Karnataka State Beverages Corporation Limited Vs ACIT (ITAT Bangalore)
No 14A Disallowance Without Satisfaction, No Penalty on Debatable Issues
In a significant ruling involving Karnataka State Beverages Corporation Ltd. (KSBCL), the Bangalore ITAT granted substantial relief by deleting both the Section 14A disallowance and the related Section 271(1)(c) penalty, while also allowing deduction for provision made towards employee ex gratia payments.
For AY 2011-12, the Tribunal held that the provision of ₹37.53 lakh towards ex gratia payment to employees was an ascertained liability and not a contingent one. Since the Corporation followed the mercantile system of accounting, the Board had approved the payment and the amount was subsequently paid after Government approval, the expenditure was held to be allowable under Section 37(1). The Tribunal rejected the Revenue’s stand that deduction could be claimed only in the year of actual payment.
On the disallowance under Section 14A read with Rule 8D, the ITAT found that although the assessee had earned exempt dividend income, the Assessing Officer failed to record the mandatory satisfaction regarding the incorrectness of the assessee’s claim that no expenditure was incurred for earning such income. The Corporation had substantial own funds far exceeding the investments in mutual funds. Following the principle laid down by the Supreme Court in Maxopp Investment Ltd., the Tribunal held that in the absence of proper satisfaction under Section 14A(2), the disallowance of ₹16.66 lakh could not survive.
