TaxTMI 
TaxTMI 
2018 (6) TMI 1177
X X X X Extracts X X X X
X X X X Extracts X X X X
....of expenses incurred in relation to exempt income u/s 14A r.w.r. 8D, disallowance of unpaid service tax liability u/s 43B of the Act for Rs. 54,78,681 and adhoc disallowance of expenses of Rs. 5 lakhs. 3. Aggrieved by the assessment order, assessee preferred appeal before the CIT(A). Before the CIT(A), the assessee made threefold arguments on the issue of disallowance of expenditure incurred in relation to exempt income u/s 14A r.w.r. 8D. The first and foremost argument of the assessee is that the AO has not recorded his satisfaction having regard to the accounts of the assessee in respect of expenses incurred in relation to exempt income which is a pre-condition as per the provisions of section 14A(2). The AO has not recorded his satisfaction about incorrectness of claim made by the assessee having regard to its accounts. The AO has disallowed expenses by applying the principles of Rule 8D(2). The assessee also made an alternative submission challenging amount quantified by the AO u/r 8D(2)(ii) of I.T. Rules, 1962 by stating that the assessee's own funds in the form of share capital, reserves, interest free unsecured loans and advances collected from customers is more than the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f disallowance of expenditure incurred in relation to exempt income u/s 14A by holding that although the assessee has made various arguments including the theory of mixed funds, failed to furnish necessary evidences including bank statements and cash flow statement to prove that as on the date of investment, it is having sufficient own funds to cover up investment made in partnership firm. Therefore, the AO was right in quantifying disallowances by invoking rule 8D(2)(ii). The Ld.CIT(A) also rejected alternative plea of the assessee by holding that there is no fault in the computation of the average value of investments and average value of assets. The investment considered in rule 8D computation is only in respect of investments in the firm from which tax exempt income is earned. However, the presumption underlying the rule 8D(2) computation is that the pro-rata cost for already available funds is considered as having been incurred for making investments which has resulted in tax free income. Since the AO has rightly taken total interest debited in the P&L account and also applied the principles prescribed u/r 8D(2)(ii), there is no error in the quantification made by the AO towar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nts of the assessee is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to the income which does not form part of the total income under this Act, shall determine disallowance by invoking rule 8D(2) by applying prescribed method. In this case, there is no iota of evidence in the assessment order of any kind of satisfaction arrived at by the AO having regard to the accounts of the assessee. Therefore, the Ld.CIT(A) was completely erred in confirming addition made by the AO. The Ld.AR further referring to the decision of Hon'ble Supreme Court in the case of Maxopp Investments Ltd vs CIT (2018) 402 ITR 640 (SC) submitted that the Hon'ble Supreme Court has categorically observed at para 41 of the order that before applying the rule, AO needs to record satisfaction that having regard to the account of the assessee, suo moto disallowance u/s 14A was not correct. In this regard, he relied upon the decision of Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg Co Ltd vs ACIT 328 ITR 81(Bom). The Ld.AR further submitted that alternatively, the assessee has its own interest free funds in the form of share capital and reserves....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed various expenditure towards employee cost and other general overhead expenses. Therefore, the claim that no expenses were incurred for earning exempt income including interest is not correct. According to the AO, disallowance contemplated u/s 14A shall be determined in accordance with prescribed method provided u/r 8D of Income-tax Rules, 1962. 10. It is the contention of the assessee that the AO has not recorded his satisfaction having regard to the books of account of the assessee in respect of expenditure incurred in relation to exempt income which is a pre-condition for invoking Rule 8D(2) which is very clear from the provisions of sub section (2) of section 14A of I.T. Act, 1961. Unless the AO records his satisfaction about incorrectness of claim of the assessee or that no such expenditure has been incurred for earning exempt income, then the AO has to categorically record his satisfaction that the assessee has incurred such and such expenditure which is directly relatable to earning exempt income. The assessee further contended that there is no iota of evidence in the assessment order about AOs satisfaction in respect of incorrectness of claim of the assessee. The asses....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oposition is further supported by the decision of Hon'ble Supreme Court in the case of Maxxopp Investments Ltd vs CIT (supra) wherein in para 41 of the order, the Hon'ble Court observed that the AO needs to record satisfaction that having regard to the accounts of the assessee, suo moto disallowance u/s 14A was not correct. It will be in those cases, where the assessee, in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality he has to record his satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by the assessee for making the investment in shares is to be examined by the AO. In this case, on perusal of the facts available on record, though the AO in a cryptic manner said that "I am not satisfied with the claim of the assessee that no expenses were incurred for earning exempt income and the expenditure relates to the exempt income is to be determined as per Rule 8D(2) of the Income-tax Act, 1962", filed to record a satisfaction having regard to the accounts of the assessee that the assessee has incurred particular expense in relation to earn exempt income. Since the AO has not recorde....
