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2016 (4) TMI 963 - AT - Income TaxDisallowance of provision made for leave salary - Held that:- Hyderabad Bench of Tribunal in Ushodaya Enterprises Pvt. Ltd. Vs. ACIT and ITO Vs. Ushodaya Enterprises Pvt. Ltd. (2014 (12) TMI 7 - ITAT HYDERABAD ), on similar facts and circumstances, have accepted the plea of the assessee and remitted the issue back to the file of Assessing Officer with direction to apply the decision of Hon’ble Supreme Court in Exide Industries (2008 (9) TMI 921 - SUPREME COURT). In case clause (f) to section 43B of the Act is struck down, then no disallowance on account of provision for leave encashment is to be made in the hands of assessee. However, the said issue is pending for adjudication before the Hon’ble Supreme Court. Accordingly, we remit the issue back to the file of Assessing Officer to decide the issue in line with the ratio laid down by the Hon’ble Supreme Court in Exide Industries (supra) - Decided in favour of assessee for statistical purposes. Disallowance computed by applying the provisions of section 40A(2)(b)- Held that:- Coming to the case of quantum of remuneration to be allowed in the hands of assessee, where the CIT(A) has allowed expenditure @ 25% of total expenses and no basis has been given by the CIT(A) to allow the said expenditure @ 25% of the total. There is no basis for measuring such services and in the absence of any evidence brought on record to establish that the expenditure incurred by the assessee was excessive i.e. more than market value of the said services, we find no merit in the orders of authorities below in invoking provisions of section 40A(2)(a) of the Act. Accordingly, we modify the order of CIT(A) and direct the Assessing Officer to allow the expenditure in totality in the hands of the assessee as the said expenditure has been laid down in terms of the agreement agreed upon between the parties and is for carrying on of the business of the assessee more efficiently and is allowable as business expenditure. - Decided in favour of assessee for statistical purposes. Disallowance made under section 14A - Held that:- The case of the assessee before the authorities below was that it had sufficient interest-free funds available with it, which in turn were invested for a short period, against which dividend income was declared. Even before the CIT(A), similar plea was raised and the CIT(A) has noted that mixed funds available with the assessee. However, while working out the disallowance on account of interest relatable to earning of exempt income, the entire interest expenditure was worked out based on assumption that the investment was made out of borrowed funds. It is admitted fact that the investments were made during the year and were also redeemed during the year and there was Nil investment both at the opening and close of the year. The question which arises for adjudication is whether in such circumstances, where the assessee has sufficient interest-free funds by way of reserves and surpluses, disallowance was merited in the case. The assessee had also made an alternate plea of prorata disallowance of ₹ 1,31,700/- on account of percentage of investment attributable to borrowed funds by working out average holding of the assessee for the year. We find merit in the said plea of the assessee and accordingly, direct the Assessing Officer to disallow sum of ₹ 1,31,700/ - under section 14A of the Act on accou nt of interest attributable to the exempt income. In respect of administrative expenses attributable to earning of the exempt income, we restrict the disallowance to ₹ 50,000/-.- Decided partly in favour of assessee. Relief granted under section 10A - grant of deduction under section 10A of the Act by invoking the provisions of section 10A(7) r.w.s. 80IA(10) of the Act - Held that:- The operating profit margins earned by the Engineering Division of the assessee company were 7.52%, which was accepted by the TPO in the report under section 92CA(4) of the Act. In the above said circumstances, where the profit margins declared by the assessee have been accepted to be at arm's length by the TPO, no curtailment of deduction under section 10A can be made by invoking the provisions of section 10A(7) r.w.s. 80IA(10) of the Act, relying on the ratio laid down in M/s Honeywell Automation India Limited vs. DCIT (2015 (3) TMI 494 - ITAT PUNE ). The onus was upon the Department to prove that an arrangement existed between the assessee and its AEs to earn more than ordinary profits and in the absence of the said onus having been discharged by the Department and following the same parity of reasoning as laid down by the Tribunal in M/s Honeywell Automation India Limited vs. DCIT (2015 (3) TMI 494 - ITAT PUNE) we find no merit in the order of Assessing Officer and we uphold the order passed by CIT(A). The Ld. Authorized Representative for the assessee pointed out that the Assessing Officer has given a finding that the profit margin earned in Engineering Division was higher than the average profit margin of comparable and has reduced the deduction under section 10A of the Act. We find no merit in the stand of Assessing Officer and upholding the order of CIT(A), we allow the claim of deduction under section 10A of the Act. - Decided in favour of assessee
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