2010 (10) TMI 214 - AT - Income Tax

Section 14A Disallowance of interest expenditure - In the case of CIT vs. Hero Cycles Ltd. (2009 -TMI - 35238 - PUNJAB AND HARYANA HIGH COURT), a finding was recorded by the Tribunal that the investment in shares and funds was made by the assessee out of the dividend proceeds and not out of borrowed funds and in view of this finding of fact, it was held by the Hon ble Punjab & Haryana High Court that the disallowance u/s 14A was not sustainable As per the decision of the Hon ble Punjab & Haryana High Court in the case of Hero Cycles Ltd. and having regard to the facts of the case, hold that the disallowance made by the A.O. out of interest expenses u/s 14A and confirmed by the ld. CIT(A) is not sustainable disallowance out of common administrative expenses - As held by the Hon ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. (2010 - TMI - 78448 - BOMBAY HIGH COURT), Rule 8D of the Income Tax Rules 1962 is applicable only prospectively i.e. from A.Y. 2008 by adopting some reasonable method Hence disallowance made by the A.O. has been sustained by the ld. CIT(A) to the extent of 5% of the total exempt income earned by the assessee - The assessee s appeal are accordingly allowed Disallowance pf amortization of premium paid by the assessee for leasehold land Which is squarely covered against the assessee by the orders of the Tribunal in assessee s own case for earlier years i.e. A.Y. 2000-01 to 2003-04 - Dismiss the assessee s appeal Depreciation on the opening written down value of the block of assets - The appellate order for immediately preceding assessment year is also squarely covered against the assessee by the decision of the Tribunal in assessee s won case for A.Y. 2003-04 rendered vide its order dated 30.9.2008 in ITA No. 4197/Mum/06 wherein a similar claim of the assessee has been disallowed by the Tribunal.

Summary

Issues: Disallowance of interest and other expenses under section 14A read with Rule 8D.

The judgment involves a common issue related to the disallowance of interest and other expenses by invoking section 14A read with Rule 8D. The appellant, a company engaged in various businesses, including shares and securities, faced disallowance of expenses attributable to earning exempt income. The Assessing Officer (A.O.) required justification for not making disallowances under section 14A. The appellant argued that no specific expenditure was incurred in earning dividends and that borrowed funds were used for business purposes, not investments. The A.O. disagreed, citing diversion of borrowed funds for investments. The A.O. disallowed interest and administrative expenses, upheld by the CIT(A) but restricted on appeal. The Tribunal noted that Rule 8D is applicable prospectively from A.Y. 2008-09, thus rejecting its retrospective application for quantifying disallowances.

The Tribunal analyzed the disallowance of interest expenditure under section 14A. The appellant demonstrated that investments were made from own funds, while borrowed funds were used for business purposes. The A.O.'s finding that investments exceeded capital and reserves was disputed, highlighting investments in taxable foreign companies and sufficient own funds for exempt investments. Relying on precedents, the Tribunal concluded that the disallowance of interest expenses was not sustainable and deleted it.

Regarding the disallowance of common administrative expenses under section 14A, the A.O.'s disallowance was enhanced by the CIT(A) using Rule 8D, which the Tribunal rejected due to its prospective application. The Tribunal sustained a 5% disallowance of total exempt income for administrative expenses. Other grounds of appeal were partly allowed or dismissed based on precedents and Tribunal decisions from earlier years.

The judgment also addressed specific issues such as amortization of premium for leasehold land and depreciation claims on block assets, ruling against the appellant based on previous Tribunal decisions. The overall appeal was partly allowed, considering various grounds and issues raised by the appellant.