2011 (7) TMI 1150 - AT - Income Tax

Disallowance of expenditure attributable to exempted income u/s 14A r/w Rule 8D - Assessee has claimed exempt income of dividend and offered a sum as expenses attributable to such exempt income and disallowed from its claim u/s 14A - Such computation was certified by statutory auditors - AO observed that such disallowance is not in accordance with rule 8D HELD THAT - We find that computation made by assessee was certified by its statutory auditors and this fact has been recorded by AO as well as CIT(A). In the present case, the assessee has explained that the share capital and reserves, that is its own funds, were utilised for the purpose of investment in shares for earning dividend income and this has not been negated by lower authorities i.e. neither CIT(A) nor AO. It is an admitted position in law that expenditure can be disallowed under sec. 14A if and only if it is incurred in relation to income which does not form part of total income. From the facts of the present case, it is clear that there is no link with expenditure for earning of dividend income incurred by the assessee and once the facts are clear, no disallowance can be made by invoking rule. 8D. Neither the AO nor CIT(A) has recorded any finding that having regard to the account of the assessee, they are not satisfied with the correctness of the claim of expenditure made by assessee or the claim made by assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the Act for the relevant assessment year. In the absence of any such finding, facts of the present case show that the investment in shares was made out of own capital employed and not from borrowed funds, no disallowance on account of interest expenditure can be made by invoking rule. 8D of the Rules. Accordingly, in the given facts and circumstances, we delete the addition - Decision against Assessee. Deduction u/s 80IA - The AO disallowed deduction under sec. 80IA after deducting proportionate head office expenses on turnover basis - CIT(A), confirmed such order HELD THAT - We find that the issue is squarely covered in favour of assessee in assessee s own case for asst. yr. 2007-08, where it was held that It is also an undisputed fact that the authorities have nowhere pointed out that any expenditure which had been incurred by the head office pertained directly to the undertakings for which deduction under sec. 80IA/80IB had been claimed. It is seen that the tax authorities have proceeded on the footing that some expenses must have been incurred by the head office; suspicion cannot supplant evidence. Since there is no shortcoming pointed out in the accounting of the assessee, no effort has been made to show that any specific expenditure incurred under the head office actually pertained to the undertakings for which deduction is being wrongly claimed. This action purely based on suspicion ignoring the facts on record is not in accordance with law. Accordingly, in the peculiar facts on record, we find that the orders of the AO and the CIT(A) deserve to be set aside. Taking a consistent view and respectfully following the same, we allow this issue of the assessee s appeal.

Issues Involved:
1. Disallowance of expenditure attributable to exempted income under Section 14A of the IT Act, 1961.
2. Reduction of deduction claims under Section 80-IA and 80-IB of the IT Act, 1961, by allocating proportionate head office expenses.
3. Levy of interest under Sections 234B and 234C of the IT Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of Expenditure Attributable to Exempted Income:
The primary issue was the disallowance of Rs. 3,90,63,218 as expenditure attributable to exempt dividend income by invoking Section 14A of the IT Act, 1961, read with Rule 8D of the IT Rules, 1962. The assessee had claimed exempt income of Rs. 1,08,72,574 and offered Rs. 1,49,995 as expenses attributable to such income, supported by a certificate from its statutory auditors. The AO, however, disallowed Rs. 3,90,63,218 by applying Rule 8D, stating that the assessee had not computed the disallowance correctly. The CIT(A) upheld this disallowance, noting that the assessee had not maintained separate accounts for exempt income and related expenditures, and the statutory auditor's certificate could not override the estimation prescribed by the IT Rules.

The Tribunal observed that the assessee had substantial capital of its own and had utilized borrowed funds primarily for its main business activities, not for investments yielding tax-free income. It was noted that the AO and CIT(A) had not pointed out any defects in the assessee's claim of Rs. 1,49,995 as expenditure. The Tribunal concluded that there was no direct link between the borrowed funds and the investments, and the disallowance under Rule 8D was unwarranted. Consequently, the Tribunal deleted the addition and allowed the assessee's appeal on this issue.

2. Reduction of Deduction Claims Under Section 80-IA and 80-IB:
The second issue involved the reduction of the assessee's claims for deductions under Sections 80-IA and 80-IB by allocating proportionate head office expenses on a turnover basis. The AO reduced the deduction claims by Rs. 2,46,51,244 and Rs. 50,35,637 respectively, a decision upheld by the CIT(A). The CIT(A) noted that the assessee had not identified direct head office expenses related to the eligible units and had itself worked out the pro rata allocation of head office expenses during the assessment proceedings.

The Tribunal referred to its decision in the assessee's case for the assessment year 2007-08, where it had allowed the assessee's claim, noting that the direct expenses of the undertakings had already been accounted for, and the authorities had not pointed out any specific head office expenses directly related to the eligible units. The Tribunal held that the proportionate allocation of head office expenses based on suspicion was not justified. Following the same reasoning, the Tribunal allowed the assessee's appeal on this issue.

3. Levy of Interest Under Sections 234B and 234C:
The final issue was the levy of interest under Sections 234B and 234C of the IT Act, 1961. The Tribunal noted that the charging of interest under these sections was consequential and directed the AO to recompute the interest after giving effect to the Tribunal's order. Thus, no further adjudication was required on this issue.

Conclusion:
The Tribunal allowed the appeal of the assessee partly, deleting the disallowance of expenditure under Section 14A and allowing the full deduction claims under Sections 80-IA and 80-IB. The issue of interest under Sections 234B and 234C was directed to be recomputed based on the Tribunal's findings.

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