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2016 (10) TMI 1043 - AT - Income TaxAddition u/s 14A - whether investments in shares of subsidiary company is not an asset yielding tax free income and has to be totally excluded from computation of disallowance of expenditure u/s 14A - Held that - Rule 8D of Income-tax Rules, 1962 is not applicable for the impugned assessment year 2007-08, while reasonable disallowance is to be made of expenditure incurred in relation to the earning of income which does not form part of the total income, keeping in view the mandate of Section 14A of the Act. Reliance is placed on the decision of Hon ble Bombay High Court in the case of Godrej and Boyce Manufacturing Company Limited (2010 (8) TMI 77 - BOMBAY HIGH COURT). In our considered view, end of justice will be met if disallowance u/s 14A of the Act be made @5% of total dividend income claimed to be exempt by the assessee which is a reasonable disallowance keeping in view facts and circumstances of the case. Disallowance made u/s. 40A(2)(b) - CIT-A directing the AO to adopt the cost per transaction at ₹ 3.06 against ₹ 1.64 worked out by the AO - Held that - Section 40A(2) of the Act is not applicable to co-operative society and thus, the additions made based on the premise that Section 40A(2) of the Act is applicable to co-operative society is not sustainable in law and hence is ordered to be deleted. Further, it is the say of the assessee that tax effect is neutral and there is no loss to the Revenue as the said subsidiary company SIL is also paying tax at the same rate and hence no prejudice is caused to the Revenue as the Revenue has got due taxes albeit paid by SIL who is subsidiary of the assessee on the charges received from assessee. See - CIT Versus MANJARA SHETKARI SAHAKARI SAKHAR KARKHANA LTD. 2007 (8) TMI 260 - BOMBAY HIGH COURT . We order accordingly and this ground is decided against Revenue. Interest expenditure allowance - Nature of expenditure - revenue v/s capital - whether CIT(A) erred in not accepting the allocation of interest expenditure towards property construction made by the assessee itself out of the total interest paid on the entire borrowed funds ? - Held that - There is no finding of fact recorded by the Revenue that borrowed funds were used by the assessee, while it is the say of the assessee that no borrowed funds were utilized by the assessee for construction of Building.The assessee has debited and capitalized notional interest of ₹ 61.76 lacs out of total interest incurred during the year, towards cost of construction in its books of accounts keeping in view AS-16 issued by ICAI, while later on the advise of the auditors same was claimed as revenue expenditure in the revised return of income filed with the Revenue. It is established principle that entries in the books of accounts are not decisive of the nature and character of expenses. It is not material and relevant how the assessee treated these expenses in its books of account but what is material and relevant is the allowability of these expenses as revenue expenses as per provisions of the Act. Once the expenditure is found to be allowable as revenue expenditure as per provisions of the Act, the same are to be allowed as revenue expenditure under the Act while computing income chargeable to tax even if the tax-payer has given different treatment in its books of account by capitalizing the same in its books of account instead of debiting it to the Profit and Loss Account. This is the mandate of the Act which has to be followed as the taxes can only be collected by the authority of law. In our considered view based on our above discussions and reasoning as set out above, the addition made by the A.O. is not sustainable keeping in view factual matrix of the case and we do not find any infirmity in the orders of the learned CIT(A) which we affirm/sustain and Revenue appeal is dismissed on this ground. Disallowance for delayed PF employee s contribution to PF authorities - Held that - No disallowance u/s 43B of the Act r.w.s. 2(24)(x) and 36(1)(va) of the Act is warranted in the instant case as the assessee in the instant case paid the employees contribution towards PF within grace period as allowed by PF statute and in any case the employee contribution to PF was deposited with PF authorities before the due date prescribed u/s 139(1) of the Act for filing of the return of income with the Revenue. We order accordingly. Computing disallowance u/s 14A - Held that - The matter need to be restored back to the file of the AO for de-novo determination of the issue on merits as while computing disallowance of interest expenditure and if the assessee s own interest free funds are more than the investments in the securities capable of yielding exempt income, presumption will apply unless rebutted by the Revenue that the assessee has utilized its own interest-free funds for making investment in securities which are capable of yielding exempt income. We order accordingly. Levy of interest u/s. 234B and 234C - Held that - Plea/contentions of the assessee that there was a sudden spurt in advances in the month of March 2010 while led to increase in advance tax liability which could not be anticipated while estimating advance tax liability as per provisions of the Act need verification by the AO and hence we are inclined to set aside and restore this issue to the file of the AO for de-novo adjudication of the issue on merits in accordance with law.
