2016 (5) TMI 1416 - AT - Income Tax

Disallowance of proportionate interest and indirect expenditure u/s. 14A - Held that - Considering the facts and circumstances of the case and also respectfully following the coordinate bench decision in assessee s own case for the earlier period we are of the opinion that the CIT(A) has rightly deleted the additions made towards proportionate interest and upheld the additions made towards indirect expenditure. We do not see any error or infirmity in the order passed by the CIT(A). Hence we inclined to uphold the order passed by the CIT(A) and reject the ground raised by the assessee as well as revenue. Disallowance of expenditure under the head repairs and maintenance - Held that - A.O. was right in disallowing certain expenditure under the head repairs and maintenance as capital expenditure by depending upon the functions and characteristics of each item of machinery. The CIT(A) after examining the each item had given relief to the items which are considered to be revenue in nature and upheld the action of the A.O. wherever the expenditure are in the nature of capital in nature. The CIT(A) has discussed each and every item of disallowances made by the A.O. and given his findings how a particular item is plant and machinery which constitute capital in nature or a particular item is replacement of parts of existing machinery which constitute revenue in nature. We do not see any error or infirmity in the order passed by the CIT(A). Hence we inclined to uphold the order of the CIT(A) and reject the ground raised by the assessee as well as revenue.

Summary

Issues Involved:
1. Disallowance of proportionate expenditure under Section 14A of the Income Tax Act.
2. Reducing the deduction under Section 80IA of the Income Tax Act.
3. Disallowance of expenditure under the head Repairs and Maintenance.

Issue-wise Detailed Analysis:

1. Disallowance of Proportionate Expenditure under Section 14A of the Income Tax Act:
The assessee received dividend income exempt under Section 10(34) but did not disallow any related expenditure. The Assessing Officer (A.O.) issued a show-cause notice and subsequently disallowed interest and indirect expenses on a pro-rata basis under Section 14A. The assessee argued that investments were made long ago and not from borrowed funds. The CIT(A) partially agreed, disallowing only administrative expenses but not interest, citing a lack of direct nexus between borrowed funds and investments. The ITAT upheld this view, emphasizing that administrative expenses related to earning exempt income should be disallowed proportionately, but not interest, as the investments were made from surplus funds.

2. Reducing the Deduction under Section 80IA of the Income Tax Act:
The assessee did not press the issue of reducing deductions under Section 80IA during the hearing. Consequently, this ground was dismissed as not pressed.

3. Disallowance of Expenditure under the Head Repairs and Maintenance:
The A.O. disallowed certain expenditures under repairs and maintenance, treating them as capital expenditures providing enduring benefits. The assessee contended these were current repairs necessary for maintaining the plant's operational status. The ITAT examined the nature of each expenditure item, distinguishing between capital and revenue expenditures. It upheld the CIT(A)’s decision, which allowed some items as revenue expenditures while treating others as capital expenditures based on their characteristics and usage in the business. The ITAT confirmed that expenditures providing enduring benefits should be capitalized, whereas those for maintaining operational efficiency should be treated as revenue expenditures.

Conclusion:
The ITAT dismissed the appeals filed by both the assessee and the revenue, upholding the CIT(A)’s decisions on all issues. The order was pronounced in the open court on 20th May 2016.