2022 (1) TMI 927 - AT - Income Tax

Tribunal decides on tax appeals, limits disallowance, upholds amortization, allows tax credit

ACIT, Circle-30 (1), New Delhi. Versus Krishak Bharti Cooperative Ltd. And (Vice-Versa)

The Tribunal dismissed the Revenue's appeals and partly allowed the assessee's appeals for both assessment years. The disallowance under Section 14A read ... Disallowance u/s 14A read with rule 8D - dividend income - HELD THAT:- We do not see an infirmity in the finding of Ld.CIT(A) that the provision of section 14A of the Act, cannot apply to the dividend income from OMIFCO which is part of the total income. The Grounds raised by the Revenue are devoid of any merit hence, rejected. Disallowance being amortization of lease payment - as argued these are allowable business expenditure for determining the taxable income and should have been allowed - HELD THAT:- The issue has been decided against the assessee by the Hon’ble Delhi High Court in the assessee’s own case [2012 (7) TMI 526 - DELHI HIGH COURT] Therefore, respectfully following the judgement of the Hon’ble Delhi High Court, we do not see any infirmity in the finding of ld.CIT(A), the same is hereby affirmed.- Decided against assessee. Addition u/s 14A - Mandation of recording satisfaction - contention of the assessee is that the assessee had sufficient interest free funds which were used for making additional equity investment in the shares in Gujarat State Energy Generation Ltd. and the AO has not recorded his satisfaction regarding the expenditure sought to be disallowed is related to earning of exempt income - HELD THAT:- authorities below failed to appreciate that Rule 8D r.w.s.14A of the Act can be invoked only when the AO from the books of accounts of assessee placed before him is able to demonstrate that the expenditure sought to be disallowed, has been incurred for earning tax free income. It is stated that Rule 8D has been mechanically invoked by the AO without establishing such nexus. He further submitted that the assessee had demonstrated before the authorities below that the assessee was having sufficient interest free fund available to make investment wherefrom it had earned exempt income. We find merit on this contention of the Ld. Counsel for the assessee. The law is wellsettled that the section 14A would come into play, where the AO gives a clear finding regarding expenditure incurred for earning of income. Where the assessee is able to demonstrate that the investment was made out of own interest free fund in such cases, no disallowance would be called for regarding interest expenditure. Therefore, in the absence of clear finding by AO and disallowance on the basis of guess work cannot be sustained. Hence, we direct the AO to delete the disallowance - Decided in favour of assessee. Issues Involved:1. Disallowance under Section 14A read with Rule 8D.2. Amortization of lease payments.3. Tax credit for dividend income under Indo-Oman DTAA.Issue-wise Detailed Analysis:1. Disallowance under Section 14A read with Rule 8D:The Revenue challenged the Ld. CIT(A)'s decision to restrict the disallowance made by the AO under Section 14A read with Rule 8D. The AO had disallowed Rs. 8,63,35,560/- for the assessment year 2010-11 and Rs. 7,96,35,820/- for the assessment year 2011-12. The Ld. CIT(A) restricted these disallowances to Rs. 50,75,526/- and Rs. 65,72,285/- respectively. The Tribunal noted that the AO did not record proper satisfaction regarding the correctness of the claim of the assessee as mandated by law. The Tribunal upheld the Ld. CIT(A)'s decision, noting that the AO mechanically applied Rule 8D without establishing a nexus between the expenditure and the earning of exempt income. The Tribunal also referenced the consistent view taken in earlier years and judgments, including those of the Hon'ble Delhi High Court, which supported the assessee's position that investments not yielding tax-free income should not be considered for disallowance under Rule 8D.2. Amortization of Lease Payments:The assessee's claim for amortization of lease payments was disallowed by the AO and upheld by the Ld. CIT(A). The Tribunal noted that the issue had been previously decided against the assessee by the Hon'ble Delhi High Court in the assessee's own case for earlier assessment years. The High Court had held that the substantial one-time lease payment constituted a capital expenditure, not a revenue expenditure, and thus could not be amortized. The Tribunal, following the principle of consistency and binding precedent, upheld the disallowance of Rs. 38,43,091/- for the assessment year 2010-11 and Rs. 25,55,745/- for the assessment year 2011-12.3. Tax Credit for Dividend Income under Indo-Oman DTAA:The Revenue argued that the Ld. CIT(A) erred in allowing tax credit for dividend income received from OMIFCO, Oman, under the Indo-Oman DTAA. The AO had withdrawn the tax credit, but the Ld. CIT(A) restored it, referencing the ITAT's decision in the assessee's favor. The Tribunal upheld the Ld. CIT(A)'s decision, noting that the ITAT had previously ruled that the dividend income from Oman, exempt under Omani law to promote economic development, qualified for tax credit under Article 25(4) of the DTAA. The Tribunal emphasized that the interpretation of Omani tax laws by Omani authorities, which clarified the exemption's purpose, must be adopted in India. The Tribunal found no merit in the Revenue's grounds and dismissed their appeals.Conclusion:The Tribunal dismissed the Revenue's appeals for both assessment years and partly allowed the assessee's appeals, affirming the Ld. CIT(A)'s decisions on disallowance under Section 14A, amortization of lease payments, and tax credit for dividend income under the Indo-Oman DTAA. The Tribunal emphasized the importance of consistent application of legal principles and adherence to binding precedents.