2025 (10) TMI 1300 - AT - Income Tax

Quashed s.14A r/w Rule 8D disallowance; remanded leave encashment, pension, PRMB and s.40A(9) claims; s.36(1)(va) upheld

ITAT Del. (AT) quashed the AO's s.14A r/w Rule 8D disallowance against exempt dividend income for lack of nexus and required satisfaction, directing its ... Disallowance of indirect expenses u/s 14A r/w rule 8D(2)(ii) against the total exempt dividend income from UTI treasury units daily dividend reinvestment plan - assessee vehemently stated that no examination of books of accounts in relation to expenses of exempt dividend income was carried out by AO, no satisfaction was recorded by AO for his findings in the order - HELD THAT:- It is true that the assessee has earned dividend income which has been claimed as exempt. It is equally true that certain expenses need to be disallowed u/s 14A of the Act r.w.r. 8D of the Rules. There is no dispute that the assessee has received dividend income accrued from SBI Mutual Fund. Also there is no satisfaction recorded by the AO which is against the legal principles. No working was made by the AO as to which expenses appearing in the P & L A/c are co-related to dividend income when there is clear assertion by the assessee that no expenses have been incurred in relation to earning exempt income of dividend. Assessing Officer observed as under: 'However the assesse company did not debit any expenses to profit and loss account relating to exempt income.' It is thus, evident from the above that the Assessing Officer has himself mentioned that there is no expenditure which is directly attributable to the exempt income and disallowances have been made only considering the past history of the assessee. The past history, i.e, A.Y 2011-12 to AY 2014-15 shows that this issue has been decided in favour of the assessee and against the Revenue by the ITAT and confirmed by the hon’ble Delhi High Court. As no nexus has been established between the exempt income and disallowance and no distinguishing decision has been brought to our notice, we direct the Assessing Officer to delete the impugned disallowance. Ground No. (ii) is allowed. Additions on account of Provisions for leave encashment and Reversal of liability - AO did not allow deductions o claimed in the revised taxable statement of income - HELD THAT:- We find that the issue of allowability of contributory pension determined with actuarial valuation; and the allowability of issue of PRMB has not been critically examined and verified by the AO. We are therefore of the considered view that the issue of actuarial valuation of Pension contribution and its allowability under the Income Tax Act as per the Indian Accounting Standard and provisions for PRMB be set aside to the file of the AO for a fresh adjudication. Needless to add that the AO shall keep in mind the applicability of the decision of Ranbaxy Laboratories Ltd. [2011 (3) TMI 1032 - DELHI HIGH COURT]. The ground (iii) is allowed for statistical purposes. Corporate membership Gymkhana Club, Life time membership of Delhi Management Association and Expenses on refreshments - We are of the considered view that the expenditure towards club membership is allowable in the light of the hon’ble Supreme Court in the case of United Glass Mfg. Co. Ltd [2012 (9) TMI 914 - SUPREME COURT] and the advertisement expense towards bringing out Tender & other business advertisement are allowable expense u/s 37(1). The ground (iii) is partly allowed for statistical purposes. Disallowance u/s 36(1)(va) - employees’ contribution to the Provident Fund deposited beyond the due date as prescribed in the respective PF/ESIC Act - HELD THAT:- The issue is no more res integra as the quarrel is now settled by the decision of Checkmate Services [Pvt] Ltd [2022 (10) TMI 617 - SUPREME COURT (LB)]. Thus, we hold that the adjustment u/s 143(1) made on account of delayed payment of PF/ESIC is legally justified and sustainable. Disallowance u/s 40A (9) as allowable being grant/subsidy to worker's association under Maharashtra state labours laws - We are of the considered view that the issue of grant in aid/contribution given to employee association/union for welfare under Maharastra Labour Law and its allowability u/s 40A(9) be remanded back to the Ld. AO for verification of facts and fresh adjudication, and follow the ITAT order (supra) of AY 2019-20. The ground (vi) is allowed for statistical purposes. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether disallowance of indirect expenses under section 14A read with Rule 8D(2)(ii) is sustainable where Assessing Officer recorded no satisfaction, made no nexus findings to exempt dividend income, and the assessee asserts no expenses were incurred in relation to earning the exempt income. 2. Whether the value of an investment in a joint venture (from which no exempt income accrued during the relevant year) may be included in computing average value of investments under Rule 8D(2)(ii) for disallowance under section 14A. 3. Whether deductions claimed in a revised taxable income statement filed during assessment (large provisons determined by actuarial valuation, PRMB, corporate club membership, advertisement) may be allowed where AO did not consider them and did not record reasons; and whether such claims require remand for verification. 