Issues Involved:
1. Disallowance of expenditure under Section 14A of the Income-tax Act, 1961. 2. Disallowance under Section 40A(2)(b) of the Act. 3. Treatment of interest expenditure as capital or revenue expenditure. 4. Disallowance for delayed PF employee’s contribution. 5. Levy of interest under Sections 234B and 234C of the Act. Detailed Analysis: 1. Disallowance of Expenditure under Section 14A: The Revenue challenged the CIT(A)’s decision to restrict the disallowance to ?3,55,270/- under Section 14A of the Income-tax Act, 1961, against the AO's disallowance of ?1,59,23,145/- for the assessment year 2007-08. The AO applied Rule 8D of the Income-tax Rules, 1962, which was deemed inapplicable for the year in question as per the Bombay High Court’s ruling in Godrej and Boyce Manufacturing Company Limited v. DCIT. The Tribunal held that a reasonable disallowance should be made, and set it at 5% of the total dividend income, amounting to ?2,58,64,934/-. The Tribunal also noted that strategic investments should be included in the computation of disallowance under Section 14A. 2. Disallowance under Section 40A(2)(b): The AO disallowed ?7.95 crores paid to the related enterprise Saraswat Infotech Limited (SIL) under Section 40A(2)(b) of the Act, considering it excessive. The CIT(A) partially upheld this, directing the AO to adopt a cost per transaction of ?3.06. The Tribunal, however, ruled that Section 40A(2) does not apply to cooperative societies, based on the Bombay High Court's ruling in CIT v. Manjara Shetkari Sahakari Sakhar Karkhana Limited. Consequently, the disallowance was deleted. 3. Treatment of Interest Expenditure: The AO disallowed ?61,76,025/- as capital expenditure, which the assessee had claimed as revenue expenditure in a revised return. The CIT(A) allowed the claim, noting that the interest was not actually paid towards borrowed funds for construction. The Tribunal upheld this, citing that the assessee’s own funds were sufficient for the construction, and the interest was notional. It emphasized that the entries in the books are not decisive of the nature of the expense. 4. Disallowance for Delayed PF Employee’s Contribution: The assessee’s delayed PF contributions were disallowed by the AO, but the CIT(A) and Tribunal ruled in favor of the assessee, citing the Bombay High Court’s decision in CIT v. Ghatge Patil Transports Limited and the Supreme Court’s ruling in CIT v. Alom Extrusions Limited. The contributions paid within the grace period or before the due date of filing the return were deemed allowable. 5. Levy of Interest under Sections 234B and 234C: The assessee contested the levy of interest under Sections 234B and 234C due to a sudden spurt in advances in March 2010, which could not have been anticipated. The Tribunal remanded the issue to the AO for verification of the assessee's claim, directing that proper opportunity be given to the assessee to present their case. Conclusion: The Tribunal partly allowed the appeals, providing relief on several grounds while ensuring adherence to legal precedents and principles of natural justice. The rulings emphasized the importance of reasonable disallowance, the non-applicability of Section 40A(2) to cooperative societies, and the correct treatment of interest expenses and PF contributions. The Tribunal also highlighted the necessity for tax authorities to assist taxpayers and ensure only legitimate taxes are collected.
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