TaxTMI 
TaxTMI 
2011 (10) TMI 724
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.... expenses attributable to that income, the Assessing Officer was only right to disallow the expenses on proportionate basis. ii) On the facts and in the circumstances of the case and in law, the CIT(A) has erred in merely relying upon the predecessor's decision in assessee's case for assessment year 2003-04 and assessment year 2002-03 (order was u/s 154 of the Act) where as the issue of determination of the expenses is a question of fact and has to be determined/examined independently in each assessment year." iii) The CIT(A) failed to take cognizance of a. the rule 8D of IT Rules inserted by the IT(Fifth Amendment) Rule,2008,w.e.f. 24.3.2008 prescribed the method for determining amount of expenditure in relation to income not included in total income. b. The ITAT Special Bench Mumbai has in its judgment reported in 2008- TIOL-ITAT-MUM-SB has held that the provisions of sec. 14A are special in nature and has over riding effect over all other sections allowing deduction. It has also held Rule 8D to be retrospective of expenses attributable to earn tax free income should be applied as per Rule 8D of IT Rules. c. In case of Kapoor Chand,266 ITR 48(ITAT)All while interpreting....
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....TA No.4688/Del/2010 "1) On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in deleting the disallowance of ₹ 9,67,49,250/- made u/s 14A of the Income-tax Act, 1961 in respect of expenses attributable to income not forming part of total income. 2) The appellant craves to the allowed to amend, delete or add any other grounds of appeal during the course of hearing of this appeal." 2. At the out set, it may be pointed out that initially the appeal for the assessment year 2002-03 was dismissed by the ITAT vide their order dated 27.7.2009 and appeals for the AYs 2003-04 and 2004-05 were also dismissed vide order dated 18th December, 2008, for want of COD approval. Subsequently, the Revenue obtained COD approval and accordingly, the appeal for the AY 2002-03 was recalled vide order dated 15.10.2010 in MA no.303/Del./2010 while appeals for the AYs 2003-04 & 2004-05 were recalled vide order dated 25.6.2010 in MA nos. 146 & 147/Del./2010 after order dated 4.12.2009 of the Hon'ble High Court in ITA no. 1276/2009 . This is how these appeals came up for hearing before us along with appeal for the AY2007-08. 3. Adverting now to ground nos.1& 3 in the a....
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....ten back 16.78 Surcharge written back 4.38 others 7.93 Total 64.34 3.4 In this assessment year also, the amount was also added back while computing book profits u/s 115JB of the Act. 4. On appeal, the learned CIT(A), merely following his decision for the AYs 2001-02 and 2002-03, deleted the disallowance in the following terms:- "4.3 I have carefully considered the facts of the case and have gone through the order of the AO and the detailed submissions made by the ld. AR appearing for the appellant. I find that this very issue had earlier come up before my ld. Predecessors in appellant's own case for the AY 2001-02 & 2002-03 wherein issue has been discussed in detail and it was held that the addition made by the AO was not sustainable on the facts and in law. Since the facts and issue involved remain the same in the year under consideration also, I would concur with the order of my ld. Predecessors and hold that the addition of 616 lacs on account of prior period expenses is not justified. The same, is, therefore, deleted and the appellant gets a relief of ₹ 616 lacs." 4.1 Likewise, in the AY 2004-05, the ld. CIT(A) concluded as under: "4.3 I have carefully consi....
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....the claim for the aforesaid expenses in these two assessment years. On appeal, the ld. CIT(A) allowed the claim of the assessee on the basis of his findings for the assessment year 2001-02. The ld. DR did not enlighten us to as to whether Revenue preferred any appeal against the findings of the ld. CIT(A) in the AY 2001-02 . We find that on appeal by the assessee in the AY 2001-02 in relation to disallowance of ₹ 2.60 crores on account of prior period expenses, the ITAT vide their order dated 27.3.2009 in ITA no.4525/Del/2004 restored the issue of prior period expenses of ₹ 1.25 crores to the file of the AO, the remaining having been allowed by the AO u/s 154 of the Act. The AO, subsequently, allowed the claim of ₹ 1.25 crores also. 6.1 In the years under considerat ion, as is apparent on a mere glance at the impugned orders, the ld. CIT(A) did not care to analyse the nature of liabi lit ies under the relevant bil ls nor recorded any f inding as to whether or not the liability on account various expenses, comprising the amount of ₹ 616 lacs and ₹ 6432 lacs ,accrued or arose in the respective years under consideration. Admittedly, the assessee is follo....
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....e ground no.1 in the appeals for the AYs 2003-04 & 2004-05, afresh in accordance with law in the light of various judicial pronouncements, including those referred to above, after allowing sufficient opportunity to both the parties. Needless to say that while redeciding the issue, the learned CIT(A) shall pass a speaking order, keeping in mind, inter alia, the mandate of provisions of sec. 250(6) of the Act, bringing out clearly as to whether or not the liability for each item of the expenditure comprising the amount of ₹ 616 lacs and ₹ 64.32 lacs really crystallized in the hands of the assessee during the respective years under consideration. With these observations, ground no.1 in the appeals of the Revenue for the AYs 2003-04 & 2004-05, is disposed of. 6.2 As regards ground no. 3 in the appeal for the AY 2003-04 & a portion of ground no.4 in the appeal for the AY 2004-05, relating to addition of prior period expenses while determining book profits u/s 115JB of the Act, we find that the ld. CIT(A) followed his own order for the preceding assessment year. There is nothing to suggest as to whether or not the Revenue disputed the issue in further appeal before the ITAT ....