X X X X Extracts X X X X
X X X X Extracts X X X X
....whom it has sold flats under construction and collected service tax thereon; however, the same has not been paid to the government account, therefore, called upon the assessee to explain as to why unpaid service tax liability shall not be disallowed under the provisions of section 43B of the Act. In response to show cause notice, assessee vide letter dated 22-02-2014 submitted that though it has collected service tax from few customers on sale of flats, the same has not been remitted to the government account for the reason that the levy of service tax on builders has been challenged before the jurisdictional High Court, by Maharashtra Chamber of Housing Industry and the Hon'ble High Court vide its order dated 23-07-2010 granted interim stay from coercive collection of tax by the department till the regular appeal filed by the association on the constitutional validity of levy of service tax is decided. Since the Hon'ble Bombay High Court has seized the matter and also granted interim stay from recovery of taxes, the assessee has treated service tax collected from customers as current liability; however, the same has been paid in the subsequent financial year as soon as the Hon'ble....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hi High Court in the case of CIT vs Noble & Hewitt India Pvt Ltd (2008) 305 ITR 324 and the decision of Hon'ble Bombay High Court in the case of CIT vs Ovira Logistics Pvt Ltd (2015) 377 ITR 129 (Bom). 17. On the other hand, the Ld.DR strongly supporting the order of the CIT(A) submitted that the lower authorities have brought out clear facts in the light of decision of Hon'ble Supreme Court in the case of Chouringhee Sales Bureau Pvt Ltd vs CIT (supra) that service tax collected from customers is a trading receipt which ought to have been routed through P&L account. Irrespective of the fact that whether such liability is routed through P&L account or not as long as it is in the nature of trading receipt, the assessee needs to treat such liability through its P&L account and also paid such taxes on or before the due date specified under respective provisions. Since assesseee has failed to pay taxes before the due date, AO has rightly disallowed unpaid service tax liability u/s 43B and his order should be upheld. 18. We have heard both the parties and perused the material available on record. There is no dispute with regard to the fact that the assessee has not paid service ta....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ax collected from its customers as 'current liability' under the pretext of promising its customers to refund such service tax collected from them in case the levy of service tax has been quashed by the jurisdictional High Court. Therefore, there is a valid reason for treating such liability as 'current liability' for the impugned year. 20. Having heard both sides, we find force in the arguments of the assessee for the reason that it is not a case of the AO that the assessee has collected service tax from its customers on sale of flats and not remitted such service tax to the government account even though such receipts has been treated as part of its business receipts. The assessee has categorically proved that it has not claimed deduction towards service tax in its books of account. Once, any taxes or duties, which is not routed through P&L Account and also not claimed any deduction towards such taxes, then there is no reason for the AO to disallow such taxes under the provisions of section 43B of the Income-tax Act, 1961. This legal proposition is supported by the decision of Hon'ble Bombay High Court in the case of CIT vs Ovira Logistics Pvt Ltd (supra) wherein the Hon'ble H....