2025 (11) TMI 152 - AT - Income Tax

Appeal allowed against Rule 8D disallowance: AO wrongly used total investments and included advances to associates.

ITAT allowed the challenge to Rule 8D disallowance, finding AO's computation used total average investments instead of only investments yielding dividends ... Disallowance u/s 14A by invoking Rule 8D(2)(ii) and 8D(2)(iii) of the Income Tax Rules - AO had applied 0.5 per cent of total average investments instead of average investments which had yielded dividend income and hence computation of disallowance was entirely misconceived in law - HELD THAT:- Reliance can be placed on ACB India Ltd. [2015 (4) TMI 224 - DELHI HIGH COURT], thus AO has erred while making disallowance when had proceeded to adopt the figure of average investment by adopting opening investment at Rs. 7,19,34,283/- and closing investment at Rs. 9,15,00,213/-; whereas the assessee had not made any such investments for earning dividend income. Thus all investments had been made in respect of advances made to its associate companies and were in the course of carrying on the business and not for the purpose of earning any dividend, other than an investment of Rs. 14,18,507/- on which never any dividend had been earned. Infact, no dividend had ever been earned on such investment right from the inception till date. Thus assessee succeeds on this issue. Disallowance of the foreign traveling expenses - as submitted by AO had made an ‘arbitrary disallowance’, despite the fact that the assessee had furnished the complete details of expenditure incurred by the directors on traveling to UK - HELD THAT:- Appellant has incurred the expenses on foreign travel in the preceding assessment year also details of which is appearing at pages 45 of PB and in none of the preceding assessment year, such expenses had been disallowed. Thus we assume expenditure was incurred during the course of business and for the purpose of business and the travel had been undertaken to explore and open new centers in U.K. to expand its existing activities in the field of education. The finding of the AO that the assessee had failed to furnish any documentary evidence in support of the expenses seems to be erroneous and is contrary to evidence on record, as is evident from the copy of ledger account as had also been furnished before the learned CIT(A) and same shows that all the expenses are not only vouched but were duly incurred through cheques. Even otherwise in the absence of any basis of estimate of 20%, the estimate made of disallowance is entirely arbitrary. Thus on this count too assessee succeeds. Conditional grants towards providing scholarships in the programme fee - inchoate receipts - assessee had claimed deduction of said sum as business loss/business expenses allowable to it u/s 28(1)/37(1) of the Act - claim so made had been disallowed on the ground that the refund made is neither a business loss nor is a business expenditure and as such the claim of deduction had been disallowed - HELD THAT:- It is not out of any misconception of law that the impugned sums received were offered as income, but, it is more out of the subsequent events wherein the amounts received on account of providing scholarships were found to be received in violation of the mandate of law requiring establishment of charitable activity of CMV Education Society in giving funds to the assessee before us. As the coordinate Bench has sustained and concluded that the ld. tax authorities were right in their decision to hold CMV Education Society to be in default of giving funds for non-charitable activity that issue finding would operate as issue res judicata against the present assessee because the assessee herein claims to have received money from M/s Sad Bhawna Trust and M/s CMV Education Society under an obligation for providing scholarships in the programme fee to financially weak and meritorious students. Now, admittedly, no such scholarships are provided by the present assessee. This only indicates that the receipts though alleged to be conditional or inchoate receipts were, in fact, received during the respective years as income but subject to an outstanding obligation. Thus, the claim that the sum was erroneously included in the total income is not sustainable. Even otherwise, on the basis of the decisions relied by the ld. Sr. Counsel, we are not impressed to accept that the amounts received were inchoate receipts as the same depended on its obligation to utilize the same in accordance with the terms of the MOU and as same were not used for the purpose, thus, do not constitute income for the relevant year. Memorandum of Understanding between the two trusts or societies expressly provide the obligations to be fulfilled. Failure of the assessee to fulfill the obligations would result in breach of obligation and if the amount is returned in subsequent years, then, it will not be a case that erroneously the receipts not representing income chargeable to tax were included in the total income. The obligation here was not utilization of any amount received as gift so to have become an endowment with the assessee to be used for fulfilling the obligation. But, the amounts received were to be utilized by the assessee at its discretion with no control of the two payers. As the complete discretion to use the funds vested with the assessee, the mere fact that the