4. Whether employer/employee pension provision (created and debited to P&L based on actuarial valuation and governed by CCS/Trust rules) and provision for post-retirement medical benefits (PRMB) are allowable deductions or require fresh adjudication by AO in light of accounting standards and judicial precedents. 5. Whether disallowance under section 36(1)(va) of employees' provident fund/ESI contributions deposited after statutory due date but during the previous year (and whether CPC may effect such disallowance in intimation under section 143(1)) is sustainable following binding Supreme Court authority and subsequent tribunal decisions. 6. Whether a small grant/contribution to employee welfare (claimed under section 40A(9)) is allowable where it was reported as not allowable in Tax Audit Report and AO/CIT(A) have not adjudicated the facts. 7. Whether unexplained discrepancy (differential amount) identified in CPC discrepancy sheet must be remanded for AO verification where particulars are lacking. 8. Whether computation of interest under sections 234A, 234B and 234C is to be considered where underlying adjustments are consequential. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Disallowance under section 14A read with Rule 8D(2)(ii) Legal framework: Section 14A disallows expenditure in relation to exempt income; Rule 8D prescribes methodology for computing disallowance when AO cannot identify actual expenditure attributable to exempt income. Precedent treatment: Coordinate bench and Delhi High Court earlier decisions in assessee's similar matters (AYs 2011-15 etc.) deleted Rule 8D disallowances where AO failed to record satisfaction or make nexus findings. CBDT circulars invoked by AO treated as guidance but do not substitute statutory requirement of recorded satisfaction. Interpretation and reasoning: The Tribunal found AO recorded that no expenses were debited to P&L in relation to exempt income and made no satisfaction or working showing nexus between any P&L items and exempt dividends. Disallowance was based on past history rather than contemporaneous findings. Where AO has not recorded requisite satisfaction and has not correlated specific expenses to exempt income, Rule 8D cannot be applied mechanically. Ratio vs. Obiter: Ratio - AO must record satisfaction and/or make working showing nexus before invoking Rule 8D(2)(ii); prior coordinate bench and High Court findings supporting deletion are binding on similar facts. Obiter - reliance on CBDT circulars without nexus findings is insufficient. Conclusion: Disallowance of Rs. 6.74 crore under section 14A r.w. Rule 8D(2)(ii) deleted and remitted as not sustainable on the facts; issue allowed for assessee. (Related question of including joint venture investment in average value was not separately adjudicated by Tribunal on merits.) Issue 2 - Inclusion of joint venture investment in average value under Rule 8D(2)(ii) Legal framework: Rule 8D(2)(ii) requires computation of average value of investments for applying formula-based disallowance. Precedent treatment: Not specifically adjudicated to a final finding by Tribunal in this order; it was raised as a without-prejudice ground by assessee challenging AO's inclusion. Interpretation and reasoning: Because main Rule 8D disallowance was deleted for lack of satisfaction and nexus, the Tribunal did not separately decide the inclusion of the joint venture's investment in the average value computation; issue remains linked to the Rule 8D analysis and would be subsumed if AO seeks to revisit with proper recorded satisfaction and working. Ratio vs. Obiter: Obiter - no conclusive ratio laid down as matter remitted/undeveloped. Conclusion: Question left open; not decided on merits given deletion of impugned disallowance on procedural and nexus grounds. Issue 3 - Deductions claimed in revised taxable income statement (provisions, PRMB, club/advertisement) Legal framework: Deductions under sections 30-43 and general business expenditure (section 37); taxability interplay with Indian Accounting Standards (Ind AS) and section 43B for timing of allowance; AO's duty to record reasons and give opportunity when making additions. Precedent treatment: Jurisprudence (Ranbaxy cited) clarifies that payments to funds for employee benefit are deductible only when actually paid under section 43B; however treatment of actuarial provisions and trust funding requires case-specific analysis aligned with accounting standards and statutory provisions. Interpretation and reasoning: AO did not discuss or give reasons for non-consideration of the claimed deductions; issues of actuarial valuation, Employee Pension Trust credits and PRMB were not examined. Tribunal directed remand to AO for fresh adjudication with specific instruction to consider applicable Delhi High Court precedent (Ranbaxy) and relevant accounting standards. For club membership and business advertisement, Tribunal applied Supreme Court authority permitting such business expenses and allowed those items (club membership and advertisement) as allowable under section 37(1). Ratio