2014 (11) TMI 771 - AT - Income Tax

Disallowance u/s 14A r.w Rule 8D on interest expenses - Held that - Neither the AO nor CIT(A) has taken any step to verify the claim of the assessee that its own fund was sufficient for making the investment - once the assessee has claimed that his own fund is available for investment then it is incumbent upon the AO to examine and verify the claim of the assessee and then give the finding on the availability as well as use of interest free fund - a very relevant aspect has not been examined regarding investment in the subsidiary and group concern - So far as the investment in the subsidiary is concerned, it is not with the motive and purpose of earning dividend income but for holding controlling stake in the subsidiary - if the investments in subsidiary is for control and for a long period then for the purpose of disallowance as per formula provided under Rule 8D, the amount of investment should be executed from the average investment. None of the aspects were examined by the authorities - the assessee s main business activity is only investment and earning the interest income - Therefore, it is not the case of the surplus fund parked by the assessee in the bank account for earning the interest or otherwise advanced for earning the interest but the interest earned by the assessee is part of its business activity - for the purpose of disallowance of interest u/s 14A, the interest income being the main business activity of the assessee cannot be set off against the business expenditure to the extent of borrowed fund used for investment in shares for the purpose of working out the quantum of disallowance as per Rule 8D, the investment made in subsidiaries for the purpose of holding the stake should be executed from the average investment the AO is directed to re-compute the disallowance made u/s 14A on account of administrative expenses - thus, the matter is remitted back to the AO for fresh consideration Decided in favour of assessee. Expenses on securing the power supply and towards protection from encroachment of land held as stock in trade disallowed Capital expenses or not Held that - Though the assessee has claimed that the land was held as stock-in-trade, this was not shown in the P&L account but directly taken into balance sheet - it cannot be denied that, barring ₹ 76,050/- incurred on tiling of the land, the balance expenditure would go to enhancing the value of the stock in trade - expenditure of ₹ 2,60,588/- should be added to the closing stock and simultaneously allowed as expenditure u/s 37(1). In the result, the appellant gets a relief of ₹ 76,050 - since the land has not been taken as stock in trade in the P&L account, the expenditure alone cannot be booked to the P&L account the order of the CIT(A) is upheld Decided partly in favour of assessee.

Summary

Issues:
1. Disallowance u/s 14A for interest and administrative expenses.
2. Disallowance of expenditure incurred for securing power supply and protection from encroachment of land held as stock in trade.

Analysis:

Issue 1: Disallowance u/s 14A for interest and administrative expenses:
- The assessee challenged the disallowance of expenses u/s 14A before CIT(A) but was unsuccessful.
- The assessee claimed no expenditure was incurred for earning dividend income as it was directly credited to the bank account.
- The Assessing Officer made a disallowance u/s 14A as per Rule 8D.
- The assessee argued that its own fund was sufficient for investments and relied on the decision of the Bombay High Court.
- The tribunal noted that authorities did not verify the availability of the assessee's own fund for investments.
- The tribunal directed the Assessing Officer to reconsider the issue after proper verification and examination of relevant aspects.
- Regarding administrative expenses, the tribunal held that the involvement of the assessee's administration in investment decisions attracts section 14A.
- The tribunal directed the Assessing Officer to re-compute the disallowance of administrative expenses under Rule 8D.

Issue 2: Disallowance of expenditure for securing power supply and protection of land:
- The Assessing Officer proposed to disallow expenses incurred for land improvements as capital expenditure.
- The assessee contended that the expenses were related to land held as stock in trade and should be treated as revenue expenditure.
- The CIT(A) partially allowed the claim, disallowing only a portion of the expenses.
- The tribunal upheld the decision, stating that since the land was not shown as stock in trade in the P&L account, the expenses could not be booked as revenue expenditure.
- The tribunal dismissed the ground of the assessee's appeal regarding this issue.

In conclusion, the tribunal partly allowed the appeal for statistical purposes, directing the Assessing Officer to re-examine the disallowances under section 14A and the treatment of expenses related to land improvements. The judgment emphasizes the importance of verifying the availability of the assessee's own funds for investments and the proper application of rules for disallowances.