 9 for the Assessment Years 2008-09 and 2009-10. The AO ignored the returns filed under Section 153A based on AS 9 and reverted to AS 7, resulting in an addition of Rs. 28,99,44,548/-. The assessee argued that the disallowance should be restricted to Rs. 27,80,57,341/-, the amount claimed under Section 80IB(10) in earlier years. The Tribunal agreed, restricting the disallowance to Rs. 27,80,57,341/-, thus partly allowing this ground of appeal.4. Addition of Rs. 13,90,45,559/- Under the Caption Unexplained Reduction in Closing Work in Progress:The AO disallowed Rs. 13,90,45,559/- due to unexplained reduction in closing work in progress. The assessee explained that this included a loss from Project Mahaveer and an error in computing the adjustment loss shown in the general reserve. The Tribunal found that the AO had already disallowed Rs. 8,20,29,838/- under a different head and mistakenly added Rs. 13,90,45,559/-, leading to a double disallowance. The Tribunal deleted the addition of Rs. 13,90,45,559/-, allowing this ground of appeal.5. Liability to Pay Interest:The appellant denied liability to pay interest, claiming it was erroneously levied. However, no detailed arguments or findings on this issue were provided in the judgment summary.Conclusion:The appeal was partly allowed, with specific disallowances and additions being adjusted or deleted based on the Tribunal's findings. The Tribunal emphasized that disallowances under Section 14A read with Rule 8D should not exceed the exempted income and corrected errors in the computation of disallowances related to changes in accounting standards and unexplained reductions in closing work in progress.