2014 (12) TMI 340 - AT - Income Tax

Disallowance u/s 14A r.w Rule 8D(2) Held that - CIT(A) was rightly of the view that the assessee had its own funds of capital and reserve & surplus more than the investments appearing in the balance sheet for the year - the assessee had not used borrowed funds as the assessee s own funds were available for the purpose of investment relying upon CIT vs. Reliance Utilities and Power Ltd. 2009 (1) TMI 4 - HIGH COURT BOMBAY - the disallowance made by the AO in relation to administrative and managerial expenses under Rule 8D(2)(iii) is upheld Decided against revenue. Disallowance on late deposit of Employees Contribution to Provident Fund deleted - Held that - CIT(A) rightly deleted the disallowance relying upon CIT vs. Alom Extrusions Ltd. 2009 (11) TMI 27 - SUPREME COURT wherein the effect of deletion of second proviso to section 43B of Finance Act, 2003 is retrospective therefore, the assessee would be entitled to claim the benefit of deduction if the amount of contribution to Employees Provident Fund is deposited on or before the due date of filing of return for the relevant AY - a grace period of five days is available to the employer even after the due date for deposit of PF under Provident Fund Act - assessee has deposited the contribution within the grace period - when the assessee had made a payment within the grace period, then it can be safely said that the assessee had made the payment within the due date under the Provident Fund Act, the requirement of section 43B even otherwise is deemed to be complied with the order of the CIT(A) is upheld Decided against revenue. Deemed dividend u/s 2(22)(e) Held that - CIT(A) was rightly of the view that the payee company was a public limited company, hence the provisions of section 2(22)(e) were not attracted to the company - the amount was not in the form of loan or advance but it was inter-corporate deposit upon which the interest payment had been made by the assessee after deducting TDS as per law - the payment was made to the assessee company in the ordinary course of business - since the payee company is a public limited company and the inter-corporate deposits were made due to business exigencies and in the ordinary course of business, the provisions of section 2(22)(e) are not attracted the order of the CIT(A) is upheld Decided against revenue. Disallowance on club entry fees deleted Held that - CIT(A) was rightly of the view that the expenses were incurred by the directors of the assessee company for the purpose of promoting the business activity of the assessee company - the expenditure was revenue in nature - the expenditure was not incurred for obtaining club membership the order of the CIT(A) is upheld Decided against revenue. Capitalization of cost of investment disallowed Held that - The assessee during the year has earned substantial dividend income and long term capital gains which had been claimed as exempt u/s 10(38) - The disallowance of expenditure made u/s 14A is relating to the expenditure which the assessee had incurred in earning the exempt income - the expenditure is to be allowed in the relevant AY in which the exempt income has been claimed the order of the CIT(A) is upheld Decided against assessee.

Summary

Issues Involved:
1. Disallowance under section 14A read with Rule 8D(2)
2. Disallowance of Employee's Contribution to Provident Fund
3. Addition under section 2(22)(e) of the Income Tax Act
4. Disallowance of Club Entry Fees
5. Disallowance confirmed by CIT(A) under section 14A read with Rule 8D(2)(iii)

Issue 1 - Disallowance under section 14A read with Rule 8D(2):
The Revenue appealed against the CIT(A)'s deletion of the addition under section 14A read with Rule 8D(2)(ii). The AO had disallowed interest expenditure and administrative expenses, but the CIT(A) reversed the decision. The CIT(A) found that the assessee had sufficient own funds for investments and had not used borrowed funds for investments. The Tribunal upheld the CIT(A)'s decision, citing the Bombay High Court's ruling in a similar case. The Tribunal dismissed the Revenue's grounds related to this issue.

Issue 2 - Disallowance of Employee's Contribution to Provident Fund:
The Revenue challenged the deletion of disallowance by the CIT(A) regarding late deposit of Employees' Contribution to Provident Fund. The CIT(A) relied on a Supreme Court decision, stating that if the contribution is deposited within the due date of filing the return, the deduction is allowable. The Tribunal upheld the CIT(A)'s decision, considering a grace period for deposit under the Provident Fund Act.

Issue 3 - Addition under section 2(22)(e) of the Income Tax Act:
The Revenue contested the CIT(A)'s deletion of the addition made under section 2(22)(e) of the Act. The AO treated an amount as deemed dividend due to a debtor-creditor relationship, but the CIT(A) found it to be an inter-corporate deposit in the ordinary course of business. The Tribunal upheld the CIT(A)'s decision, stating that the provisions of section 2(22)(e) did not apply in this case.

Issue 4 - Disallowance of Club Entry Fees:
The Revenue disputed the CIT(A)'s deletion of the disallowance related to club entry fees. The AO disallowed the fees, considering them non-allowable expenditure. However, the CIT(A) found the fees were for promoting business activities and allowed them as revenue expenditure. The Tribunal upheld the CIT(A)'s decision, noting that the fees were not for obtaining club membership.

Issue 5 - Disallowance confirmed by CIT(A) under section 14A read with Rule 8D(2)(iii):
The assessee appealed against the CIT(A)'s confirmation of disallowance under section 14A read with Rule 8D(2)(iii). The Tribunal upheld the CIT(A)'s decision, stating that all provisions of Rule 8D(2) operate independently. The Tribunal dismissed the assessee's contention that the disallowed amount should be capitalized and allowed as a deduction in the year of transfer of investments.

In conclusion, the Tribunal dismissed both the Revenue's and the assessee's appeals based on the detailed analysis and findings on each issue presented in the judgment.