2015 (5) TMI 426 - AT - Income Tax

Disallowance u/s 14A read with Rule 8D(2)(iii) - CIT(A) allowed part relief - Held that - Assessee had share capital of ₹ 19.29 crores and reserves and surplus of ₹ 201.15 crores, sum of which far exceeded the investments of ₹ 41.68 crores of the assessee company in shares and mutual funds at the end of the year and therefore, as held by various Hon'ble Courts, no interest expenditure can be held to be attributable to earning to exempt income from share and mutual funds at the end of the year and therefore, as held by various Hon ble Courts, no interest expenditure can be held to be attributable to earning of exempt income from shares and mutual funds. Accordingly, no disallowance is warranted in the appellant s case under Rule 8D(2)(i) and Rule 8D(2)(ii). Disallowance u/s 14A r.w. Rule 8D cannot in any rate exceed the expenditure that has been actually incurred by the assessee as per its books of account for earning exempt income and in the absence of exercise not carried out by the AO as prescribed by section 14A before invoking Rule 8D as afore-stated, we find force in the contention of the counsel of the assessee and direct that only ₹ 1,72,879/- suo- motto disallowed by the assessee can be upheld and the rest of the addition made need to be deleted. - Decided in favour of assessee. Addition on account of product development expenses as deferred revenue expenses - CIT(A) deleted addition - Held that - Such expenses were claimed by the assessee in earlier years too and were being allowed by department. So by applying the rule of consistency as laid by the Hon ble Supreme Court in Radhasoami Satsang Vs. CIT (1991 (11) TMI 2 - SUPREME Court ), we are of the opinion that there was no need to take a different view, because, the facts permeating in earlier years have not changed. We concur with the opinion of the ld CIT(A) that expenses incurred for developing samples as per the requirement of customers are allowable expenses u/s 37(1) of the Act and are not covered by Section 35D of the Act. - Decided in favour of assessee.

Summary

Issues Involved:

1. Disallowance under Section 14A of the Income Tax Act.
2. Product Development Expenses as Deferred Revenue Expenses.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:

The assessee challenged the disallowance under Section 14A read with Rule 8D(2)(iii) amounting to Rs. 18,02,321/- made by the Assessing Officer (AO). The AO noted that the assessee had earned dividend income of Rs. 1,18,076/- and claimed it as exempt under Sections 10(33)/10(34). However, the AO was not satisfied with the assessee's suo motu disallowance of Rs. 1,72,879/- and invoked Rule 8D, computing the disallowance at Rs. 1,45,72,152/-.

The CIT(A) provided partial relief, reducing the disallowance to Rs. 18,02,321/-. The Tribunal noted that the assessee had sufficient own funds (share capital and reserves) far exceeding the investments made in shares and mutual funds. The Tribunal emphasized that the AO did not record any dissatisfaction with the assessee's suo motu disallowance before invoking Rule 8D, which is a prerequisite. The Tribunal cited various case laws, including CIT vs. Hero Cycles, which held that disallowance under Section 14A requires a finding of incurring of expenditure. It was concluded that no interest expenditure was attributable to earning exempt income, and the assessee's suo motu disallowance of Rs. 1,72,879/- was sufficient. Therefore, the Tribunal allowed the assessee's appeal and dismissed the revenue's appeal on this ground.

2. Product Development Expenses as Deferred Revenue Expenses:

The revenue challenged the deletion of Rs. 7,91,00,000/- made by the AO on account of product development expenses, which the AO treated as deferred revenue expenditure. The AO argued that the sample and design expenses created enduring benefits for the assessee, and thus, only one-third of the expenses should be allowed in the current year, with the remaining deferred over the next two years.

The assessee contended that these expenses were of a revenue nature, incurred for developing samples as per buyers' requirements, and did not result in any enduring benefit. The CIT(A) agreed with the assessee, noting that such expenses were consistently allowed in earlier years and were necessary for the business of manufacturing and exporting readymade garments. The CIT(A) held that these expenses were allowable under Section 37(1) and not covered by Section 35D.

The Tribunal upheld the CIT(A)'s decision, emphasizing the rule of consistency as laid by the Supreme Court in Radhasoami Satsang vs. CIT, and dismissed the revenue's appeal on this issue.

Conclusion:

The Tribunal allowed the assessee's appeal regarding the disallowance under Section 14A and dismissed the revenue's appeal concerning both the disallowance under Section 14A and the product development expenses. The Tribunal's decision was pronounced in the open court on 30.04.2015.