Tribunal remits KOPT tax liability, upholds Section 14A disallowance rule, partly allows assessee appeals.

The Tribunal remitted the matter back to the Ld. AO for verification of KOPT's tax liability discharge regarding the royalty amount disallowance under Section 40(a)(ia). For the disallowance under Section 14A, the Tribunal upheld the Ld. CIT(A)'s directions to compute disallowance under Rule 8D(2)(iii) only for investments yielding exempt income. All three appeals of the assessee were partly allowed for statistical purposes.

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Issues Involved:
1. Disallowance under Section 40(a)(ia) due to non-deduction of tax at source on additional amount provided as payable to KOPT.
2. Disallowance under Section 14A of the Act read with Rule 8D(2)(iii).

Issue-Wise
Detailed Analysis:

1. Disallowance under Section 40(a)(ia) due to non-deduction of tax at source on additional amount provided as payable to KOPT:

Background:
The assessee, engaged in port operations, cargo handling, and related services, filed returns for AY 2012-13, reporting a total income of Rs. 13,02,02,450/-. The case was selected for scrutiny, resulting in additions/disallowances. The primary issue was the disallowance of Rs. 31,24,829/- as royalty payable to KOPT.

Arguments and Findings:
- Allowability under Section 37(1): The Ld. AO disallowed the amount on the grounds that it was an estimated liability and not an ascertained one. However, the coordinate bench of ITAT, Kolkata, in the assessee's own case for AY 2009-10, had allowed similar royalty payments as an ascertained liability. The Ld. CIT(A) followed this precedent, allowing the royalty payable under Section 37(1).

- Non-deduction of TDS under Section 194J: The Ld. AO also disallowed the amount for non-deduction of TDS, invoking Section 40(a)(ia). The Ld. CIT(A) upheld this disallowance, stating that the liability to deduct TDS on royalty payable to a resident payee under Section 194J was no longer contingent upon arbitration outcomes.

Remand for Verification:
- The Ld. Counsel for the assessee referred to the second proviso to Section 40(a)(ia), inserted by the Finance Act, 2012, effective from AY 2013-14, which deems TDS as deducted and paid if the payee has discharged its tax liability. The Ld. Counsel cited judicial precedents to argue for retrospective application of this proviso.
- The Tribunal remitted the matter back to the Ld. AO for verification of KOPT's tax liability discharge on the royalty amount. The Ld. AO was directed to call for relevant information from KOPT and decide the allowability of the amount under Section 40(a)(ia).

2. Disallowance under Section 14A of the Act read with Rule 8D(2)(iii):

Background:
The Ld. AO noted the value of investments and the exempt income earned by the assessee. The assessee claimed that no expenditure was incurred to earn the exempt income, thus no disallowance under Section 14A was warranted.

Arguments and Findings:
- The Ld. CIT(A) referred to the coordinate bench of ITAT, Kolkata's decision in the assessee's own case for AY 2009-10, which directed the Ld. AO to compute disallowance under Rule 8D(2)(iii) only for investments yielding exempt income.
- The Tribunal upheld the Ld. CIT(A)'s directions, following the jurisdictional High Court's affirmation in CIT vs. REI Agro Limited, which validated the computation of disallowance under Rule 8D(2)(iii) only for investments yielding exempt income.

Conclusion:
- For the issue of disallowance under Section 40(a)(ia): The Tribunal remitted the matter back to the Ld. AO for verification of KOPT's tax liability discharge and subsequent decision on the allowability of the royalty amount.
- For the issue of disallowance under Section 14A: The Tribunal upheld the Ld. CIT(A)'s directions for verification and recomputation of disallowance under Rule 8D(2)(iii) for investments yielding exempt income.

Result:
All three appeals of the assessee were partly allowed for statistical purposes. The order was pronounced in the open court on January 9, 2023.

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