TMI Blog2016 (10) TMI 883X X X X Extracts X X X X X X X X Extracts X X X X ..... A r.w.r. 8D(2)(ii) of the Rules is not sustainable in view of the proposition laid down by the Hon'ble High Court of Delhi in the case of Taishika [2014 (12) TMI 482 - DELHI HIGH COURT] and thus we demolish the same. Prior period expenses - disallowance on the preliminary ground these were not in fact in the nature of prior period expenses - Held that:- since these expenses/incomes are for the projects completed in the past years but were subjected to final payments to be made to the vendor or receivable from clients these difference arose and hence have been accounted for during the current period. The A.O has not controverted the above explanation and submission of the assessee and proceeded to make disallowance and addition by observing that the assessee is maintaining its books of accounts on mercantile basis. - the claim of the assessee was allowed consistently during the earlier and subsequent A.Y and expenses claimed by the assessee were shown under the heard of prior period expenses but it was incurred during the previous year relevant to A.Y 2009- 10. Thus the same cannot be disallowed and added to the income of the assessee. Therefore, the A.O is directed to allow the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f disallowance u/s 14A of the Act. The ld. AR further pointed out that in view of the above, the AO has erred in making the disallowance u/s 14A of the Act by taking into consideration the investments as per Schedule 5 of the balance sheet. The ld. AR vehemently pointed out that despite the fact that the CIT(A) observed the entire relevant facts pertaining to this addition, but after recording the facts uphold the addition on incorrect and unjustified premise. Therefore, the same may be directed to be deleted. 4. In appeal, the CIT(A) noted from the balance sheet that there was no secured loan as on the beginning and in the end of the financial years. Unsecured loans have come down from ₹ 6713.57 lakhs as on 31.3.2007 to Rs. NIL as on 31.3.2008. Therefore, there was no new interest bearing secured and unsecured loans during the previous year relevant to A.Y 2008-09 against the tax free investments made during the relevant period. Therefore, no direct or indirect expenses can be disallowed u/s 14A r.w.r. 8D(2)(ii) of the Rules on account of ht tax free investment. The ld. AR pointed out that the disallowance of indirect interest expenditure of ₹ 5.03 lakhs made by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the impugned order, dealt with the issue and granted relief to the assessee. However, the addition of ₹ 12 lakhs u/s 14A r.w.r. 8D(2)(i i) of the Rules was upheld with the following observations: 4.1 I have carefully considered the submissions of ht ld. AR of the appellant company , the facts of the case as well as the finding of ht A.O. Ground No. 1nd and 4 of appeal are general in nature and not pressed for by the appellant. Therefore, no adjudication is called for. Ground No. 2 of appeal is directed against disallowance of ₹ 18,48,519/- made by the AO u/s 14A of the IT Act as the amount of expenditure incurred in relation to earning of exempt income. The appellant has earned dividend on mutual fund/shares of ₹ 2.50,51,655/- and claimed ihe same as exempt u/s 10(33)/] 0(34) of IT Act in the computation of income but no disallowance u/s 14A of IT Act to earn this exempt dividend income were offered for taxation. Section 14A read with rule 8D provides for disallowance of expenditures incurred in relation to income which does not form part of the total income under the IT Act. In this regard it is seen that the AO has disallowed ₹ 18,48,519/- treating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re offered for taxation. Section 14A read with rule 8D provides for disallowance of expenditures incurred in relation to income which does not form part of the total income under the IT Act. In this regard it is seen that the AO has disallowed ₹ 18,48,519/- treating the investments as per schedule 5 of the balance sheet as investments from which ,exempt dividend income of ₹ 2.50 crores was earned. From the submission of the appellant it is evident that the investments as appearing in the schedule 5 of the balance sheet are joint ventures, the income from which are duly taxable under the IT Act. Therefore, the above investments cannot be considered for the purpose of disallowance u/s 14A. In view of the above, the AO has erred in making the disallowance u/s I4A by taking into consideration the investments as per schedule 5 of the balance sheet. From the submissions of the appellant, the account statement of dividends and the balance sheet it is evident that the exempt dividend income is earned from investment of ₹ 4,800 lacs in Liquid Fund Cash Plan as per schedule 8 of the balance sheet. Therefore, the investment of R. 4,800 lacs made during the relevantt previous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of such expenditure in relation to which does not form part of total income under this Act, viz., suo moto disallowance or NIL disallowance made by the assessee. At this juncture, it would be apt to consider the ratio of the decision of the Hon'ble Jurisdictional High Court in the case of CIT Vs. Taishika Engineering wherein it was held that where disallowance or NIL disallowance made by the assessee is found to unsatisfactory on examination of accounts, the A.O is entitled and authorized to compute deduction u/r 8D of the Rules and this precondition and stipulation is also mandated in Sub Rule (1) of rule 8D of the Rules. In the present case, from the relevant operative part of the assessment order para 4.1 to 4.5, we are unable to see any observations and conclusion of the A.O which states that the A.O was not satisfied with the correctness of NIL disallowance claim of the assessee and thus, as per sub-section (2) of section 14A of the Act, the A.O cannot proceed to determine the amount of expenditure incurred in relation to such income which does not form part of total income under this Act in accordance with the method as prescribed in Rule 8D of the Rules. The ld. counse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Goel reported at 331 ITR 10 [Del] and submitted that when the assessee is following the mercantile system of accounting, then the fees for full course or package received in advance cannot be taxed in the year of receipt and when services there against are to be rendered in the next F.Y. then the income should be recognized in the year of receipt unless services are rendered and in this situation, income does not accrue to the assessee in the year of receipt. The ld. AR pointed out that this analogy and proposition also applies to cases of expenses especially when the AO has not raised any doubt about the correctness and quantum of claiming of expenses and the AO has not alleged claimed expenditure as bogus. 10. The ld. DR replied that in the mercantile system of accounting, claim of assessee cannot be allowed and the AO was well within his power to disallow the claim. The ld. DR strongly supported the first appellate order and contended that the CIT(A) was quite justified and correct in upholding the correct addition made by the AO. 11. On careful consideration of the above submissions, at the very outset, we observe that in para 3.2 of the assessment order the A.O made dis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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