assessee was supposed to use the funds as per the MOU does not make the receipts fall in the category of inchoate receipts. The consideration in any contract may not be in cash, but, any obligation which is enforceable under law falls in the definition of consideration. The obligation here in the hands of the assessee was to use the funds for giving scholarships as per the MOU. This was an enforceable obligation. Had the occasion arisen, the payers had remedy under law to enforce the obligation or to recover the money back. Clear case of quid pro quo is involved. Thus not making out a case of inchoate receipts. Certainly, the burden lies upon the Department to prove that a receipt is to be taxed as income. However, when the assessee has claimed a receipt to be income and then wants to change the stand claiming that the same was done erroneously, the assessee has to also prove that the error was out of any misinterpretation of law or factual error. But, here when the assessee claims that the receipts came along with an obligation and as the obligation was not fulfilled, therefore, the receipts had to be returned, then, that cannot be considered to be a case of any factual error or erroneously out of misinterpretation of law, including the receipts in total income. It is an admitted case of the assessee that in the subsequent year when the amounts were returned, they have been disallowed as not falling u/s 37 of the Act and the consequential appeals of the same are pending before the Tribunal which are yet to be decided. Thus, also the assessee cannot claim of any finality being arrived with regard to the assertion that the receipts were inchoate receipts. Thus, in the given facts and circumstances as discussed above, we are not inclined to accept the plea of the assessee raised by way of additional grounds and the additional grounds are decided against the assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether disallowance under section 14A read with Rule 8D(2)(ii) and 8D(2)(iii) of the Income-tax Rules can be computed on total average investments when only a portion of investments actually yielded exempt (dividend) income. 2. Whether a 20% arbitrary disallowance of foreign travelling expenses is sustainable where the assessee furnished ledger entries, vouchers and evidence showing travel was for business expansion and expenses were paid by cheque. 3. Whether sums received from two grantors under MOUs (conditional grants for scholarships) and subsequently returned constitute inchoate/non-taxable receipts such that their earlier inclusion as income can be corrected in appeals for the relevant years. 4. Whether an orally raised ground challenging the validity or application of approval under section 153D could be admitted without supporting material showing lack of application of mind by the approving authority. ISSUE-WISE DETAILED ANALYSIS - Disallowance under section 14A / Rule 8D Legal framework: Section 14A read with Rule 8D of the Income-tax Rules permits disallowance of expenditure in relation to income which does not form part of total income (e.g., exempt dividend income). Rule 8D prescribes computation methods - including applying percentages to average investments - to quantify such expenditure when direct apportionment is not possible. Precedent treatment: The Bench relied on the principle in ACB India Ltd. v. ACIT (as cited) that disallowance under Rule 8D must be based on investments which actually yielded exempt income; not on total investments unrelated to exempt income. Interpretation and reasoning: The AO applied 0.5% to total average investments (opening and closing balances) including investments not yielding any dividend, while the assessee's records showed most investments were advances to related parties made in the course of business and an opening balance of only Rs. 14,18,507 in investments 'other than strategic investment' on which no dividend had ever been earned. The Tribunal found the AO's computation misconceived: where investments did not generate exempt income and were business-related or strategic, attributing notional expense on entire investment corpus was impermissible. Ratio vs. Obiter: Ratio - Disallowance under Rule 8D must be computed with reference to the quantum of investments that actually produced exempt income; applying the statutory percentage to the entire investment corpus (including business advances and strategic investments not yielding exempt income) is erroneous. Obiter - Reference to ACB India Ltd. supports this correct application. Conclusions: The Tribunal set aside the impugned disallowance of Rs. 4,08,586 (insofar as based on Rule 8D(2)(iii) applied to total investments) and upheld deletion of a smaller disallowance previously deleted by CIT(A); the assessee succeeds on this issue. ISSUE-WISE DETAILED ANALYSIS - Foreign travelling expenses disallowance Legal framework: Business expenditure is allowable if incurred wholly and exclusively for business purposes and properly vouched; AO bears onus to show non-business character or illegitimacy of claimed expenses to justify disallowance under general provisions (e.g., section 37). Precedent treatment: No separate precedent cited by parties for percentage disallowance; Tribunal applied established principle that arbitrary estimates by AO without basis are unsustainable where vouchers and transactional evidence