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....e or more prior periods. Therefore, the income or expenses relatable to prior period items are those which arise in the current period, i.e., the period relevant for the purposes of computing the net profit or loss. Clearly, prior period items are to be included in the determination of net profit or loss. Furthermore, paragraph 7 of AS 5 stipulates that the net profit or loss, inter alia, comprises of extraordinary items and the same should be disclosed on the face of the statement of profit and loss. From this, it is clear that both, "prior period items" as well as "extraordinary items" are to be included in the determination of net profit or loss. If a prior period item is an expense, it is obvious that it will go towards reducing the net profit or increasing the loss, as the case may be. On the other hand, if the prior period item is an income, it would go towards increasing the net profit or reducing the loss, as the case may be. The same is the position with extraordinary items which may be income or expenses. The conclusion that one can arrive at from this discussion is that prior period items and extraordinary items form part of the net profit or loss. ....
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....enue for the AYs 2003-04 & 2004-05, to the f ile of the ld. CIT(A), we consider it fair and appropr iate to restore the issue raised in ground no. 3 in the appeal for the AY 2003-04 & a portion of ground no.4 in the appeal for the AY 2004-05, relating to addition of prior period expenses while determining book profits , also to his file with the directions to examine the issue in the light of various judicial pronouncements including that referred to above and thereafter pass a speaking order in accordance with law after allowing sufficient opportunity to the assessee. With these directions, ground no. 3 in the appeal for the AY 2003-04 & a portion of ground no.4 in the appeal for the AY 2004-05, are disposed of. 7. Coming now to ground no.2 in the appeal of the Revenue for the AY 2003-04 relating to disallowance u/s 14A of the Act, the AO noticed during the course of assessment proceedings that the assessee claimed exemption of ₹ 60,96,45,500/- on account of interest on tax free bonds. To a query by the AO, the assessee replied that the assessee did not use loan funds for investment/current assets nor the assessee obtained any overdraft or cash credit limit for creating sun....
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....t the assessee company did not make any further investment decisions during the year,as evident from its Balance Sheet nor engaged in any trading activity in the bonds held by it. Moreover, borrowed funds were not utilized in acquiring these bonds and the company came to own the same by virtue of sovereign decision of the Government of India..Since there was no material on the basis of which the AO estimated the disallowance @ 2.5% of the administrative expenses, the ld. CIT(A) deleted the disallowance as also the addition made while determining book profits u/s 115JB of the Act. 8.1 Likewise in assessment year 2002-03, the ld. CIT(A) deleted the disallowance, relying upon his order for the assessment year 2003-04 in the following terms:- "4.3 I have carefully considered the facts of the case and have gone through the order of the AO and the submissions made on behalf of the appellant company. The undisputed facts are that the appellant company earned tax free interest income of ₹ 30,17,15,010/- and the overall business receipts amounted to ₹ 2831 cores. I find that the AO has disallowed proportionate expenses in relation to exempt income, which is worked out to S....
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....ly considered the facts of the case and have gone through the order of the AO and the submissions made on behalf of the appellant company. The undisputed facts are that the appellant company earned tax free interest income of ₹ 60.96 crores and the overall business receipts amounted to ₹ 2533 crores. I find that the AO has disallowed on an estimate basis expenses @ 2.5% of administrative expenses, which worked out to ₹ 2,31,57,500/-. The undisputed facts are that the appellant company did not make any further investment decisions during the year, as is evident from its balance sheet; it is also undisputed that it did not engage in any trading activity in the bonds held by it. The appellant did not borrow any funds for acquiring these bonds which have yielded the tax free income and, accordingly, no amount of interest paid was utilised for acquiring the tax free investments. I have also taken note of the fact that the appellant company did not even purchase these bonds on its own and came to own the same by virtue of sovereign decision of the Government of India. 5.3.1 Based on the above facts, I find sufficient merit in the contention of the appellant that the AO....
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...... But when Sec.14A has not given such specific power to the AO, he has no authority to estimate the expenditure which the assessee would have in the opinion of the AO incurred in relation to the exempted income. The words "in relation to" income which is exempt under the Act, no doubt, appear to be broad at first impression, but on deeper examination, and read in conjunction with the word "incurred", it seems to us that these are restrictive words, restricting the power of the AO to estimate e a part of the expenditure incurred by the assessee as relatable to the exempted income. It seems to us that implicit in the expression 'in relation to' is the concept that the AO be in a position to pin-point, with an acceptable degree of accuracy, the expenditure which was incurred by an assessee to produce non-taxable income; the word 'incurred' signifies that the expenditure must have been actually incurred, not notionally." 5.3.2 The case of the appellant is squarely covered by the above cited decision in the case of Eicher Ltd. As discussed hereinabove, there is no evidence or material on record in the present case authorising the AO to invoke section 14A for the purpose of disallowing....
