TaxTMI 
TaxTMI 
2026 (6) TMI 295
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....ommissioner of Income-tax, Circle 4(3)(1), Bangalore, u/s. 271(1)(c) of the Act through order dated 30.07.2022. 02. We first address the Assessee's appeal for Assessment Year 2011-12. Briefly stated, the Assessee is a Government of Karnataka company engaged in the canalisation of liquor, beer, and rectified spirit. It filed its return of income on 30.08.2011 declaring total income of Rs. 20,28,42,680/-. In the assessment order dated 26.02.2014 passed u/s. 143(3) of the Act, the Ld. Assessing Officer made the following additions: (i) disallowance of privilege fee of Rs. 695,14,70,000/-; (ii) disallowance u/s. 14A read with rule 8D of Rs. 19,20,039/-; (iii) disallowance of provision for ex gratia payment of Rs. 37,52,700/-; and (iv) disallowance of expenditure on increase in share capital of Rs. 4,85,000/-. As a result, the assessed income was determined at Rs. 716,04,70,419/-, reflecting total additions of Rs. 695,76,27,739/-. 03. The Assessee challenged the Assessment Order in Writ Petition No. 14687 of 2014. By order dated 18.02.2016, the Hon'ble High Court set aside the Assessment to the extent it treated the privilege fee as taxable inco....
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....0/-, which was confirmed by the Ld. CIT(A) on the ground that the liability was contingent and would become ascertained only in the financial year in which the actual payment was made. Briefly stated, at its 38th meeting held on 25.06.2011, the Board of Directors approved ex gratia payment to the employees of the Corporation, and accordingly a provision of Rs. 37.53 lakhs was made in the books for Financial Year 2010-11. Since the Assessee maintains its books on the mercantile basis, it contended that the provision represented an accrued and ascertained liability and was therefore allowable as salary expenditure. It was further submitted that the Government approved the payment on 20.01.2012 and that the Assessee paid Rs. 36,33,310/- on 21.01.2012 against the provision of Rs. 37,52,700/-. The Assessee's case is that the expenditure was incurred wholly and exclusively for the purposes of business, had the approval of both the Government of Karnataka and the Board of Directors, and was neither gratuity nor any other statutory payment. It was therefore claimed to be allowable business expenditure. 10. The Ld. Assessing Officer while paragraph No. 6.3 of the original order held that....
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....stained. 14. Accordingly, we allow ground No. 2 - 4 of the appeal of the Assessee and direct the Ld. Assessing Officer to delete the disallowance of Rs. 37,52,700/- of expiration of payment provision. 15. Ground No. 5 - 11 of the Appeal are against the disallowance of Rs. 16,66,890/- made by the Ld. Assessing Officer u/s. 14 A read with rule 8D of the Act. The fact of the case shows that the Assessee has earned dividend income of Rs. 3,05,17,000/- and claimed it as an exempt income under the provisions of the Act. The Ld. Assessing Officer noted that as per the accounts of the Assessee the finance charges and interest expenditure claimed for the year were Rs. 11,51,000/- for this year and Rs. 62,93,000/- for the earlier year. Therefore the Assessee was asked a question that why the disallowance u/s. 14A should not be made. The main claim of the Assessee is that the investment made by the Assessee in the mutual funds are out of the own funds of the Assessee since the Assessee had sufficient funds to invest the amounts out of internal accruals etc., the surplus funds generated from the business, there cannot be any disallowance of interest expenditure is no interest expenditure....
