2013 (5) TMI 885 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of broken period interest on purchase of securities.
2. Disallowance of contribution to Retired Employees Medical Benefit Scheme.
3. Disallowance of contribution towards Trust fund as per Supreme Court's direction.
4. Disallowance of expenditure u/s 14A read with Rule 8D.

Summary:

1. Disallowance of Broken Period Interest on Purchase of Securities:
The Assessing Officer disallowed the broken period interest on purchase of securities, treating it as a capital outlay based on CBDT instruction and the Supreme Court's decision in Vijaya Bank Ltd vs CIT. However, the CIT(A) deleted the addition, recognizing the interest as revenue expenditure since the securities were held as stock-in-trade. The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's ruling in Citi Bank N.A., which allowed broken period interest as revenue expenditure.

2. Disallowance of Contribution to Retired Employees Medical Benefit Scheme:
The Assessing Officer disallowed the contribution to the Retired Employees Medical Benefit Scheme u/s 37(1), considering it non-business expenditure. The CIT(A) and Tribunal, referencing previous Tribunal decisions and the case of State Bank of Travancore, allowed the deduction, recognizing it as a business expenditure incurred out of business expediency.

3. Disallowance of Contribution Towards Trust Fund as per Supreme Court's Direction:
The Assessing Officer disallowed the contribution of Rs. 2 crores towards the Trust fund for empowerment of persons with disability, treating it as non-business expenditure. The CIT(A) upheld the disallowance. However, the Tribunal allowed the deduction, noting that the payment was made as per the Supreme Court's direction and was not gratuitous but a refund of excess interest tax collected, thus qualifying as a revenue expenditure.

4. Disallowance of Expenditure u/s 14A Read with Rule 8D:
The Assessing Officer disallowed Rs. 2,52,54,916/- u/s 14A read with Rule 8D for the expenditure incurred in relation to exempt income. The CIT(A) confirmed the disallowance. The Tribunal, while agreeing with the disallowance under Rule 8D, directed the Assessing Officer to re-work the disallowance by apportioning the expenditure between exempt and taxable income earned from the investments, following the principle laid down by the Special Bench in Vishnu Anant Mahajan.

Conclusion:
The Tribunal's decision addressed the disallowances made by the Assessing Officer and upheld by the CIT(A), providing relief to the assessee in most instances by recognizing the expenditures as business-related and allowing appropriate deductions. The Tribunal also provided clear directions for re-working the disallowance u/s 14A, ensuring a fair apportionment between exempt and taxable income.