2014 (2) TMI 843 - AT - Income Tax

Reduction in capital advances given to suppliers - Acquisition of land from Capital-Work-in- Progress Held that - The assessee has merely given the advances to the suppliers/contactors/sellers and the expenses have not been actually incurred - Nor any bills have been raised by the persons to whom the advances have been made the CIT(A) has rightly held that the said advances given by assessee towards expenditure that may arise or may arise in future cannot be said to be capital in nature -there is no confirmation regarding expenditure incurred or to be incurred by assessee Decided against Assessee. Disallowance u/s 14A r.w Rule 8D of the Act Held that - The contention of the assessee has merits that no borrowed funds were used by assessee for making the said investment - the borrowed money was taken by assessee from IDFC as secured loan which the assessee could utilized only for setting up hotel project the disallowances of out of interest is not justified - AO has made disallowance of expenses as per Rule 8D(iii) of the Rules, the formula prescribed by Legislature which is applicable from assessment year under consideration - there is no arbitrarily disallowance, made by AO but has followed the statutory formula to make the disallowance towards attributable administrative expenses there is no need to interfere in the decision of CIT(A) in confirming the disallowance Decided partly in favour of Assessee.

Summary

Issues:
1. Dispute over reducing capital advances from CWIP.
2. Disallowance of expenses under section 14A of the Income Tax Act.

Issue 1: Dispute over reducing capital advances from CWIP

The appellant contested the reduction of capital advances given to suppliers and for land acquisition from Capital-Work-in-Progress (CWIP) by the ld. CIT(A). The Assessing Officer (AO) observed that the appellant had given advances to suppliers and for land acquisition, which were included in CWIP for hotel construction. The AO contended that since the actual cost did not arise during the year, the advances should not be part of CWIP. The appellant argued that as per accounting standards, these advances would eventually become fixed assets when capitalized. The ld. CIT(A) upheld the AO's decision, stating that the advances were not towards confirmed expenditure and could not be part of CWIP. The Tribunal agreed, noting that the expenses were not actually incurred, and there was no confirmation of future expenditure, thus rejecting the appellant's appeal.

Issue 2: Disallowance of expenses under section 14A of the Income Tax Act

The AO disallowed expenses amounting to Rs.6,32,887 under section 14A of the Income Tax Act, related to exempt dividend income claimed by the appellant. The AO applied Rule 8D of the Income Tax Rules, calculating the disallowance based on proportionate interest and expenses. The ld. CIT(A) upheld the AO's decision. During the appeal, the appellant argued that no borrowed funds were used for investments and no administrative disallowance should apply. The Tribunal considered the balance-sheet and profit and loss account, finding merit in the appellant's argument regarding the interest disallowance. However, the disallowance of administrative expenses under Rule 8D(iii) was justified as the appellant had not attributed any expenditure to earning exempt dividend income. Therefore, the Tribunal allowed the appeal in part by deleting the interest disallowance but upholding the administrative expenses disallowance.

In conclusion, the Tribunal partially allowed the appeal, ruling in favor of the appellant on the interest disallowance issue but confirming the disallowance of administrative expenses under section 14A of the Income Tax Act.