PFA
The dictum laid down in case of Rubber Udyog Vikas (P) Ltd. is that incorrect claim would not tantamount to furnishing of inaccurate particulars unless it is established that assesee has acted with malafide intention. CA Sandeep Kanoi | January 4, 2015 at 8:42 am | Tags: ITAT judgments, section 271(1)(c) | Categories: Income Tax Case Laws | URL: http://wp.me/p3ulce-gKw
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Incorrect claim would not tantamount to furnishing of inaccurate particulars
CA Prarthana Jalan
Hon'ble Delhi ITAT has in the case of ACIT V/S M/s.Beekman Heiix India Consulting P. Ltd.has held that Incorrect claim would not tantamount to furnishing of inaccurate particulars and penalty u/s 271(c ) should not be levied on it.In the assessment framed disallowances on 3 heads i.e
(i) Call option fees of Rs. 53,12,500/- was disallowed in full.
(ii) Feasibility study charages of Rs. 11,93,827/- was treated as mortizable expenses u/s 35D and 4/5th of these were disallowed.
(iii) Disallowance of Rs. 2,13,126/- u/s 14A. Hon'ble CIT(A) had sustained the disallowance on account of Feasibility study charges and 14A.
Subsequently penalty was initiated by the assessing officer, which was deleted by the cit(a) . The department preferred an appeal to the ITAT. The Hon'ble ITAT dismissed the appeal by observing as under
"8. We have heard rival submissions and perused the material on record. The CIT(A) has made threadbare analysis of disallowance of expenditure made in the quantum assessment which had resulted in the imposition of penalty u/s 271(1)(c) of the Act and had come to a correct conclusion that two disallowance of expenditure is only an incorrect claim and does not amount to concealment of income. The conclusions /findings of the CIT(A) have not been dispelled by the revenue. The CIT(A)'s reliance on the various case laws on the subject is apt to the facts of this case. The revenue in its grounds of appeal relied on the case of CIT vs. Rubber Udyog Vikas (P) Ltd. 335 ITR 558 (2011 (P&H). This decision has been taken note of by CIT(A) at para 3.8 of the impugned order. The dictum laid down in case of Rubber Udyog Vikas (P) Ltd. is that incorrect claim would not tantamount to furnishing of inaccurate particulars unless it is established that assesee has acted with malafide intention. The decision relied on by the revenue is in no way helpful to the case of the revenue. On the contrary it help the assessee's case. For the aforesaid reason, we are of the view that CIT(A)'s order is correct and in accordance with law and no interference is called for"
Source- ACIT V/S M/s.Beekman Heiix India Consulting P. Ltd. (ITAT Delhi), ITA No. 4886/Del/2013, Date of Order- Date 18th July, 2014
There is no mechanism available in the ITD to verify the veracity of claim of the assessees for depreciation in respect of additions made to the block of assets in previous year. CA Sandeep Kanoi | January 4, 2015 at 8:55 am | Tags: CAG, section 32 | Categories: Income Tax | URL: http://wp.me/p3ulce-gKk
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There is no mechanism available in the ITD to verify the veracity of claim of the assessees for depreciation in respect of additions made to the block of assets in previous year
PFA
Income Tax Act, 1961, (Act) lays down diverse provisions on depreciation and/or amortisation for tax purposes as deduction to an assessee/ a company in the course of its business with the intention for promoting economic growth within the Country.
CAG suggestions on Allowance of depreciation & amortisation under Income Tax Provisions
Executive Summary
1. Income Tax Act, 1961, (Act) lays down diverse provisions on depreciation and/or amortisation for tax purposes as deduction to an assessee/ a company in the course of its business with the intention for promoting economic growth within the Country. It is important to ensure that these provisions are properly utilised as per the existing tax laws to avoid any major revenue loss. The objective of this study was to focus on whether the systems and procedures are sufficient and in place to ensure compliance with the provisions of the Act/Rules and instructions issued by Central Board Direct Taxes (CBDT) in this regard. The study also seeks assurance that adequate internal control mechanism exists within the Income Tax Department (ITD) for monitoring the allowance of depreciation in general and under special circumstances viz., amalgamation, demerger, reconstruction etc.
