2016 (8) TMI 1219 - AT - Income Tax

Disallowance applying Rule 8D u/s 14A - Held that - As in the present case there is no satisfaction of the assessing officer based on tangible material that interest bearing funds have been used for investment in tax free income earning securities therefore we reverse the finding of the ld CIT (A) in confirming the disallowance u/s 14A. Disallowing of interest expenditure treating it as capital expenditure - Held that - According to the details furnished capital work in progress includes amount for purchase of land as well as building under construction and advances to contract and the total capital work in progress is of ₹ 2.88 crores. Assessee has shown that total interest has been paid for working capital finance except a small sum for terms loan. Assessee has submitted that it has not borrowed any sum for acquisition of land as well as for construction and this argument is not controverted by revenue, no interest according to us is in relation to acquisition of this assets is claimed as expenditure by the assessee. In view of fact that assessee has not borrowed any capital for acquisition of an asset which the plot at Noida or construction thereon, we are of the view that the claim of the assessee is not hit by the first proviso 36(1)(iii) and therefore no disallowance on account of interest to be capitalized for that asset can be made. Disallowance of expenditure as capital expenditure - R&D expenditure - Held that - We do not find that the assessee has purchased any new capital asset or has acquired enduring benefit. It is only an operational benefit that has arisen to the assessee, which does not result, into any capital asset and therefore the expenditure is allowable as revenue expenditure. Even otherwise, the provision of section 35(1) allows deduction with respect to capital expenditure as well as revenue expenditure both on account of research and development expenditure. Therefore, we reverse the finding of the ld CIT(A) with respect of disallowance of research and development expenditure. Purchase of accounting software - Held that - As it is stated that it is an annual expenditure for the license of the software. Such software license purchase cannot be held to be capital expenditure as it is merely a license to use that software for a particular period not culminating in to any enduring benefit to the assessee. Therefore we reverse the finding of the ld CIT (A) with respect to software expenditure and direct the same to be allowed as revenue expenditure. Repairs and maintenance expenditure - Held that - The bill of the architect also shows that it was renovation expenditure of the premises. The assessee also incurred repairs expenditure for premises etc. looking to the details of such expenses, which are petty in nature and routine, looking to the total assets of the company as on 31.03.2008 having gross block of ₹ 4.36 crores. The above expenditure has also not resulted in to new asset and further no new construction has been allegedly undertaken by the assessee. Assessee has also explained reasons about why these expenditure are necessary. Thus we reverse the finding of the ld CIT(A) in confirming the disallowance as capital expenditure and not repairs and renovation

Issues Involved:
1. Prejudicial observations in appellate and assessment orders.
2. Confirmation of addition under Section 14A read with Rule 8D of the Income Tax Rules.
3. Disallowance of interest under proviso to Section 36(1)(iii) of the Income Tax Act, 1961.
4. Confirmation of expenditure as capital expenditure.

Issue-wise Detailed Analysis:

1. Prejudicial Observations:
The first ground of appeal was dismissed as it was general in nature and did not require further deliberation.

2. Confirmation of Addition under Section 14A read with Rule 8D:
The assessee contested the confirmation of disallowance of ?9,243 under Rule 8D of Section 14A. The assessee argued that the investment in equity shares was made from non-interest-bearing funds and no interest was paid during the year. However, the Assessing Officer (AO) applied Rule 8D and disallowed ?9,243, which was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) noted that the appellant had not proven the nexus between interest expenditure and exempt income and that netting of interest was not permissible under Rule 8D. The ITAT referred to the jurisdictional High Court's decision in the case of AVON Cycles Ltd v. CIT, which upheld the application of Rule 8D(2)(ii) for mixed funds, and Abhishek Industries Limited, which emphasized the need for tangible material to record satisfaction. The ITAT concluded that the AO did not have tangible material to prove that interest-bearing funds were used for tax-free investments, thereby reversing the CIT(A)’s decision and allowing the assessee's appeal on this ground.

3. Disallowance of Interest under Proviso to Section 36(1)(iii):
The assessee challenged the disallowance of ?1,29,000 as interest expenditure, arguing that no funds were borrowed for capital work in progress and that sufficient non-interest-bearing funds were available. The AO disallowed the interest by applying Section 43(1) read with Section 36(1)(iii), which was upheld by the CIT(A). The ITAT examined the provisions of Section 36(1)(iii) and the proviso added from 01.04.2004, which disallows interest paid on capital borrowed for asset acquisition until the asset is put to use. The ITAT found that the assessee had not borrowed funds for capital work in progress and that the AO had not demonstrated otherwise. The ITAT accepted the assessee's argument that it had sufficient non-interest-bearing funds and reversed the CIT(A)’s decision, allowing the appeal on this ground.

4. Confirmation of Expenditure as Capital Expenditure:
The assessee contested the disallowance of ?3,86,388 as capital expenditure, which included research and development (R&D) expenditure, software purchase, and building repairs. The AO disallowed these expenditures, treating them as capital in nature, and this was upheld by the CIT(A). The ITAT reviewed the nature of the expenditures:
- R&D Expenditure: The ITAT found that the expenditure was for operational purposes and did not result in a new capital asset, thus allowing it as revenue expenditure under Section 35(1).
- Software Purchase: The ITAT determined that the software purchase was an annual expenditure for a license and did not provide enduring benefits, thus allowing it as revenue expenditure.
- Building Repairs: The ITAT noted that the expenditure was for termite treatment and renovations, which were routine and did not result in new assets. Thus, it allowed the repairs and maintenance expenditure as revenue expenditure.

The ITAT reversed the CIT(A)’s decision on all counts and allowed the appeal on this ground.

Conclusion:
The appeal was partly allowed, with the ITAT reversing the CIT(A)’s decisions on the disallowances under Section 14A, Section 36(1)(iii), and the capital expenditure, thereby favoring the assessee on these grounds. The order was pronounced in the open court on 11/08/2016.

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