2025 (7) TMI 957 - AT - Income Tax

Assessee's suo-moto disallowance calculation valid under Section 14A; only exempt income investments considered for Rule 8D

ITAT Mumbai allowed the appeal for statistical purposes regarding disallowance under section 14A read with Rule 8D. The tribunal held that AO's ... Disallowance u/s 14A read with Rule 8D - suo-moto disallowance made by assessee - AO recorded that the assessee has made investment in shares and mutual funds - Assessee argued AO has not recorded his satisfaction about suo-moto disallowance and secondly only those investment which yield a exempt income has to be considered - HELD THAT:- We find that no specific procedure is prescribed either in the Act or in the Rules to record the non-satisfaction on the suo moto working of disallowance of assessee under section 14A, once, the AO has not accepted the working on disallowance that itself reflects his dissatisfaction. So far as second submission of assessee is concerned, we find convincing force in her submissions that only investment which yielded exempt income is to be considered for the purpose of calculating average value of investment as per decision of Vireet Investment [2017 (6) TMI 1124 - ITAT DELHI] Hence, we direct the AO is workout the figure of average value of investment as per the decision of ACB India Limited [2015 (4) TMI 224 - DELHI HIGH COURT] and Vireet Investment (P) Ltd [2017 (6) TMI 1124 - ITAT DELHI] - AO is further directed to follow the decision Vireet Investment (P) Ltd (supra) while computing book profit under section 115JB. Needless to direct that before passing the order, the AO shall allow reasonable opportunity to the assessee. In the result, this ground of appeal is allowed for statistical purposes. Disallowance of employee cost payable to workers in treating it as a contingent liability - assessee submits that assessee is a company and required to follow accounting principle while accounting income and expenditure - HELD THAT:- There is no dispute that assessee has created a provision of workers payment on account of wage revision. The lower authorities stated this as contingent and as unascertained liability. We find that in a recent decision in Housing & Urban Development Corporation Ltd. [2020 (2) TMI 372 - DELHI HIGH COURT] held that provision made by assessee Public Sector unit for revision of pay of its employees, as per recommendation of committee appointed by the government was to be allowed as a business expenditure. Assessee has made provision on the basis of pending demand of workers on account of revision labour payment. Thus, assessee is eligible for allowance of such expenditure. Book profit roundly computed in computation sheet - Considering the fact that there is mismatch in the book profit computed in assessment order and shown in the computation sheet. AO is directed to verify the fact and correct the figure of book profit accordingly. The core legal questions considered by the Tribunal in this appeal are:1. Whether the additional disallowance under section 14A of the Income Tax Act, read with Rule 8D, upheld by the lower authorities, was justified, particularly regarding the methodology of computing disallowance on exempt income and investments not yielding dividend income.2. Whether the Mutual Funds (Growth Option) investments, which did not yield dividend income, should be included in the computation of disallowance under section 14A.3. Whether disallowance under Rule 8D(2)(ii) should be computed only on investments that have earned dividends.4. Whether the employee cost provision of Rs. 10,06,858 payable to workmen, treated as a contingent liability by the Assessing Officer (AO) and disallowed, was rightly disallowed or should be allowed as a business expenditure.5. Whether the computation of book profit under section 115JB, as reflected in the assessment order and computation sheet, was correct or required rectification.6. Whether the initiation of penalty proceedings under section 270A for alleged under-reporting of income was justified.Issue-Wise Detailed Analysis1. Disallowance under Section 14A read with Rule 8DLegal Framework and Precedents: Section 14A disallows expenditure incurred in relation to exempt income. Rule 8D prescribes the method for computing such disallowance. The Supreme Court in Maxopp Investments Ltd. clarified that the dominant intention behind investment is immaterial for disallowance under section 14A. The Tribunal and High Courts have further interpreted the scope and computation methodology, including the Delhi High Court decisions in ACB India Ltd. v. CIT and the Special Bench of the Delhi Tribunal in ACIT v. Vireet Investment Pvt. Ltd.Court's Interpretation and Reasoning: The Tribunal noted that the AO did not record explicit satisfaction that the assessee's suo-moto disallowance was incorrect but proceeded to recompute disallowance as per Rule 8D. The Tribunal held that non-acceptance of the assessee's method implies dissatisfaction, and the AO is empowered to adopt the Rule 8D method. However, the Tribunal accepted the assessee's submission, supported by judicial precedents, that only investments yielding exempt income should be considered in computing the average value of investments for disallowance. This approach aligns with the decisions in ACB India Ltd. and Vireet Investment Pvt. Ltd.Key Evidence and Findings: The assessee had made a suo-moto disallowance of Rs. 20,56,871 based on 3% of exempt income, a method consistently followed and accepted in prior years. The AO computed disallowance at Rs. 25,86,319 by applying 1% on the average value of total investments, including those not yielding dividend income. The Tribunal found merit in the assessee's contention to exclude non-dividend yielding investments.Application of Law to Facts: The Tribunal directed the AO to recompute the disallowance under section 14A and the corresponding book profit under section 115JB in accordance