2. We audited assessments completed during the period FY 10 to FY 13 and all cases of scrutiny assessments, appeal and rectification cases etc, within the selected units. We covered all circles/wards taken up for regular audit during the period from July to September 2013. We checked 87,023 records of the assessees. This report contains 725 cases of deficiencies in the implementation of provisions of the Act with tax effect of RS. 2,464.06 crore.
3. Rates of depreciation on different assets/ block of assets as provided in the Act differ from those prescribed under the Companies Act 1956 for the same assets. We found that depreciation as per the Act was higher in 6,267 cases and lower in 5,926 cases by a difference aggregating RS. 57,665.41 crore and RS. 11,754.80 crore respectively. We suggested harmonising these rates as assessees and ITD make additional efforts in computation of taxable income. The intended purpose for allowing depreciation in the Act has also not been evaluated (paragraph 2.2). Due to non-existence of proportionate allowance of depreciation depending upon the use of assets, assessees have claimed unintended benefits. We observed that 986 assessees made additions of various assets worth RS. 1,41,725.45 crore in the month of March and claimed depreciation of RS. 15,617.86 crore instead of allowable depreciation of RS. 2,602.61 crore on pro rata basis for the month of March only, the assets being purchased in the month of March itself (paragraph 2.3). Besides this, there are inconsistencies in allowance of depreciation on assets owned by Charitable / Religious Trusts and Association of Persons (paragraph 2.4).
4. A number of mistakes were noticed in compliance with the provisions of the Act dealing with allowance of depreciation and amortisation and the relevant circulars/instructions issued by CBDT/ Judicial decisions delivered by the Apex court and jurisdictional High Courts.
5. 20 assessees claimed and were allowed depreciation on assets which were not owned by them at all and resulted in under assessment of income to that extent involving tax effect of RS. 92.79 crore (paragraph 3.2).
6. Assessing Officers (AOs) allowed depreciation to 35 assessees on assets which were not used in the business which resulted in under assessment of income to that extent involving tax effect of RS. 43.96 crore (paragraph 3.3).
7. We noticed mistakes in determination of actual cost or written down value of assets in 29 cases, which resulted in excess allowance of depreciation involving tax effect of RS. 85.47 crore (paragraph 3.4).
In 18 cases while calculating depreciation, AOs did not deduct capital investment subsidies received from the cost of the assets which resulted in under assessment of income to that extent involving tax effect of RS. 35.65 crore (paragraph 3.6).
In 18 cases while calculating depreciation, AOs did not deduct capital investment subsidies received from the cost of the assets which resulted in under assessment of income to that extent involving tax effect of RS. 35.65 crore (paragraph 3.6).
8. 44 assessees committed mistakes in adoption of correct figure of depreciation in computation of income involving tax effect of RS. 212.97 crore (paragraph 3.8).
9. In 142 cases, AOs allowed depreciation at the rates which were higher than the rates provided in Appendix I to Income Tax Rules 1962. The mistake resulted in excess allowance of depreciation involving tax effect of RS. 107.85 crore (paragraph 3.9).
10. In carrying forward/setting off of depreciation which resulted in under assessment of income to that extent, we found that in 87 cases, tax effect was RS. 694.65 crore (paragraph 3.11).
11. 26 assessees irregularly claimed and was allowed capital expenditure as revenue expenditure which resulted in under assessment of income to that extent involving tax effect of RS. 344.97 crore (paragraph 3.13).
12. The Act also provides for additional depreciation to assessees and here also we found mistakes in assessments done by AOs. We found that AOs committed mistakes in grant of additional depreciation in 99 cases resulting in under assessment of income to that extent involving tax effect of RS. 656.19 crore (paragraph 3.19).
13. In case of 13 assessees, AOs did not allow additional depreciation during tax holiday which resulted in over assessment of income to that extent involving tax effect of RS. 3.33 crore (paragraph 3.20).
14. Regarding allowance of amortisation to assessees, we found that in case of 12 assessees, AOs irregularly allowed amortisation expenses under section 35D which resulted in under assessment of income to that extent involving tax effect of RS. 6.70 crore (paragraph 4.2).
15. We also found that four assessees irregularly claimed and were allowed expenses towards amortisation under section 35DDA which resulted in under assessment of income to that extent involving revenue impact of RS. 5.38 crore (paragraph 4.3).
