2007 (5) TMI 354 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of disallowance of interest claim amounting to Rs. 36,03,466.
2. Deletion of disallowance made u/s 14A of the IT Act of proportionate administrative expenses amounting to Rs. 10,000.

Summary:

Issue 1: Deletion of Disallowance of Interest Claim

The Department challenged the CIT(A)'s decision to delete the disallowance of an interest claim amounting to Rs. 36,03,466, payable to M/s. Euro Alloys Ltd. The Department argued that the assessee was in dispute regarding the liability of the interest and had not made any provision for it in the books of account. The Tribunal referred to its previous order dated 19-12-2006 for the assessment year 1998-99, where an identical issue was decided against the Department. The Tribunal observed that the CIT(A) had followed the Tribunal's order for the assessment year 1997-98, which held that interest on the principal amount is admissible to the assessee as per the decree of the Bombay High Court, even if no provision for interest was made in the accounts. The Department could not provide any reason to take a contrary view for the current year. Therefore, the Tribunal dismissed Ground No. 1 taken by the Department.

Issue 2: Deletion of Disallowance u/s 14A of Proportionate Administrative Expenses

The Department contested the CIT(A)'s decision to delete the disallowance of Rs. 10,000 made u/s 14A of the IT Act for proportionate administrative expenses attributable to earning dividend income. The assessee claimed dividend income of Rs. 1,20,805 as exempt u/s 10(33) of the IT Act and argued that no expenditure was incurred for earning this income. The Assessing Officer, relying on CBDT Circular No. 780, estimated Rs. 10,000 as expenditure incurred for earning the dividend and disallowed it. The CIT(A) deleted this addition. The Tribunal noted that several orders had considered identical issues and held that proportionate disallowance of expenses allocable to earning exempt income was permissible. The Tribunal referred to the decision in Kalpataru Construction v. Dy. CIT, which discussed the procedural and computational provisions of sub-sections (2) and (3) of section 14A. The Tribunal concluded that the provisions of sub-sections (2) and (3) of section 14A apply to all pending matters and restored the issue to the Assessing Officer for a fresh decision in light of these provisions. Ground No. 2 was treated as allowed for statistical purposes.

Conclusion:

The appeal filed by the Department is partly allowed. Ground No. 1 is dismissed, and Ground No. 2 is restored to the file of the Assessing Officer for a fresh decision.