2014 (1) TMI 621 - AT - Income Tax

Disallowance u/s 14A - Held that - Following Godrej & Boyce Manufacturing Company Ltd. vs. DCIT and Others 2010 (8) TMI 77 - BOMBAY HIGH COURT - the provision of section 14A are applicable and the disallowance has to be worked out by the A.O. on some reasonable basis and not under Rule 8D. Since the A.O. while calculating the disallowance u/s.14A has also applied Rule 8D of the Income Tax Rules, 1962, which is applicable from the A.Y. 2008-09 - The issue has been restored for fresh adjudication. Exemption u/s 10(35) - Held that - The assessee has earned tax free income from bonds of UTI - CIT(A) held that the decisions in CIT vs. Silk & Art Silk Mills Association Ltd. 1989 (10) TMI 35 - BOMBAY High Court distinguish - Even if the income is exempt, the same has to be included in the gross receipts and has to be applied as per provisions of section 11(1) because income has to be computed in commercial manner - The ld. CIT(A) has not adjudicated the issue properly and has not passed a reasoned order - The issue has been restored to the file of CIT(A) for fresh adjudication in accordance with the decision in General Insurance Corporation of India vs. DCIT 2011 (12) TMI 70 - BOMBAY HIGH COURT . Whether depreciation on fixed assets claimed as application of income be double deduction - Held that - Following Lissie Medical Institutions vs. CIT 2012 (4) TMI 115 - KERALA HIGH COURT - Assessee is not claiming double deduction on account of depreciation as has been held by the Revenue Authorities - The income of the assessee being exempt, the assessee is only claiming that depreciation should be reduced from the income for determining the percentage of funds which have to be applied for the purpose of Trust - There is no double deduction claimed by the assessee - Decided in favour of assessee. Denial of claim of adjustment of carry forward of excess application of income - Held that - The assessments for the earlier assessment years (i.e. 2003-04) are still pending before the A.O. in which the Tribunal has directed the A.O. to allow exemption as a result of registration u/s 12AA which is now available to the assessee - The issue has been restored for fresh adjudication in view of the decision of the Tribunal. Interest u/s 234D - Held that - Following CIT vs. M/s Indian Oil Corporation Ltd. 2012 (9) TMI 517 - BOMBAY HIGH COURT - As per Explanation 2 which has been inserted in sec 234D by the Finance Act, 2012 with retrospective effect from 1.6.2003 - The provisions of sec. 234D shall also apply to the assessment year commencing before the first day of June, 2003 if the proceedings in respect of such assessment year is completed after the said date - The A.O. was justified in charging the interest u/s 234D of the Act - Decided against assessee.

Summary

Issues Involved:
1. Sustenance of addition under Section 14A of the Income Tax Act.
2. Denial of exemption under Section 10(35) of the Income Tax Act.
3. Disallowance of depreciation on application of income.
4. Denial of claim of adjustment of carry forward of excess application of income of earlier years.
5. Levy of interest under Section 234D of the Income Tax Act.

Detailed Analysis:

1. Sustenance of Addition under Section 14A:
The Assessing Officer (A.O.) observed that the assessee had shown tax-free income from UTI bonds and, as per Section 14A, no deduction is allowed for expenditure incurred in relation to income not forming part of the total income. The assessee argued that no direct expenditure was incurred to earn this income, and investments in tax-free bonds were made from statutory reserves, not borrowed funds. However, the A.O. made a disallowance of Rs. 77,23,789/- applying Rule 8D, which was confirmed by the CIT(A). The Tribunal, following the jurisdictional High Court decision in Godrej & Boyce Manufacturing Company Ltd., set aside the orders and directed the A.O. to make a reasonable disallowance without applying Rule 8D, effective from A.Y. 2008-09.

2. Denial of Exemption under Section 10(35):
The A.O. included the income from UTI bonds in the gross receipts, stating it must be applied as per Section 11(1). The CIT(A) upheld this view. The Tribunal found that the CIT(A) had not adjudicated the issue properly and set aside the order, directing the CIT(A) to reconsider the matter in light of relevant legal precedents, including the Bombay High Court decision in General Insurance Corporation of India vs. DCIT.

3. Disallowance of Depreciation on Application of Income:
The A.O. disallowed depreciation on fixed assets, citing the Supreme Court decision in Escorts India Ltd. The CIT(A) upheld this, stating it amounted to double deduction. The Tribunal, however, referenced the Bombay High Court decision in CIT vs. Institute of Banking Personal Selection, which allowed depreciation to be deducted from income for determining the application of funds. The Tribunal found no double deduction and allowed the assessee's claim for depreciation.

4. Denial of Claim of Adjustment of Carry Forward of Excess Application of Income of Earlier Years:
The A.O. denied the claim for set off of excess application of income from earlier years, stating the returns were barred by limitation and the exemption under Section 11 was not claimed. The CIT(A) upheld this view. The Tribunal noted that the assessments for earlier years were still pending and remitted the matter back to the A.O. for reconsideration in light of the Tribunal's earlier directions and any relevant documentation provided by the assessee.

5. Levy of Interest under Section 234D:
The CIT(A) upheld the A.O.'s levy of interest under Section 234D, stating it was mandatory. The Tribunal referenced the Bombay High Court decision in CIT vs. M/s Indian Oil Corporation Ltd. and the Special Bench decision in Kotak Mahindra Capital Co. Ltd. vs. ACIT, which clarified that Section 234D applies to pending proceedings as of 1/6/2003. The Tribunal upheld the levy of interest under Section 234D.

Conclusion:
The Tribunal provided a detailed analysis and directions for each issue, setting aside certain orders for reconsideration and upholding others based on relevant legal precedents and judicial interpretations. The appeals were partly allowed for statistical purposes.