16. We have also highlighted the control issues of the ITD relating to allowance of depreciation and amortisation (paragraphs 5.2 to 5.4).
The allowance of depreciation and amortisation under the Act is intended to promote economic growth within the country but in absence of any monitoring mechanism within ITD, the purpose remained to be achieved. Besides, AOs committed mistakes in applying provisions relating to depreciation and amortisation correctly which resulted in under assessments. CBDT needs to improve the quality of assessments and explore the possibility of capacity building for AOs for reducing the incidence of mistakes.
Summary of Recommendations Regarding systemic issues of allowance of depreciation
The Ministry may consider providing the rates of depreciation under the Act in conformity with the rates of depreciation applicable as per the Companies Act. (Paragraph 2.2)
The Ministry may consider providing for depreciation on pro-rata basis in the Act depending upon usage of the assets during the relevant previous year subject to the condition that depreciation at 50 per cent of the normal depreciation may be allowed only when asset is put to use at least for a certain fixed period. (Paragraph 2.3)
The Ministry may clarify whether the depreciation is to be allowed in addition to capital expenditure on assets towards application of income thereon in the case of Charitable/ Religious Trusts. (Paragraph 2.4)
CBDT may clarify the applicability of Section 32 (2) of the Act relating to carry forward and set-off of unabsorbed depreciation allowance pertaining to the period AY 98 to 02. (Paragraph 2.5)
Regarding assessment of allowance of depreciation and amortisation
CBDT may devise a mechanism to improve the quality of assessments and explore the possibility of capacity building for Assessing Officers for reducing the incidence of mistakes. (Paragraphs 3.2 to 3.20 and Paragraphs 4.2 to 4.4.)
Regarding internal control mechanism
CBDT may consider modifying the e-filing of returns so that information relating to additions to fixed assets made during the relevant previous year is available with AOs at the time of assessment. (Paragraph 5.2)
CBDT may make it mandatory for all AOs to obtain a statement of unabsorbed depreciation assessment year-wise as per latest assessment order and make it a part of the assessment order after due verification at the time of finalizing the assessment. (Paragraph 5.3)
CBDT may evolve an effective mechanism to verify and ensure the correctness of written down value of the block of assets carried over. (Paragraph 5.4)
(Source-Report No. 20 of 2014 Performance Audit by C&AG)
(This Article is been posted CA Sandeep Kanoi after editing the same for web viewing)
In the case of ACIT Vs. M/s. Bharat Hotels Ltd. Hon'ble ITAT delhi held that in case the dividend income is not received by an assessee, the disallowance u/s 14A cannot be made
If dividend is not received, disallowance u/s 14A cannot be made
CA Sandeep Kanoi
In the case of ACIT Vs. M/s. Bharat Hotels Ltd. Hon'ble ITAT delhi held that in case the dividend income is not received by an assessee, the disallowance u/s 14A cannot be made.
In further held that Once the assessee has been found to have made a business investment by way, of shares in related line of business, the said investment though held by way of shares in the said company cannot be subjected to disallowance under section 14A of the Act, which in any case is relatable to disallowance of the expenditure out of the exempt income earned by the assessee, by way of its investment in shares of other company. In the present cases also, we note that assessee had made strategic investments in subsidiary companies and the purpose was to run hotels and the investments were not made for the purpose of earning dividend. Therefore, disallowance u/s 14A cannot be made.
Facts of the Case-
A.R. at the outset, submitted that the disallowance u/s 14A is now fully covered in favour of the assessee as various High Courts have held that where dividend is not received, disallowance u/s 14A cannot be made. In support, Ld. A.R. relied on the following case laws:
CIT Vs Holcim India Pvt. Ltd. I.T.A.No. 486 and 299/2014 decided by Hon'ble Delhi High Court placed in paper book pages 9A-9M.
CIT Vs Shivam Motors (P) Ltd. I.T.A.No. 88 of 2014 placed at paper book pages 10-16.
CIT Vs Corrtech Energy Pvt. Ltd. I.T.A.No. 239/2014 placed at paper book pages 17-21
CIT Vs M/s. Lakhani Marketing Incl. I.T.A.No. 970/2008 placed at paper book pages 22-28
CITVs Delite Enterprises its 110/2009 placed at paper book pages 29-30 CIT Vs Mr. M. Baskaran I.T.A.No. 1717/Mds.2013 paper book pages 31-41.
