DY. COMMISSIONER OF INCOME TAX, CIRCLE-16(2), HYDERABAD vs. MERCURY PROJECTS PRIVATE LIMITED, HYDERABAD

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ITA 440/HYD/2018Status: DisposedITAT Hyderabad30 January 2019AY 2012-139 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that Section 14A is not applicable when exempt income is Nil, and Rule 8D can only be applied if there's difficulty in apportioning expenses. It also upheld the deletion of disallowance for interest on late TDS, considering it compensatory rather than penal.

What were the facts?

The assessee company, engaged in trading construction materials and machinery, had its assessment selected for scrutiny. The Assessing Officer (AO) made additions for disallowance of expenditure under Section 14A, preliminary expenses under Section 35D, and interest on late TDS payment.

What were the issues?

Whether disallowance under Section 14A is warranted when exempt income is Nil, and if interest paid on late TDS is a disallowable expenditure.

Which sections of the Income-tax Act were involved?

Section 14A,Section 35D

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, HYDERABAD BENCH ‘B, HYDERABAD

Before: SMT. P. MADHAVI DEVI & SHRI S. RIFAUR RAHMAN

For Appellant: Shri P. Murali Mohana Rao
For Respondent: Shri Y.V.S.T. Sai, Shri P. Murali Mohana Rao
Hearing: 10/01/2019Pronounced: 30/01/2019

PER S. RIFAUR RAHMAN, AM:

Both these appeals are cross appeals by the assessee and the revenue directed against the order of CIT(A) – 4, Hyderabad, dated, 20/12/2017 for AY 2012-13. 2. Brief facts of the case are that the Assessee company engaged in the business of supply and trading of construction material, construction machinery and other goods for infrastructure, real estate and power sector, filed its return of I.T.A. Nos. 440 & 705/Hyd/18 income for the AY 2012-13 on 27/09//2012 admitting a total income of Rs. 2,06,11,350/-, which was processed u/s 143(1) of the Income-tax Act, 1961 (in short ‘the Act’). Subsequently, the case was selected for scrutiny and accordingly, notices were issued. In response to the notices, the AR of the assessee filed the information and after going through the information, the AO completed the assessment by adding Rs. 1,56,11,181/- towards disallowance of expenditure u/s 14A, Rs. 22,20,400/- towards disallowance of preliminary expenses written off u/s 35D and Rs. 2,49,253/- towards disallowance of interest paid towards late payment of TDS.

3.

When the assessee preferred an appeal before the CIT(A), the CIT(A) deleted the disallowance of Rs. 1,56,11,181/- made u/s 14A and the disallowance of interest paid of Rs. 2,49,253/- towards late payment of TDS and confirmed the disallowance of Rs. 22,20,400/- made towards preliminary expenses written of u/s 35D of the Act.

4.

Aggrieved by the order of CIT(A), both the assessee as well as revenue are in appeal before us raising the following grounds of appeal:

4.

1 Grounds raised by the revenue:

“1. The CIT (A) erred in deleting the disallowance u/s 14A of Rs. 1,56,11,181/-.

2.

The CIT (A) erred in ignoring CBDT's Circular No.5 of 2014 dated: 11-02-2014. 3. The CIT (A) erred in ignoring the Supreme Court decision in the case of CIT Vs. Walfort Share of Stock Brokers P Ltd [326 ITR I], wherein it was held that the mandate of section 14A was to curb the practice of claiming deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by way of exempt income I.T.A. Nos. 440 & 705/Hyd/18 without making any apportionment of expenses incurred in relation to exempt income.

4.

The CIT (A) erred in deleting the disallowance interest paid towards late payment of TDS of Rs. 2,49,253/-.

5.

Any other ground that may be urged at the time of hearing.”

4.

2 Grounds raised by the assessee are as under:

“1. The order of the Commissioner of Income Tax (Appeals) is erroneous both on facts and in law and it is prejudicial to the interest of the assessee. The Ld. CIT(A) ought to have allowed the appeal of the appellant in full.

2.

The Ld. CIT (A) erred in disallowing an amount of Rs.22,20,400/_ claimed by the appellant as deduction towards preliminary expenses u/s 35D of the Income tax act, 1961 without appreciating the facts of the case and legal provisions. merely stating that the reasons are explained by the AO and there is no provision in the Act to allow expenses in relation to fees paid to ROC for increase of authorised share capital of the company.