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....st free funds are available to the Assessee, the presumption should be given to the Assessee favourably of no disallowance of interest expenditure. He further stated that the disallowance is made to 0.5% of the average value of investment which is with respect to the other expenditure incurred by the Assessee other than interest expenditure and therefore this argument of the Assessee fails. 19. We have carefully considered the rival contention and perused the orders of the Ld. lower authorities. The facts clearly shows that the Assessee has earned an interest free income in the form of dividend and mutual funds, it is also a fact that Assessee has not disallowed any sum in the computation of total income. However the Ld. Assessing Officer while issuing the show cause notice has directed the Assessee to explain that Assessee has paid interest and therefore why there is no disallowance made under section 14A of the Act. In response to that the Assessee submitted that there cannot be any disallowance of interest expenditure as the Assessee has not borrowed any fund for the purpose of making any investment in the mutual funds. It is the claim of the Assessee that the amount of inves....
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.... of making of the investment in shares is required to be examined. 22. Therefore, in view of the above facts we find that in absence of any satisfaction recorded by the Ld. Assessing Officer about the correctness of the claim of the Assessee that it is not incurred any expenditure in relation to earning of the exempt income in terms of provisions of section 14A(2) of the Act, the disallowance made by the Ld. Assessing Officer and confirmed by the Ld. CIT(A) of Rs. 16,66,890/- is not sustainable. Accordingly we direct the Ld. Assessing Officer to delete the disallowance of Rs. 16,66,890/-. Accordingly ground No. 5 - 11 of the Appeal are allowed. 23. Ground No. 12 - 13 is with respect to the restriction of the disallowance to the extent of Rs. 3,50,000/- being expenditure incurred towards increasing the share capital. The facts clearly shows that Assessee Company has incurred the above sum for increasing the authorised capital. The Ld. Assessing Officer though disallowed a sum of Rs. 4,85,000/- being the above sum and also the stamp duty fees of Rs. 35,000/- and stem duty paid of Rs. 1 lakh. Holding Corporation of India towards the stamp duty charges for issue of shares. The Ld....
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....the decision of the Hon'ble Rajasthan High Court should not be followed. The Ld. CIT(A) in paragraph No. 5.4.2 has made a reference that as the above expenditure is not a revenue expenditure, same cannot be allowed u/s. 35D of the Act and further the expenditure incurred by the Assessee also do not fall into the specific expenditure covered under that section. We do not find any infirmity in the order of the Ld. lower authorities in also denying the deduction to the Assessee u/s. 35D of the Act. Accordingly ground No. 12 and 13 of the Appeal are dismissed. 28. Ground No. 14 and 15 of the appeal is general in nature, no arguments were advanced and hence dismissed. 29. Accordingly ITA No. 2086/Bangalore/2025 filed by the Assessee for Assessment Year 2011 - 12 is partly allowed. 30. Now we come to the appeal of the Assessee for Assessment Year 2012 - 13 in ITA No. 2087/Bangalore/2025 against the order of the Ld. CIT(A) dated 08.07.2025 wherein the penalty levied by the Ld. Assessing Officer of Rs. 18,09,227/- was confirmed. 31. Briefly stated the facts of the case shows that the Assessee Company filed its return of income on 27.09.2012 at a total income of Rs. 29,89,82,630....
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....ending before the Hon'ble Karnataka High Court wherein the Appeal of the Assessee is admitted. It was further stated that when the Appeal of the Assessee is admitted, conceivably there are two opinions on the issue otherwise the Hon'ble High Court would not have admitted the appeal. In such circumstances also the penalty cannot be levied u/s. 271(1)(C) of the Act. 35. He further referred to the decision of the coordinate bench wherein the addition of Rs. 60,30,758/- was confirmed wherein despite the claim of the Assessee that no satisfaction is recorded, the addition was confirmed. Therefore, it was submitted that when the addition itself or disallowance itself is against the principle laid bowed laid down by the Hon'ble Supreme Court of recording satisfaction, the disallowance those made, cannot result into levy of penalty. 36. The Ld. Departmental Representative vehemently supported the orders of the Ld. lower authorities and submitted that the Assessee has not disallowed any sum u/s. 14A of the Act and therefore the penalty has been correctly levied. 37. We have carefully considered the rival contention and also perused the orders of the Ld. that lower authorities. Firs....