M/S TAVANT TECHNOLOGIES INDIA PVT LTD ,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-12(4), BANGALORE

The assessee has filed the appeal against the order of the CIT(A), Mysore, passed u/s 143(3) read with section 144C and 250 of the Income-tax Act,1961 ['the Act' for short].

1. “The learned CIT (Appeals) erred in passing the order in the manner he did.

2. The learned CIT (Appeals) grossly erred in confirming the additions made by the AO under Section 14A read with Rule 8D of the Rules although there was no specific expenditure incurred while earning the Page 2 of 8 exempted income and also there was no nexus between the expenditure and exempted income that was established by the Appellant.

3. The learned CIT (Appeals) erred in confirming the provision that was made for long term retention bonus to the employees which was subsequently paid to the employees which was the part of the salary itself.

8. The learned CIT (Appeals) erred in confirming the levy of Interest under Section 234B of the Act.

9. For these and such other grounds that may be urged at the time of hearing, the Appellant prays that the appeal may be allowed.”

Since the assessee has International transactions, reference was made to the Transfer Pricing Officer (TPO) whereas the TPO by order dated 27/04/ 2012 made no adjustment to the arm's length price of the assessee. On the disputed issue, the Assessing Officer found that the assessee has received dividend income of Rs.84,91,571/- and claimed as exempt. Whereas no expenses have been disallowed by the assessee for earning of such income. The AO, applied the provisions of section 14A r.w.s. rule 8D(2)(iii) and calculated ½% of average investments worked out to Rs.4,18,230/-. Similarly, AO has disallowed the claim of long-term Retention Bonus of Rs.10,31,070/- as it was not paid on or before the due date of filing return u/s 139(1) of the Act. Further AO found that the assessee has claimed Rs.3,72,599/- towards rent equalization reserve of the current year and whereas the AO is of the opinion that it does not relate to the relevant period and disallowed the claim. Similarly, AO while computing the deduction u/s 10A of the Act, has not allowed the claim of freight charges, insurance,

Page 4 of 8 tele-communication expenses from the total turnover as the SLP filed by the Revenue is pending before the Hon’ble Supreme Court against the order of the Hon’ble High Court and the expenses incurred in foreign currency towards providing technical services outside India has to be reduced only from export turnover and not from total turnover and restricted the claim of deduction u/s 10A of the Act and determined the total income and passed the order u/s 143(3) r.w.s. 144C dated 18/3/2013.

4. Aggrieved by the order, the assessee has filed an appeal with the CIT(A). Whereas the CIT(A) has not granted the relief on the disputed issues but granted relief on other additions and partly allowed the appeal of the assessee.

5. Aggrieved by the order of the CIT(A), the assessee has filed an appeal before the Tribunal. The learned AR of the assessee on the issue of disallowance u/s 14A submitted that the CIT(A) has erred in confirming the addition made by the AO where no expenditure was incurred by the assessee and the application of rule 8D(2)(iii) was not properly considered. The learned AR further submitted that the CIT(A) has confirmed the addition made for long term retention bonus paid to the employees as part of salary and is an ascertained liability and Page 5 of 8 therefore, it has to be allowed as business deduction and fall under the purview of section 43B of the Act. On the third disputed issue, the learned AR submitted that the CIT(A) has erred in confirming the addition in respect of rent equalization provision as the assessee has reversed the amount for rent equalization provision which was considered in the earlier year as per the accounting standards and has to be allowed as expenditure. On the last disputed issue, the learned AR submitted that the CIT(A) has erred in confirming the disallowance of claim u/s 10A of the Act whereas the issue is covered by the jurisdictional High Court in the case of Tata Elxsi (349 ITR 98) and filed paper book to substantiate the claim along with judicial decisions. Contra, the Ld. DR relied on the order of the CIT(A).

6. We heard the rival submissions and perused the material on record. On the first disputed issue of disallowance u/s 14A r.w. rule 8D(2)(iii), learned AR argued that the assessee has not incurred any expenditure for earning dividend income and hence, no disallowance is called for. On perusal of the assessment order, we found that the AO has calculated disallowance under rule 8D(2)(iii) considering ½% of average value of investment. As rightly pointed out by the learned AR that the AO has considered the value of all investments as on Page 6 of 8 1/4/2008 and as on 31/3/2009 and calculated. In the Special Bench decision of Tribunal rendered in the case of Vireet Investments (165 ITD 27)(Del.), it has been held that where for the purpose of calculation of disallowance under rule 8D, only those investments which yielded exempt income have to be considered. Considering the above facts and circumstances, we restore this disputed issue to the file of the AO to recompute the disallowance considering the decision of the Special Bench in the case of Vireet Investments(supra) where only dividend yielding investment has to be considered for the purpose of calculation of average value of investments under rule 8D(2)(iii). Accordingly, the ground of appeal of the assessee are allowed for statistical purposes.

7. On the second disputed issue with respect to disallowance of long-term retention bonus, the learned AR contention that bonus paid to employees has to be allowed.

But on perusal of the assessment order, we found that the AO has considered the provision of long-term retention bonus as an ascertained liability and it was not paid before due date of filing of Return of income u/s 139(1) of the Act and disallowed apparently u/s 43B of the Act, which the learned AR concedes.

In the circumstances, we are of the substantive opinion that the claim shall not be allowable for the assessment year 2009-

Page 7 of 8 10. But if the assessee has paid in subsequent year, the claim has to be allowed on payment basis and ground of appeal is dismissed.

Page 8 of 8 relying on the decision of the jurisdictional High Court and direct the AO to reduce the expenses incurred in foreign exchange from the export turnover as well as total turnover and allow the claim u/s 10A and the ground of appeal of the assessee is allowed.

Order pronounced in the open court on 14th June, 2019.