2012 (7) TMI 626 - AT - Income Tax

Disallowance of interest expenses and Management expenses u/s 14A - CIT deleted the disallowance - re opening of assessment - Held that - The A.O. did not establish any nexus between the borrowed funds and the investments. Nothing has been brought on record by the A.O. to rebut the assessee s contentions that the investments have been made from own interest free funds and not borrowed funds. The assessee has submitted that he has not incurred any expenses for earning the income but the A.O. has not given any clear finding of incurring of expenses, and has not established nexus of expenses incurred with the earning of exempt income - invoking Rule 8D to disallowance is not warranted as AY under appeal is 1999-2000 and Rule 8D is to be applied prospectively from Assessment Year 2008-09 onwards - against revenue. Deletion of disallowance of software expenses by CIT(A) - Held that - CIT (A) has given a finding to the effect that the issue of software expenses was disallowed by A.O. in the original assessment and CIT (A) had allowed the assessee s appeal. In the second round, in reassessment proceedings, the A.O. has again raked up that very issue of disallowance of software expenses which had already reached to the finality in favour of the assessee by the order of ITAT - against revenue.

Summary

Issues Involved:
1. Disallowance of interest and management expenses under Section 14A of the Income Tax Act.
2. Deletion of disallowance of software expenses.

Detailed Analysis:

1. Disallowance of Interest and Management Expenses Under Section 14A:

Facts and Arguments:
- The assessee, a Public Limited Company, declared a total loss of Rs. 3,03,11,589/- for the assessment year 1999-00. The Assessing Officer (A.O.) disallowed Rs. 17,18,000/- for interest expenses and Rs. 1,20,000/- for management expenses under Section 14A, totaling Rs. 18,38,000/-.
- The A.O. noted that the assessee had claimed dividend income of Rs. 15,68,330/- as exempt and argued that expenses related to earning this exempt income should not be allowed. The A.O. calculated the disallowance on a proportionate basis, citing mixed funds and lack of separate accounts for investments.
- The assessee contended that the investments were made from interest-free funds and not borrowed funds, supported by the decision in ACIT vs. Eicher Ltd. The CIT (A) agreed, noting that the assessee had sufficient interest-free funds and no specific expenses were identified for earning the dividend income, thus deleting the disallowance.

Judgment:
- The Tribunal upheld the CIT (A)'s decision, emphasizing that the A.O. did not establish a direct nexus between borrowed funds and investments. The Tribunal referenced Section 14A(2), stating that the A.O. can only invoke Rule 8D if not satisfied with the correctness of the assessee's claim. Since the assessment year was 1999-2000 and Rule 8D applies prospectively from 2008-09, the Tribunal directed the deletion of the addition.

2. Deletion of Disallowance of Software Expenses:

Facts and Arguments:
- The assessee claimed software expenses of Rs. 14,58,990/- as revenue expenditure but treated it as deferred revenue expenditure in its books, writing off Rs. 4,86,330/-. The A.O. initially disallowed Rs. 9,72,660/- in the original assessment, which was deleted by the CIT (A) and upheld by the ITAT.
- During reassessment, the A.O. again disallowed Rs. 10,94,242/- for software expenses, arguing that the software expenses should be treated as capital expenditure eligible for depreciation, not as revenue expenditure.
- The CIT (A) found that the issue had already been decided in favor of the assessee in the original assessment and the reassessment was a change of mind by the A.O. without new grounds.

Judgment:
- The Tribunal agreed with the CIT (A), noting that the issue had reached finality in favor of the assessee by the ITAT's previous order. The A.O.'s action in the reassessment was seen as unjustified since the matter had already been conclusively decided. Consequently, the Tribunal dismissed the Revenue's appeal on this ground.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT (A)'s decisions on both issues: the disallowance under Section 14A and the treatment of software expenses. The Tribunal emphasized the necessity of establishing a direct nexus for disallowances and respected the finality of previously adjudicated matters. The judgments were pronounced in open court on 29-6-2012.