exist. Interpretation and reasoning: The AO applied a flat 20% disallowance without disputing that the travel was undertaken for business or providing a reasoned basis for the percentage. Assessee produced ledger entries and proof of payment by cheque and asserted travel related to exploring/establishing overseas centres. The Tribunal found the AO's approach arbitrary, and that record evidence supported business purpose and vouching of expenses; historical consistency in treatment in prior years reinforced the business character. Ratio vs. Obiter: Ratio - Arbitrary percentage disallowance is unsustainable in absence of reasoned basis or specific evidence contradicting business purpose when expense vouchers and payments are produced. Obiter - Consideration that prior years' treatment is relevant but not determinative. Conclusions: The Tribunal held the 20% reduction to be arbitrary and restored the expenditures to the extent challenged; the assessee succeeds on this issue. ISSUE-WISE DETAILED ANALYSIS - Character of conditional grants (inchoate receipts / correction of earlier inclusion) Legal framework: Whether a receipt is taxable income depends on its character - true donations/gifts without quid pro quo may be non-taxable; however, receipts given under enforceable contractual obligations, or that carry an enforceable obligation on the recipient, may constitute consideration/receipts taxable as income. Principles from Parimisetti Seetharamamma v. CIT and Commissioner of Expenditure Tax v. P.V.G. Raju recognize that some receipts are not income when given without material return; Hindustan Housing considered contingent inchoate rights. Precedent treatment: The Tribunal considered a coordinate-bench decision dealing with the payor (the society) which disallowed charitable exemption and treated funds as not applied for charitable purposes because funds were funneled back to commercial group entities; that decision found collusion and treated funds as not used for charitable activity, denying sections 11/12 benefit to the payor. Interpretation and reasoning: The assessee argued the receipts were conditional grants for scholarships and therefore inchoate/not income. The Tribunal examined the MOUs and the subsequent findings against the payor society that funds were not used for charitable purposes and could be recovered. It held: (a) the MOUs imposed enforceable obligations on the assessee to use funds for scholarships (quid pro quo/enforceable consideration), (b) funds vested at the assessee's discretion subject to contractual obligation (not mere endowments), and (c) subsequent events (payor's failure to establish charitable usage and requirement to refund) indicate the receipts were not innocuous inchoate donations at time of receipt but were accompanied by enforceable obligations making them taxable when received. The Tribunal also noted that the assessee later sought deduction for refunds in a subsequent year and those issues remained undecided, so there was no settled factual basis to treat the earlier receipts as erroneously taxed. Ratio vs. Obiter: Ratio - Receipts received under MOU with enforceable obligations and quid pro quo are not to be treated as inchoate non-income merely because labelled as conditional grants; subsequent findings about the payor's non-charitable application of funds and the assessee's failure to fulfill scholarship obligations negate a claim of mere inadvertent misclassification. Obiter - Discussion distinguishing case law where pure donations without material return were held non-taxable; those precedents are distinguishable where contractual obligations/enforceability exist. Conclusions: The Tribunal refused to admit or allow the additional grounds seeking exclusion of these receipts from assessed total income for the relevant years; the pleas that such receipts were included by misconception of law were rejected. ISSUE-WISE DETAILED ANALYSIS - Admission of oral ground challenging approval under section 153D Legal framework: Grounds raised in appeals must have factual or legal basis and cannot be admitted when claim is purely factual without supporting material, particularly when opposing side has no opportunity to meet new factual assertions. Interpretation and reasoning: The orally raised ground alleged that approval under section 153D was not in accordance with law. The Tribunal found the ground involved factual allegations about the approval's content and the approving authority's application of mind; no material was produced to substantiate that inference and allowing the ground would prejudice the Revenue without opportunity to rebut. Ratio vs. Obiter: Ratio - An additional ground alleging factual infirmity in statutory approvals will not be admitted without supporting material showing the basis for the allegation; absence of such material justifies refusal. Obiter - A purely legal challenge might be admitted; this particular ground had factual overlay and was therefore not admitted. Conclusions: The oral ground was not admitted for want of supporting material; the Tribunal declined to entertain it. Disposition cross-references: The rejection of the additional grounds concerning inchoate receipts is linked to (a) the coordinate bench's findings on the payor's misuse of funds and (b) the existence of enforceable obligations under the MOUs; see the analyses of issues 1-3 above.