A.R. submitted that admittedly, no dividend was received by the assessee in the present year and, therefore, disallowance u/s14A was not warranted as held in the above mentioned decisions.
ITAT Obsevations
We find from the facts of the present cases that following are the undisputed facts:
i) The assessee did not receive dividend during the year under
ii) The investment was made by Assessee Company in subsidiary companies for strategic Purposes.
iii) The investment during the year was made in a subsidiary company which was situated outside India and, therefore the dividend income if any received from foreign companies was not exempt.
The Hon'ble Jurisdictional High Court of Delhi in the case of Holcim India Pvt. Ltd. (supra) vide para 14 to 17 has held as under:
"14. On the issue whether the respondent-assessee could have earned dividend income and even if no dividend income was earned, yet Section l4A can be invoked and disallowance of expenditure can be made, there are three decisions of the different High Courts directly on the issue and against the appellant-Revenue. No contrary decision of a High Court has been shown to us. The Punjab and Haryana High Court in Commissioner of Income Tax, Faridabad Vs. M/s. Lakhani Marketing Incl., ITA No. 970/2008, decided on 02.04.2014, made reference to two earlier decisions of the same Court in CIT Vs. Hero Cycles Limited, [2010] 323 ITR 518 and CIT Vs. Winsome Textile Industries Limited, [2009] 319 ITR 204to hold that Section 14A cannot be invoked when no exempt income was earned. The second decision is of the Gujarat High Court in Commissioner of Income Tax-I Vs. Corrtech Energy (P.) Ltd. [2014] 223 Taxmann 130 (Guj.). The third decision is of the Allahabad High Court in Income Tax Appeal No. 88 of 2014, Commissioner of Income Tax (Ii) Kanpur, Vs. M/s. Shivam Motors (P) Ltd. decided on 05.05.2014. In the said decision it has been held:
"As regards the second question, Section 14A of the Act provides that for the purposes of computing the total income under the Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Hence, what Section 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of fact is that the assessee had not earned any tax free income. Hence; in. the absence of any tax free income, the corresponding expenditure could not be worked out for disallowance. The view of the CIT(A), which has been affirmed by the Tribunal, hence does not give rise to any substantial question of law. Hence, the deletion of the disallowance of Rs.2,03, 7521- made by the Assessing Officer was in order" .
15. Income exempt under Section 1 0 in a particular assessment year, may not have been exempt earlier and can become taxable in future years. Further, whether income earned in a subsequent year would or would not be taxable, may depend upon the nature of transaction entered into in the subsequent assessment year. For example, long term capital gain on sale of shares is presently not taxable where security transaction tax has been paid, but a private sale of shares in an off market transaction attracts capital gains tax. It is an undisputed position that respondent assessee is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to management. Possibility of sale of shares by private placement etc. cannot be ruled out and is not an improbability. Dividend mayor may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend. When declared, it is subjected to dividend distribution tax.
16. What is also noticeable is that the entire or whole expenditure has been' disallowed as if there was no expenditure incurred by the respondent-assessee for conducting business. The CIT(A) has positively held that the business was set up and had commenced. The said finding is accepted. The respondent-assessee, therefore, had to incur expenditure for the business in the form of investment in shares of cement companies and to further expand and consolidate their Expenditure had to be also incurred to protect the investment made. The genuineness of the said expenditure and the fact that it was incurred for business activities was not doubted by the Assessing Officer and has also not been doubted by the CIT(A).
17. In these circumstances, we do not find any merit in the present The same are dismissed in limine."
Similarly, Hon'ble Allahabad High Court in the case of Shivam Motors in I.T.A.No. 88/2014 has held as under:
"15 As regards the second question, Section 14A of the Act provides that for the purposes of computing the total income under the Chapter, no , deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Hence, what Section 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of fact is that the assessee had not earned any tax free income. Hence, in the absence of any tax – free income, the corresponding expenditure could not be worked out for disallowance. The view of the CIT(A), which has been affirmed by the Tribunal, hence does not give rise to any substantial question of law. Hence, the deletion of the disallowance of Rs.2,03, 752/- made by the Assessing Officer was in order."
