2014 (3) TMI 260 - AT - Income Tax

Disallowance under section 14A of the Act Held that - The Assessee has not placed any material to demonstrate the number of transactions and the details of receipt of exempt income - The Assessee has also not been able to demonstrate that no administrative expenses at all have been incurred for earning the exempt income - CIT(A) while deleting the disallowance has not given any detailed finding but by passing a very cryptic order has summarily upheld the disallowance - It is a settled law that the principle of res judicata is not applicable in income tax matters and each assessment year is separate unit of assessment thus, the disallowance is restricted to a sum instead made by the AO Decided partly in favour of Assessee. Depreciation on lease hold land Held that - The Decision in Torrent Power Ltd., Torrent House Versus Assistant Commissioner of Income Tax 2014 (2) TMI 1020 - ITAT AHMEDABAD followed - Merely because the deed was registered the transaction in question would not assume a different character - By obtaining the land on lease the assessee has acquired a facility to carry on business by paying nominal lease rent, therefore, lease rent paid was held allowable as Revenue expenditure - The matter remitted back to the AO for examination of the facts Decided in favuor of Assessee. Disallowance of fees paid for new project at Bhuvneshwar Held that - Assessee submitted that the expenditure was incurred for the study relating to possible expansion of project in the same line of business and the expenditure has neither brought into existence any new asset nor has resulted into any benefit of enduring nature to the Assessee and the project could not materialize and abandoned but, no tangible material has been placed on record before us by Assessee in support of the contentions - report which the Assessee had received from Ernst and Young was also not placed on record thus, the order of A.O. upholding the disallowance needs to be upheld and that of CIT(A) on the ground set aside Decided against Revenue.

Summary

Issues Involved:
1. Disallowance of administrative expenses under section 14A of the Income Tax Act.
2. Depreciation on leasehold rights for 99 years.
3. Allowance of expenditure under section 37(1) for fees paid for a new project study.

Issue-wise Detailed Analysis:

1. Disallowance of Administrative Expenses under Section 14A:

During the assessment proceedings, the Assessing Officer (A.O.) noted that the Assessee had shown exempt income from tax-free bonds and dividends totaling Rs. 6,26,76,144/-. The A.O. disallowed administrative expenses under section 14A, applying Rule 8D, resulting in a disallowance of Rs. 56,55,938/-. The Assessee argued that sufficient interest-free funds were available, and no specific efforts were made to earn the exempt income, thus no administrative expenses should be disallowed. The CIT(A) partially agreed, deleting the interest disallowance of Rs. 23,81,088/- but upholding the administrative expenses disallowance of Rs. 32,74,850/-.

The Tribunal noted that Rule 8D was not applicable for the assessment year 2007-08, as per the Bombay High Court decision in Godrej Boyce Manufacturing Company Ltd. The Tribunal found that the Assessee did not provide sufficient evidence to demonstrate that no administrative expenses were incurred for earning the exempt income. Consequently, the Tribunal restricted the disallowance to Rs. 10 lacs instead of the original Rs. 56,55,938/-.

2. Depreciation on Leasehold Rights for 99 Years:

The Assessee claimed depreciation on leasehold land, which was disallowed by the A.O. on the grounds that the lease was for 99 years, effectively making the Assessee the owner, and the payment was capital in nature. The CIT(A) upheld this view, referencing the Tribunal's earlier decision in the Assessee's own case, which denied depreciation on leasehold rights and treated the payment as capital expenditure.

The Tribunal, however, noted that the issue was previously remitted back to the A.O. for re-examination in light of the Gujarat High Court decision in DCIT vs. Sun Pharmaceuticals Industries Ltd., which allowed similar expenditures as revenue expenditure. The Tribunal directed the A.O. to re-examine the facts and decide the issue accordingly.

3. Allowance of Expenditure under Section 37(1) for Fees Paid for New Project Study:

The A.O. disallowed Rs. 12,28,579/- paid to Ernst and Young for a study relating to a new project in Bhuvaneshwar, considering it capital expenditure. The CIT(A) reversed this, allowing the expenditure as revenue since the project was abandoned and did not result in any asset or enduring benefit.

The Tribunal found no tangible evidence from the Assessee to support the claim that the expenditure was for the existing business and that the project was abandoned. Consequently, the Tribunal upheld the A.O.'s disallowance, setting aside the CIT(A)'s order on this ground.

Conclusion:

The Tribunal partly allowed the Assessee's appeal, restricting the disallowance under section 14A to Rs. 10 lacs and remitting the issue of depreciation on leasehold rights back to the A.O. for re-examination. The Tribunal also partly allowed the Revenue's appeal, upholding the disallowance of fees paid for the new project study.