2015 (10) TMI 2499 - AT - Income Tax

Disallowance u/s 14A - Held that - From the perusal of the balance sheet and other documents filed in the Paper Book we see that the total investment in shares and mutual funds as on 31.3.2007 was of 3, 83, 82, 47, 226/- while the investment as on 31.3.2008 is of 4, 64, 37, 73, 922. Therefore there was an increase of around 80 crores in the investment during the year. While reserves and own funds of the assessee company as on 31.3.2008 are amounting to 6, 24, 18, 74, 854/-. From these figures it is quite clear that own funds and reserves of the assessee are more than sufficient to cover the investment made during the year. In such a scenario it can be very conveniently presumed that all the investment have been made out of own funds. Therefore in such circumstances no disallowance under section 14A of the Act on account of interest can be made. Though the learned counsel for the assessee has made alternative submissions on the computation made by the Assessing Officer under Rule 8D of the Income Tax Rules in view of our finding that no disallowance on account of interest under section 14A an be made we do not find any need to adjudicate these issues. - Decided against revenue. Administrative expenses disallowance under Rule 8D - Held that - It is a fact on record that the assessee himself had disallowed an amount of 2, 73, 13, 827/- on account of expenses incurred for earning tax free income and the Assessing Officer has nowhere recorded a finding as to why the disallowance so made by the assessee is not correct. Reliance is placed on the judgment of the Hon ble Jurisdictional Punjab & Haryana High Court in the case of CIT Vs. Deepak Mittal (2013 (9) TMI 764 - PUNJAB & HARYANA HIGH COURT ) to the effect that in the absence of any satisfaction recorded by the Assessing Officer as to why the calculation made by the assessee is not correct the disallowance made by him on account of administrative expenses under Rule 8D of the Income Tax Rules is not as per law. In view of the above disallowance made by the Assessing Officer under section 14 of the Act read Rule 8D of the Income Tax Rules is deleted. - Decided against revenue. Capitalization of interest - Held that - The disallowance has been made by the Assessing Officer on account of proportionate interest for three months on the premises that interest bearing funds are used for the purposes of acquisition of the paint shop. The reply filed by the assessee was that the funds have been used from the C/C account with ICICI bank which is allowed by the bank for the purposes of business only. The C/C account is an interest bearing fund. Therefore disallowance made by the Assessing Officer on this account is correct. As regards the contention of the assessee that there is no extension of the existing business we do not find any infirmity in the observation made by the CIT (Appeals). It is clear from the record that a new asset has been purchased in the form of paint shop which was imported from Germany. This shop clearly adds to the business of the assessee. No evidence is there on record that this is in replacement of an existing assets. As regards the alternative contention of allowing depreciation on such capitalization we see that the disallowance itself has been made after providing depreciation. - Decided against assessee.

Summary

Issues:
1. Disallowance under section 14A of the Income Tax Act
2. Capitalization of interest amount for a new paint shop

Issue 1: Disallowance under section 14A of the Income Tax Act:

The appeal was against the disallowance of Rs. 4,17,28,341 made by the Assessing Officer under section 14A of the Income Tax Act. The Assessing Officer held that the provisions of section 14A were applicable to the assessee's case, leading to the disallowance under Rule 8D of the Income Tax Rules. The assessee argued that all expenditure related to investments had been self-disallowed, and the Assessing Officer erred in considering certain aspects like gross interest and interest received. The CIT (Appeals) upheld the disallowance, stating that section 14A was applicable. The Tribunal noted the increase in investments during the year and the adequacy of the assessee's own funds to cover the investments, relying on relevant case law. Consequently, the Tribunal held that no disallowance under section 14A could be made, thereby deleting the disallowance made by the Assessing Officer.

Issue 2: Capitalization of interest amount for a new paint shop:

The Assessing Officer capitalized interest of Rs. 20,24,929 related to the investment in a new paint shop, considering it as per section 36(1)(iii) and Explanation-8 to section 43(1) of the Act. The assessee contended that no interest-bearing funds were used for the paint shop and that it was a replacement, not an extension of business. However, the CIT (Appeals) rejected these arguments. The Tribunal observed that the paint shop was a new asset purchased during the year, imported from Germany and commissioned in January, 2008. The disallowance was based on the use of interest-bearing funds from the C/C account, allowed by the bank for business purposes. The Tribunal found no merit in the assessee's contentions and upheld the disallowance, noting that depreciation had already been provided. Consequently, the ground of appeal on this issue was dismissed.

In conclusion, the Tribunal partly allowed the assessee's appeal, deleting the disallowance under section 14A while upholding the capitalization of interest amount for the new paint shop.