vs. Obiter: Ratio - where AO fails to examine or record reasons on substantial deductible claims raised in a revised statement filed during assessment, matter should be remitted for verification and fresh adjudication. Tribunal applied established law on club/advertisement (ratio) and remanded actuarial/provision items (procedural direction, ratio-bound to facts). Conclusion: Substantial actuarial pension and PRMB items remanded to AO for fresh adjudication; club membership and advertisement expenses allowed. Ground partly allowed for statistical purposes. Issue 4 - Allowability of employer pension provision determined by actuarial valuation Legal framework: Interaction of tax law with accounting treatment (AS-15/Ind AS) and section 43B; treatment of employer contributions to pension trusts governed by statutory rules and payment timing. Precedent treatment: Delhi High Court decision (Ranbaxy) noted; Tribunal directed AO to have regard to that authority when adjudicating allowance of pension contributions determined by actuarial valuation and debited to P&L. Interpretation and reasoning: Tribunal observed that facts and accounting nature of the pension obligation (payable on retirement/resignation, fixed entitlement) require verification. Because AO had not examined the allowability in light of Ind AS and statutory scheme, matter remanded for AO to consider with reference to relevant case law. Ratio vs. Obiter: Ratio - allowability of actuarial pension provision cannot be decided without factual and legal verification by AO; direction to follow judicial precedent is binding in adjudication. Conclusion: Remanded to AO for fresh decision; ground allowed for statistical purposes. Issue 5 - Disallowance under section 36(1)(va) of delayed PF/ESI contributions and CPC power under section 143(1) Legal framework: Section 36(1)(va) disallows employer deduction for employees' contributions to PF/ESI not deposited by due date; CPC processes returns and may make adjustments under section 143(1). Precedent treatment: Supreme Court decision in Checkmate Services holds delayed employee contribution deposits are not allowable; subsequent tribunal decisions (including Savleen Kaur) apply the Supreme Court ratio to adjustments in intimation under section 143(1) and uphold CPC's power to make such adjustments. Mumbai Tribunal decision distinguishing applicability of 143(1) was considered but distinguished by Delhi Tribunal. Interpretation and reasoning: Tribunal followed binding Supreme Court precedent and subsequent tribunal decisions holding that a mechanical distinction between 143(1) and 143(3) does not defeat the substantive ratio. CPC's adjustment under 143(1) removing deduction for late deposit is valid and within power. Ratio vs. Obiter: Ratio - employee contributions deposited after due date are not deductible; CPC can lawfully make such adjustments under section 143(1) in light of Supreme Court authority. This is presented as binding precedent application rather than obiter. Conclusion: Grounds challenging disallowance under section 36(1)(va) and CPC's power dismissed; adjustment sustained. Issue 6 - Allowability under section 40A(9) of grant to employee welfare/union Legal framework: Section 40A(9) permits certain payments to employee welfare funds/unions to be deductible if genuine and for welfare; Tax Audit reporting may incorrectly classify items. Precedent treatment: Coordinate bench previously allowed similar amount for AY 2019-20; AO had allowed in appeal effect as per direction of ITAT in that AY. Interpretation and reasoning: Tribunal noted absence of adjudication by AO on facts and directed remand to AO for verification and fresh adjudication, following prior coordinate bench order. No opposition from Revenue on remand. Ratio vs. Obiter: Ratio - where factual basis for allowable grant exists and prior ITAT direction exists, AO should verify and adjudicate; Tribunal remanded for verification. Conclusion: Ground allowed for statistical purposes and remitted to AO. Issue 7 - Differential discrepancy of Rs. 199.18 lakh in CPC sheet Legal framework: CPC discrepancy sheets must be supported by particulars; assessee entitled to particulars and verification if unexplained differences affect tax computation. Precedent treatment: Not directly cited; standard practice to remit unexplained discrepancies for verification. Interpretation and reasoning: Tribunal observed lack of detail in discrepancy sheet and directed remand to AO to verify factual position and allow claim if fit. Ratio vs. Obiter: Ratio - unexplained CPC discrepancies should be sent back to AO for verification. Conclusion: Ground allowed for statistical purposes and remitted. Issue 8 - Interest under sections 234A/234B/234C Legal framework: Interest consequences follow from determination of taxable income and tax liability adjustments. Interpretation and reasoning: Tribunal treated computation of interest as consequential; no independent adjudication given pending remand/adjustments. Ratio vs. Obiter: Obiter/consequential ruling - interest to be recomputed in conformity with final tax adjustments made after remand/adjudication. Conclusion: Consideration deferred as consequential.