2022 (11) TMI 656 - AT - Income Tax

Tribunal allows appeal, directs deletion of additions under sections 41(1), 37, & 14A. Proximate relationship required.

The Tribunal allowed the appeal of the assessee, directing the deletion of additions/disallowances made by the Ld. AO for challenged items under sections ... Addition made u/s 41(1) - Cessation of Liability u/s 41(1) - HELD THAT:- It is a fact on record that assessee has written off the said liability and offered it to tax in AY 2017-18 considering which we are inclined to accept the submission made by the Ld. Counsel and direct the ld. AO to delete the addition so made. Further it is settled position of law that unilateral right off in the manner which the AO has done cannot be sustained u/s 41(1) of the Act. In respect of second and third issue taken together, we note that it is an uncontroverted fact that assessee has never claimed these expenses in its return of income while reporting the total income. Thus, when no claim has been made by the assessee for the allowance of these expenses that the disallowance so made by the Ld. AO is not warranted and it is directed that the same be deleted. Disallowance u/s 14A read with Rule 8D(2)(iii) - We note that the assessee had capital, reserve and surplus far exceeding investment made in securities yielding exempt income. We also note that Ld. AO has straightway applied Rule 8D(2)(iii) for the purpose of making a disallowance without complying with the requirements of Section 14A to record a satisfaction having regard to the books of account of the assessee. AO has not brought on record the proximate relationship between the expenditure and the tax exempt income. We note that application of Section 14A read with Rule 8D(2) is not automatic and it is mandatory on the part of Ld. AO to record an objective satisfaction before resorting to computation of disallowance under rule 8D(2). Accordingly, we direct the Ld. AO to delete the disallowance made by applying Rule 8D(2)(iii). Appeal of the assessee is allowed. Issues Involved:- Challenge to additions made by Ld. AO for four different items- Cessation of Liability u/s 41(1)- Disallowance u/s 37 transportation charges capitalized- Disallowance u/s 37 donation debited to profit and loss account- Disallowance u/s 14A read with Rule 8D(2)(iii)Detailed Analysis:Cessation of Liability u/s 41(1):The appellant challenged the addition made under section 41(1) related to a disputed liability. The appellant had written off the amount in a subsequent year and offered it for taxation, arguing against being taxed twice for the same amount. The Tribunal accepted the appellant's submission, noting that unilateral write-offs as done by the Ld. AO were not sustainable under section 41(1) of the Act. The addition was directed to be deleted.Disallowance u/s 37 transportation charges capitalized:The dispute involved disallowance of transportation charges capitalized by the assessee. The charges were incurred for storage racks and were duly capitalized to the asset. The appellant had not claimed these charges as expenses in the profit and loss account. The Tribunal found that since the appellant had not sought allowance for these expenses, the disallowance made by the Ld. AO was unwarranted, and it was directed to be deleted.Disallowance u/s 37 donation debited to profit and loss account:Regarding the disallowance made for a donation debited in the profit and loss account, the appellant demonstrated that it had suo-moto disallowed the amount in its return and never claimed it as an allowable expenditure. The Tribunal agreed with the appellant's position and directed the disallowance to be deleted.Disallowance u/s 14A read with Rule 8D(2)(iii):The disallowance under section 14A read with Rule 8D(2)(iii) was challenged by the appellant. The Tribunal observed that the appellant had sufficient capital, reserves, and surplus exceeding the investments yielding exempt income. It was noted that the Ld. AO had not recorded a satisfaction regarding the relationship between expenditure and tax-exempt income. The Tribunal emphasized that the application of Rule 8D(2) was not automatic, and the Ld. AO must establish an objective satisfaction before making a disallowance. Citing a relevant High Court decision, the Tribunal directed the Ld. AO to delete the disallowance.In conclusion, the Tribunal allowed the appeal of the assessee, directing the deletion of the additions/disallowances made by the Ld. AO for the specified items. The judgment highlighted the importance of establishing a proximate relationship between expenditure and exempt income for disallowances under section 14A.