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....actually incurred to earn the tax free income; in fact, it appears that he has proceeded on the presumption that some expenditure must have been incurred in relation to the earning of such tax free income. As discussed above, no disallowance is permissible on presumption or estimate basis; disallowance can only be made if it is established by the AO, with an acceptable degree of accuracy, that certain expenditure has been incurred in relation to the earning of tax free income. On overall consideration of the facts and the ratio of various decisions cited above it is held that there is no material on the basis of which the AO could have estimated and disallowed expenses @ 2.5% of administrative expenses. The said addition is, accordingly deleted and the appellant gets a relief of ₹ 2.83 crore." 8.3 In assessment year 2007-08, the learned CIT(A) following his decision in the AYs 2005-06 and 2006-07 deleted the disallowance as under:- "2.2 I have carefully considered the submissions of the leaned AR and perused the order passed by the Assessing Officer. The Assessing Officer has made disallowance of Rs. `6,97,49,250/- as the appellant has earned dividend income of `Rs.1,20,00....
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....re by way of interest for investment in tax free bonds. In fact, the tax free bonds were acquired on the orders of the Government on conversion of sundry debtors of State Electricity Boards, facing financial crunch. The AO disallowed 2.5% of the administrative expenses for earning interest income from tax free bonds in the assessment years 2002-03 to 2004-05 while in assessment year 2007-08 disallowance has been made having recourse to provisions of rule 8D of the I.T. Rules, 1962. There is no material before us, suggesting that the assessee incurred any expenditure by way of administrative expenses for earning interest income in these four assessment years nor the AO identified any item of such expenditure for earning the interest income. In these circumstances, the estimated disallowance made by the AO ,without establishing the nexus between administrative expenses and interest income from tax free bonds, cannot be sustained. 11. We find that the Hon'ble Bombay High Court in their decision dated 12.8.2010 in case of Godrej & Boyce Mfg.Co.Ltd. Mumbai while holding that Rule 8D, inserted w.e.f 24.3.2008 cannot be regarded as retrospective because it enacts an artificial method of ....
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....income. The basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure. On the same analogy the exemption is also in respect of net income. Expenses allowed can only be in respect of earning of taxable income. This is the purport of section 14A. In section 14A, the first phrase is "for the purposes of computing the total income under this Chapter" which makes it clear that various heads of income as prescribed under Chapter IV would fall within section 14A. The next phrase is, "in relation to income which does not form part of total income under the Act". It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A. Further, section 14 specifies five heads of income which are chargeable to tax. In order to be chargeable, an income has to be brought under one of the five heads. Sections 15 to 59 lay down the rules for computing income for the purpose of chargeability to tax under those heads. Sections 15 to 59 quantify the total income chargeable to tax. The permissible deductions enumerated in sections 15 to 59 are now to be allowed only wi....
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....ssed. 12. Ground no.3 in the appeal of the Revenue for the assessment year 2004- 05, related to disallowance of ₹ 3.82 crores . The AO noticed that the assessee claimed an amount of ₹ 3.82 crores by way of provision for medical benefits post retirement. To a query by the AO, the assessee replied that the provision for the post retirement medical benefits was an ascertained liability. Since the assessee was under obligation in terms of employment to provide its employees the benefit of medical facilities for post retirement and the liability was based on actuarial valuation of the present value of future liability in terms of Accounting Standard- 15 issued by the Institute of Chartered Accountants of India on Accounting of Retirement Benefits etc. , the claim was allowable, the assessee pleaded. Inter alia, the assessee relied upon decisions in Metal Box company of India Limited vs. its Workmen (1969) 73 ITR 53 (SC),Bharat Earth Movers Limited vs. CIT (245 ITR 428 (SC),Protos Eng. Co. Private Limited vs. CIT (282 ITR 550) (Bom.),CIT vs. Mahindra and Mahindra Limited 150 Taxman 451 and National Aluminium Company Limited vs. DCIT 101 TTJ 948. However, the AO did not accep....
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....tentions of the appellant that/the provision made for retirement benefits on the basis of actuarial valuation is not a contingent liability and is allowable as a deduction. I have taken note of the decision of the Hon'ble Supreme Court in the case of Metal Box Co. of India Ltd.(supra),wherein it has been held that the provision for gratuity on actuarial variation represents real liability and can not be said to be a contingent liability. The appellant's case is also found to be supported by the decisions rendered by the Hon'ble Supreme Court in the case of Bharat Earth Movers Ltd.(supra),by the Hon'ble Bombay High Court in the case of Protos Engg. Co.(P) Ltd.(supra) and in the case of Mahindra & Mahindra Ltd.(supra).The appellant's case,in particular, is covered by the decision of the ITAT,Cuttack Bench in the case of NALCO vs. DCIT(101 TTJ 948),which has specifically considered the question of allowability of provision made in respect of post retirement medical benefits based on actuarial valuation. It has been held that such a provision for post retirement medical benefit made on actuarial valuation is allowable as a deduction since the same is not a contingent liability but repr....