2023 (6) TMI 396 - AT - Income Tax

Tribunal decision: Section 14A disallowance, Rule 8D, capitalization of license fee, TDS credit claim verification

The Tribunal upheld the CIT(A)'s decision to restrict disallowance under Section 14A, ruling that only investments yielding exempt income should be ... Disallowance u/s.14A r.w.r. 8D - whether exempt income during the year under consideration? - HELD THAT:- For computing disallowance under Rule 8D(2)(iii), only the investments yielding exempt income during the year under consideration can form part of average value of investment. Since, the strategic investments made by the assessee have not yielded any exempt income during the year, they cannot form part of the average value of investment for computing the disallowance under Rule 8D(2)(iii). So far as investments in mutual fund are concerned, from the materials on record, including the financial statements of the assessee, it is observed that there is no opening and closing balances of mutual fund. Meaning thereby, the investments, on which the assessee had earned exempt income, were not only made during the year under consideration, but also sold during the year under consideration. That being the case, the average value of investment as on the 1st day of the financial year and at the year end is nil. Computation mechanism provided in Rule 8D(2)(iii) would fail, as it is not possible to compute the disallowance in absence of average value of investment. This is the view expressed by the coordinate bench while deciding identical issue in assessee’s own case in assessment year 2011- 12 In view of the aforesaid, [2020 (1) TMI 403 - ITAT DELHI] we direct the AO to delete the disallowance made over and above the suo motu disallowance made by the Assessee. Capitalisation of license fee - revenue v/s capital expenditure - HELD THAT:- Facts of the present case appears to be similar to the facts involved in the case of CIT Vs Bharti Hexacom Ltd. (Delhi) [2013 (12) TMI 1115 - DELHI HIGH COURT] we, therefore, restored this issue to the file of the AO to be decided in accordance with the findings given by the Hon'ble Jurisdictional High Court in the case of Bharti Hexacom Ltd. [2013 (12) TMI 1115 - DELHI HIGH COURT] and if any expenditure on account of licence fee was payable up to 31.07.1999, it should be treated as capital expenditure and the licence fee on revenue sharing basis after 01.08.1999 should be treated as revenue in nature. Disallowance of TDS credit - whether TDS credit relates to future income? - HELD THAT:- Even after disallowing the TDS credit claimed by the assessee, the Assessing Officer has added the corresponding amount to the income of the assessee. Once, certain amount claimed as TDS credit is disallowed, assessee’s claim of pre-paid taxes to that extent gets reduced. No need for making any further addition of the corresponding amount to the income of the assessee as it amounts to addition of the same amount twice. In view of the aforesaid, we direct the Assessing Officer to factually verify assessee’s claim and in case, the assessee has not been given credit of TDS in the computation of income, the addition of the same amount made to the income of the assessee should be deleted - Decided in favour of assessee. Issues Involved:1. Disallowance under Section 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962.2. Deletion of addition made on capitalization of license fee.3. Disallowance of TDS credit and corresponding addition to the income of the assessee.Summary:Issue 1: Disallowance under Section 14A read with Rule 8DThe Revenue contested the CIT(A)'s decision to restrict the disallowance under Section 14A, arguing that strategic investments should not be excluded based on the Supreme Court decision in Max Opp Investment Ltd vs. CIT. The assessee argued that no exempt income was earned from strategic investments, and thus, they should be excluded from the average value of investments for Rule 8D(2)(iii) computation. The Tribunal upheld the CIT(A)'s decision, noting that only investments yielding exempt income during the year should be considered. Since the assessee's mutual fund investments had no opening or closing balances, the disallowance mechanism under Rule 8D(2)(iii) failed, and the Assessing Officer was directed to delete the disallowance over the suo motu disallowance made by the assessee.Issue 2: Deletion of Addition on Capitalization of License FeeThe Assessing Officer treated the license fee paid to the Department of Telecommunication as capital expenditure, amortizing it under Section 35ABB. The CIT(A) deleted the disallowance, referencing Tribunal decisions in earlier years favoring the assessee. The Tribunal confirmed this view, citing consistent past decisions and the Delhi High Court's ruling in CIT vs. Bharti Hexacom Ltd., which treated license fees post-1999 policy as revenue expenditure.Issue 3: Disallowance of TDS Credit and Corresponding AdditionThe Assessing Officer disallowed TDS credit claimed for deferred revenue and added the corresponding amount to the income. The Tribunal found this resulted in double addition. It directed the Assessing Officer to verify the factual claim and ensure that if the TDS credit was disallowed, the corresponding income addition should be deleted to avoid double taxation.Conclusion:The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross-objection, directing appropriate adjustments based on the established legal principles and factual verification. The order was pronounced on 07/06/2023.