with the legal principles established in the cited precedents, specifically excluding investments that did not yield exempt income.Treatment of Competing Arguments: The revenue argued for strict adherence to Rule 8D and rejected the suo-moto disallowance as unscientific and untested judicially. The Tribunal acknowledged that each assessment year is independent but found the assessee's method reasonable and supported by judicial authority. The Tribunal thus allowed the appeal on this ground for statistical purposes.Conclusion: The Tribunal allowed the ground relating to section 14A disallowance partially, directing recomputation excluding non-dividend yielding investments.2. Inclusion of Mutual Funds (Growth Option) in Section 14A DisallowanceThis issue was considered in conjunction with the first issue. The Tribunal agreed with the assessee's submission that Mutual Funds under Growth Option, which do not yield dividend income, should not be included in the disallowance computation under section 14A. This position is consistent with the principle that disallowance relates to expenditure incurred to earn exempt income, and where no exempt income is earned, disallowance is not warranted.3. Computation of Disallowance under Rule 8D(2)(ii) Only on Dividend-Earning InvestmentsThe Tribunal found merit in the assessee's contention that Rule 8D(2)(ii) disallowance should be computed only on investments yielding dividend income. This approach aligns with judicial precedents and avoids penalizing investments that do not generate exempt income. The AO was directed to follow this principle in recomputing disallowance.4. Disallowance of Employee Cost Provision as Contingent LiabilityLegal Framework and Precedents: Section 37 allows deduction of expenses incurred wholly and exclusively for business purposes but excludes contingent liabilities. The Supreme Court in CIT v. Gemini Cashew Sales Corporation held that contingent liabilities dependent on future events are not allowable deductions. However, subsequent decisions, including Housing & Urban Development Corporation Ltd. v. ACIT (Delhi HC), have allowed provisions made based on reasonably ascertained liabilities arising out of wage revisions.Court's Interpretation and Reasoning: The Tribunal found that the assessee had created a provision for the minimum amount payable to workers based on a revised wage agreement, which was an ascertained liability. The dispute related only to the excess amount claimed by workers, which was not provided for. The provision was thus not contingent but a reasonable estimate of liability. The Tribunal relied on the Delhi High Court decision in Housing & Urban Development Corporation Ltd. which held that such provisions are allowable business expenses.Key Evidence and Findings: The assessee submitted detailed working of the provision and the status of the dispute pending before the Labour Court. The Tribunal noted that the liability was accrued based on a past event and was reasonably certain.Application of Law to Facts: The Tribunal applied the principle that expenses or provisions for ascertained liabilities, even if disputed, are allowable deductions. Since the liability was not contingent but reasonably certain, the disallowance was not justified.Treatment of Competing Arguments: The revenue contended that the liability was unascertained and contingent since the Labour Court had not fixed it. The Tribunal rejected this, distinguishing the facts from Gemini Cashew and relying on more recent authoritative decisions.Conclusion: The Tribunal allowed the ground relating to disallowance of employee cost provision and directed its allowance as a business expenditure.5. Computation of Book Profit under Section 115JBThe Tribunal observed a discrepancy between the book profit figures in the assessment order and the computation sheet. It directed the AO to verify and correct the book profit figure accordingly. The Tribunal also noted that adjustments related to disallowance under section 14A and employee cost provision must be reflected correctly in the book profit computation as per section 115JB(2) and its explanation clauses.6. Initiation of Penalty Proceedings under Section 270AThe Tribunal did not specifically address the penalty proceedings under section 270A in the detailed analysis, and thus no determination was recorded on this ground.Significant HoldingsOn section 14A disallowance, the Tribunal held:'No specific procedure is prescribed either in the Act or in the Rules to record the non-satisfaction on the suo moto working of disallowance of assessee under section 14A, once, the AO has not accepted the working on disallowance that itself reflects his dissatisfaction.''Only investment which yielded exempt income is to be considered for the purpose of calculating average value of investment as per decision of special bench in ACIT v. Vireet Investment and Delhi High Court in ACB India Limited.'On employee cost provision, the Tribunal stated:'Provision made by assessee for revision of pay of its employees, as per recommendation of committee appointed by the government was to be allowed as a business expenditure.''Liability to pay the disputed amount depends on Labour Court decision, making it uncertain at the time of assessment. However, provision for the ascertained liability is allowable.'On book profit computation:'Adjustment made by AO is in consistent with law and binding precedent. The AO is directed to verify and correct the figure of book profit accordingly.'The Tribunal's final determinations were:The disallowance under section 14A is to be recomputed excluding investments not yielding exempt income, following judicial precedents.The employee cost provision made for ascertained liability arising from wage revision is allowable as a business expenditure.The book profit computation under section 115JB requires correction to reflect accurate figures.The appeal was partly allowed accordingly.