2014 (7) TMI 837 - AT - Income Tax

Expenses on purchase on new items - Acquisition of new assets for replacement of existing assets as current repairs - Held that - AO has mentioned various items and no doubt the wooden paneling, wooden partition, some small items of steel or purchase of cement etc. may fall under repair but at the same time purchase of almirah in AY 2008-09 amounting to ₹ 102600/-, installation of board etc. cannot be termed as repair and maintenance - the assessee has shown purchase of Orissa type W.C along with G.I. Flush bend, C.I Pee Trap etc. which shows construction of new bath room. The Ld. Counsel for the assessee could not give any answer in respect of these items - At the same time there is no purpose if the issue is set aside - if 10% of items listed by the AO are held to be of capital nature Decided partly in favor of Revenue. Disallowance u/s 14A r.w. Rule 8D Held that - In earlier years before AY 2008-09 Rule 8D was not applicable Relying upon Godrej & Boyce Manufacturing Vs. DCIT 2010 (8) TMI 77 - BOMBAY HIGH COURT - Rule 8D has no retrospective application and is applicable only from Assessment year 2008-09 - it cannot be said that no expenditure is required to be incurred for making investments and receiving dividends - All the activities require involvement of various management and finance personnel which involves expenditure - Rule 8D has been rightly invoked by the AO Decided partly in favour of Assessee.

Issues Involved:
1. Deletion of addition on account of disallowance of expenditure incurred on purchase of new items.
2. Disallowance under Section 14A read with Rule 8D.

Detailed Analysis:

1. Deletion of Addition on Account of Disallowance of Expenditure:

In the appeals ITAs No. 599 & 600/Chd/2013, the Revenue contended that the Ld. CIT(A) erred in deleting the addition of Rs. 80,81,719/- made by the Assessing Officer (A.O) on account of disallowance of expenditure incurred on purchasing new items, arguing that these were new identifiable assets and should be considered capital expenditure.

The A.O had identified expenses on building repairs amounting to Rs. 189.77 lakhs and plant & machinery repairs amounting to Rs. 193.39 lakhs, deeming certain items as capital in nature and adding 20% labor expenses to these items, resulting in capital nature sums of Rs. 59,13,039/- and Rs. 27,59,984/- respectively.

The Ld. CIT(A) deleted these additions, referencing the Tribunal's earlier orders in the assessee's case for previous years (ITA No. 594/Chd/2008 and ITA No. 107/Chd/2010).

Upon review, the Tribunal found merit in the Revenue's argument that each year's items should be examined on their own merits, as the nature of items can differ annually. The Tribunal concluded that while some items could be considered repairs, others like the purchase of almirahs and construction of new bathrooms should be treated as capital expenditure. The Tribunal directed that 10% of the items listed by the A.O should be treated as capital expenditure, with requisite depreciation allowed on the capital portion.

Thus, the appeals of the Revenue in ITAs No. 599 & 600/Chd/2013 were partly allowed.

2. Disallowance under Section 14A read with Rule 8D:

In the appeals ITAs No. 644 & 645/Chd/2013, the assessee objected to the disallowance under Section 14A read with Rule 8D. The A.O had observed that the assessee made fresh investments in shares and mutual funds and disallowed Rs. 144.03 lakhs attributable to exempt income, invoking Rule 8D.

The Ld. CIT(A) upheld the A.O's decision, noting that the Tribunal had made an ad-hoc addition of Rs. 25 lakhs in earlier years, and Rule 8D provided a mechanism for apportioning expenditure related to exempt income.

The Tribunal agreed with the Ld. CIT(A) that the earlier years' orders did not cover the issue as Rule 8D was applicable only from Assessment year 2008-09, as held by the Hon'ble Bombay High Court in Godrej & Boyce Manufacturing Vs. DCIT. The Tribunal found that the A.O had provided sufficient reasoning for invoking Rule 8D, emphasizing the necessity of monitoring and managing investments, which involves expenditure.

However, for Assessment year 2009-10, the Tribunal agreed with the assessee's contention that disallowance under Rule 8D(iii) should be proportionate to the period of operation (four months) and directed the A.O to verify and adjust the disallowance accordingly. Additionally, if no interest expenditure was incurred, no proportionate disallowance should be made out of interest.

Thus, the appeal of the assessee in ITA No. 644/Chd/2013 was dismissed, and ITA No. 645/Chd/2013 was partly allowed.

Conclusion:

The Tribunal's consolidated order resulted in the partial allowance of the Revenue's appeals (ITAs No. 599 & 600/Chd/2013) and the partial allowance of the assessee's appeal for Assessment year 2009-10 (ITA No. 645/Chd/2013), while dismissing the assessee's appeal for Assessment year 2008-09 (ITA No. 644/Chd/2013).

Order pronounced in the open court on 20.5.2014.

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