3.

The Ld. CIT(A) erred in not adjudicating ground No.7 of the appellant and written submissions made by the appellant on this issue and the case laws relied on by the appellant.

4.

The Ld. CIT(A) ought to have appreciated the fact that the AO erred in holding the expenditure in question is not allowable u/s 35D since the Same is capital in nature.

5.

The Ld. CIT(A) ought to have appreciated the fact that the facts of appellant's case are different from the facts of the case relied on by the AO. The Ld. CIT (A) ought to have appreciated the fact that the expenditure in question Was incurred for the purpose of increasing authorised share capital to meet working capital requirement of the appellant company and not for the purchase of acquiring any assets.”

5.

As regards ground Nos. 1 to 3 raised by the revenue with regard to the disallowance u/s 14A of Rs. 1,56,11,181/-, the AO noticed from the balance sheet filed by the assessee company during the course of scrutiny proceedings that an amount of Rs. 41,50,97,000/- was shown under the head investments as on 31/03/2012. He further noticed from the information furnished by the assessee company that it had debited interest charges on fixed loans, working capital loans and others of Rs. 12,63,82,000/- and also the assessee took unsecured loans of Rs. 209,88,69,000/-.

5.

1 Referring to the provisions of section 14A, the AO calculated the expenditure of Rs. 1,56,11,181/- and the same was disallowed u/s 14A of the Act.

6.

When the assessee preferred an appeal before the CIT(A), the CIT(A) relying on the decision of the coordinate bench of this Tribunal in the case of Prathista Industries Ltd. in ITA No. 1302/Hyd/2015 deleted the disallowance made by the AO u/s 14A of the Act.

7.

Considered the rival submissions and perused the material on record. It is settled position of law that the provisions of section 14A can be applied to quantify the expenses in relation to exempt income. Since the exempt income is Nil, section 14A will not apply. The Rule 8D can be applied only when there is difficulty in finding the expenditure relating to exempt income. The provisions of section 14A and Rule 8D will not apply to the present case.

8.

As regards ground No. 4 raised by the revenue regarding disallowance of interest paid towards late payment I.T.A. Nos. 440 & 705/Hyd/18 of TDS of Rs. 2,49,253/-, it is observed that on verification of schedules to P&L A/c, the AO noticed that assessee debited an amount of Rs. 2,49,253/- towards interest paid on late payment of TDS under the head finance costs and sub-head interest. AO opined that the above expenditure debited to P&L Account was not allowable expenditure as per the provisions of the IT Act and assessee had not added back the same in the computation of total income. He, therefore, disallowed the said amount of Rs. 2,49,253/-.

9.

Before the CIT(A), the assessee contended that the interest was paid on delayed payment of TDS beyond the due dates and the interest on delayed payment of TDS is levied for speedy and prompt collection of dues. It was further submitted that in case of delays in payments of TDS, the interest is chargeable at fixed rate automatically but only to compensate the department for the loss of revenue during the period of delay, thus, the interest so paid is compensatory in nature.

10.

The CIT(A) after considering the submissions of the assessee as well as relying on the decision of the coordinate bench in the case of M/s Taksheel Solutions Ltd. Vs. ACIT in ITA No. 1768/Hyd/2012, deleted the addition made by the AO towards interest paid on late payment of TDS.

11.

Considered the rival submissions and perused the material on record. We do not find any infirmity in the decision of the CIT(A) as his decision is in consonance with the order of ITAT wherein the ITAT held that interest on TDS is not interest paid on income tax per se. The same is in the nature of compensation and not as penal. Therefore, the ground raised by the revenue in this regard is dismissed.

I.T.A. Nos. 440 & 705/Hyd/18

12.

As regards grounds raised by the assessee from 1 to 5 with regard disallowance of Rs. 22,20,400/- made u/s 35D of the Act, the AO observed that on verification of the submissions and expenditure debited to P&L A/c, the assessee claimed in the computation of income an amount of Rs. 22,20,400/- (1/5th of Rs. 1,11,02,000 incurred towards ROC fee expenditure) as deduction u/s 35D.

12.

1 Referring to the provisions of Section 35D of the Act., the AO observed that ROC fee expenditure incurred towards increase in authorized share capital incurred is not allowable as deduction under section 35D. Further, he observed that the ROC fee expenditure paid to the

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