From the above decision of Hon'ble Delhi High Court we find that Hon'ble High Court has considered various case laws for arriving at the conclusion that in case the dividend income is not received by an assessee, the disallowance u/s 14A cannot be made.
Moreover, we find that investments were for strategic purposes and such investment cannot be said to have been made for earning of dividend as held by various courts which has been relied upon by Ld.A.R. as detailed below:
i) CIT vs Oriental Structural Engineers Pvt. Ltd. 216 Taxman 92
ii) 147 ITD 678 VA Tech Escher Wyss Flovel (P) Ltd. Vs ACIT
iii)I.T.A.No. 5123 & 5124/Del/2012 Holcim (India) P.Ltd. (Del.)
iv) 1362 & 1032/Del/2013 Interglobe Enterprises Ltd. VS DCIT
v) I.T.A.No. 5408/2012 Garware Wall Ropes Ltd. vs Addl. CIT
vi) I.T.A.No. 1021/Cjd.2011 Spray Engg. Devices Ltd.vs Addl. CIT
vii) I.T.A.No. 4521/Mum/2012 J M Financial Ltd. VsACIT
viii) 215 Taxman 8 CIT Vs CUTI Bank Ltd.
ix) S.C. decision in Civil appeal 4678/2014 dismissing SLP filed by Deptt. Against Guj. High Court order.
x) 215 Taxman 272 CIT Vs Suzlon Energy Ltd. (Guj.)
The Hon'ble Tribunal in the case of Holcim (India) Pvt. Ltd. (supra) held as under:
"15. Even on merits, we note that disallowances made u/s 14A were unwarranted as assessee has not invested in shares for earning of dividend but acquired the controlling interest in t~e respective companies for doing the business. Ld. CIT(A) himself has admitted that assessee is doing the business and the business of the assessee company has been set up, therefore, there is no question that assessee has invested the funds for earning of dividend.
16:- Similar issue came up before the Chandigarh Bench of the Tribunal in the case of M/s Spray Engineering Devices Ltd. (*supra). In this case also the disallowances were made u/s 14A by the assessing officer by observing that-assessee has purchased shares of Rs. 3.01 crores of M/s Shri Sai Baba Sugar Mills Ltd. for earning exempt income. This action of the assessing officer was confirmed by CIT(A). On second appeal before the Tribunal, the Tribunal held that, "we find merit in the plea of the assessee that where a business strategy had been adopted by the assessee by way of investment in shares of sick company in order to make over the said company for widening its operation of business, cannot be held to be investment per se. The decision making of a business man by way of strategy planning in allied line of business is a decision made in the course of carrying on the business and the Assessing officer cannot sit in judgment seat to comment upon the same. Once the assessee has been found to have made a business investment by way, of shares in related line of business, the said investment though held by way of shares in the said company cannot be subjected to disallowance under section 14A of the Act, which in any case is relatable to disallowance of the expenditure out of the exempt income earned by the assessee, by way of its investment in shares of other company. In the facts of the present case the investment was purely of business nature as the company in which the amount was invested was a loss making company and there was no question of earning any dividend income from such investment. In the totality of the facts and circumstances of the case we find no merit in the order of the authorities below in disallowing any expenditure under the garb of section 14A of the Act".
17. Identical facts are involved in the present case in hand, as in this case also the assessee has invested in the companies which were not showing any profits. The assessee acquired controlling interest in those companies just to run these companies properly. Ld. AR has stated that till date no dividend has been earned by the assessee as assessee is doing the business in these companies from the amounts invested through shares. Therefore, in our considered view this is not a case of disallowance u/s 14A of the Act.
Accordingly, we delete the disallowance made by ld. CIT(A) U/s 14A of the for both the years in question.
18. In the result, the appeals of the assessee are allowed."
In the present cases also, we note that assessee had made strategic investments in subsidiary companies and the purpose was to run hotels and the investments were not made for the purpose of earning dividend. Therefore, on the basis of case laws relied upon by Ld. A.R. under such circumstances disallowance u/s 14A cannot be made.
Source- ACIT Vs. M/s. Bharat Hotels Ltd. (ITAT Delhi), I.T.A. No.4959/Del/2012 & 5401 /Del/2013, Date: 29.12.2014
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