2014 (12) TMI 294 - AT - Income Tax

Disallowance u/s 14A r.w Rule 8D Whether the revenue was right in deleting the disallowance u/s 14A holding that no dividend income was earned by the assessee ignoring the provisions u/s 14A Held that - Following the decision in Commissioner of Income Tax-IV Versus Holcim India P. Ltd. 2014 (9) TMI 434 - DELHI HIGH COURT no exempt income has been earned by the assessee from the investment made in the subsidiary - there was a contradiction in the submissions made by the revenue that the assessee had acquired shares for earning of dividends - assessee is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to management - Possibility of sale of shares by private placement etc. cannot be ruled out and is not an improbability - Dividend may or may not be declared - Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend - the CIT(A) erred in confirming the order of the AO - the deletion of ₹ 63,16,000/- added u/s 14A read Rule 8D is directed. Expenses on Air Condition and renovation of lease hold premises disallowed Held that - Out of amount of ₹ 4,80,000/- in respect of painting and ₹ 1,24,785/- in respect of sign board has been allowed by AO as Revenue expenditure - The balance ₹ 38,14,000/- was held to be capital expenditure, which has been allowed by the ld CIT(A), except a sum of ₹ 5,50,000/- on ducting of air condition - The nature of expenditure reveals that they were in respect of interior work of an office premises - The office premise of the assessee is a leased premise - The lessor has provided the air-conditioning - Only the ducting was carried out by the assessee - no asset was created so as to hold the expenditure to be capital expenditure relying upon COMMISSIONER OF INCOME TAX Versus M/S AMWAY INDIA ENTEPRISES 2011 (11) TMI 4 - DELHI HIGH COURT expenditure incurred and claimed was for carrying out interior of a leased premise is revenue expenditure Decided in favour of assessee.

Issues Involved:
1. Disallowance of Rs. 63,16,000/- under Section 14A read with Rule 8D.
2. Disallowance of expenditure incurred on A.C. ducting amounting to Rs. 5,50,000/- treating it as capital expenditure.
3. Deletion of additions of Rs. 28,82,600/- towards renovation of leased premises treated as capital expenditure.

Detailed Analysis:

1. Disallowance of Rs. 63,16,000/- under Section 14A read with Rule 8D:
The assessee company contested the disallowance of Rs. 63,16,000/- under Section 14A of the Income Tax Act, 1961, read with Rule 8D of the Income Tax Rules, 1962. The Assessing Officer (AO) noted that the assessee held investments amounting to Rs. 126.33 crores and invoked Rule 8D to estimate expenses related to tax-free income. The assessee argued that the investments were in its wholly-owned subsidiary which did not generate any exempt income, hence no expenditure was incurred for earning exempt income. However, the CIT(A) upheld the AO's decision, citing the Hon'ble Bombay High Court in Godrej & Boyce Manufacturing Co. Ltd. vs. DCIT and the Special Bench of ITAT Delhi in M/s Cheminvest Ltd., which held that disallowance under Section 14A is applicable even if no exempt income was earned.

The Tribunal, however, relied on the Delhi High Court's decision in CIT Vs. Holcim India Ltd., which ruled that Section 14A cannot be invoked if no exempt income is earned. Consequently, the Tribunal directed the deletion of the Rs. 63,16,000/- disallowance.

2. Disallowance of expenditure incurred on A.C. ducting amounting to Rs. 5,50,000/- treating it as capital expenditure:
The assessee incurred Rs. 44,18,785/- on interior work, including A.C. ducting. The AO disallowed Rs. 34,32,600/- as capital expenditure. On appeal, the CIT(A) held that the expenditure on renovation and repairs of leased premises was revenue in nature, except for the A.C. ducting of Rs. 5,50,000/- which was treated as capital expenditure.

The Tribunal, referencing the Delhi High Court's decision in Amway India Enterprises, concluded that the expenditure on A.C. ducting did not create an enduring asset and should be treated as revenue expenditure. Therefore, the Tribunal allowed the assessee's appeal on this ground.

3. Deletion of additions of Rs. 28,82,600/- towards renovation of leased premises treated as capital expenditure:
The AO had disallowed Rs. 34,32,600/- out of the total expenditure claimed by the assessee as capital expenditure. The CIT(A) allowed the appeal of the assessee, except for Rs. 5,50,000/- on A.C. ducting, treating the remaining expenditure as revenue in nature. The Tribunal upheld the CIT(A)'s decision, stating that the expenditure was for interior work on leased premises and did not result in any enduring benefit, thus qualifying as revenue expenditure.

The Tribunal relied on various judgments, including CIT Vs. Escorts Finance Ltd. and CIT Vs. Hi Line Pens Pvt Ltd., which supported the view that expenditure on leasehold improvements for facilitating business operations is revenue in nature. Consequently, the Tribunal dismissed the revenue's appeal and maintained the deletion of the Rs. 28,82,600/- addition.

Conclusion:
The Tribunal allowed the assessee's appeal regarding the disallowance under Section 14A and the expenditure on A.C. ducting, treating them as revenue expenditures. The revenue's appeal regarding the deletion of additions for renovation of leased premises was dismissed, affirming the CIT(A)'s decision that such expenditures were revenue in nature. The final order was pronounced in the open court on 05.12.2014.

← Previous Next →