2015 (7) TMI 49 - AT - Income Tax

Disallowance u/s. 14A r.w. Rule 8D - Held that - Though the expenditure incurred by the assessee got the benefit to the assessee for more than one year that expenditure itself cannot be called/treated as capital expenditure on the simple reason that it does not bring into existence any new asset in the field of capital or in other words no new asset was developed by incurring that expenditure and even the accounting treatment given by the assessee cannot be conclusive to treat expenditure as capital. In this case, expenditure for the purposes of access to data relating to business of the assessee so as to increase the Business of the assessee. This expenditure stands incurred for the purpose of running the business. It is not per se capital in nature. By incurring this expenditure, it cannot be said that any capital asset stands acquired by the assessee and it was incurred for the purpose of running the business and such nature of expenditure cannot be said that resulted in enduring benefit. As the expenditure has not resulted in capital asset, so has to be recorded as expenditure in capital field. It should be noted that the assessee had to incur this kind of expenditure year after year so as to be in business subsequently even the advantage secured from earlier expenditure would get dissipated. Further, we place reliance on the judgment of Supreme Court in the case of Alembic Chemical Works vs. CIT (1989 (3) TMI 5 - SUPREME Court ) wherein held that just because an expenditure is debited in books towards the business being competitive and prudence and conservatism being fundamental accounting assumptions, capitalization of such expenses or ascribing lasting abiding value to such expenses, could only be done on sound footing and cogent basis. Thus, in our opinion the expenditure cannot be attributed to capital expenditure.Being so, taking consistent view, we are of the opinion that expenditure is to be allowed as revenue expenditure only. - Decided in favour of assessee. Addition relating to expenditure incurred for exempt income while computing the book profit u/s.115JB - Held that - Disallowance made u/s.14A r.w. Rule 8D cannot be added while computing book profit u/s.115JB of the Act that the disallowance is only disallowance for the purpose of computing taxable income of the assessee in the normal course. There is no provision in the Act to add these kind of disallowance while computing book profit u/s.115JB and it cannot change the book profit on this count. Therefore even if there is an addition in view of provision u/s.14A r.w.Rule 8D, that cannot be added back to compute the book profit u/s.115JB.- Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D.
2. Nature of expenditure for access to branch network.
3. Addition of disallowed expenditure under Section 14A while computing book profit under Section 115JB.

Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:
The primary issue was the disallowance made by the Assessing Officer (AO) under Section 14A read with Rule 8D, amounting to Rs. 9,53,58,713 for the assessment year 2010-2011. The AO computed the disallowance based on the method prescribed in Rule 8D, considering the expenditure related to exempt income. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, noting that the assessee could not provide sufficient evidence to dispute the findings. The CIT(A) emphasized that a significant portion of the expenditure could be attributed to earning dividend income, and the assessee failed to maintain separate books of accounts for exempt and non-exempt income. The Tribunal, however, referred to previous cases, including the assessee's own case in earlier years, and concluded that the investments were made for strategic purposes, not merely to earn tax-free dividends. Consequently, the Tribunal directed the AO to disallow a lump sum amount of Rs. 15 lakhs for each assessment year, reducing the disallowance significantly.

2. Nature of Expenditure for Access to Branch Network:
The second issue was whether the expenditure of Rs. 25 crores paid by the assessee for access to the branch network of three chit fund companies should be treated as capital or revenue expenditure. The AO treated it as capital expenditure, but the assessee argued it was revenue expenditure necessary for business operations. The CIT(A) upheld the AO's decision, considering it an intangible asset acquired for a period of 10 years. The Tribunal, however, disagreed, stating that the expenditure did not bring into existence any new asset and was incurred for running the business. The Tribunal emphasized that the expenditure was recurring and necessary for business operations, thus treating it as revenue expenditure and allowing the claim.

3. Addition of Disallowed Expenditure under Section 14A while Computing Book Profit under Section 115JB:
The third issue was whether the disallowed expenditure under Section 14A should be added back while computing the book profit under Section 115JB. The AO included the disallowed amount in the book profit computation, which was confirmed by the CIT(A). The Tribunal, however, ruled that disallowance under Section 14A should not be added back while computing book profit under Section 115JB, as there is no provision in the Act to add such disallowances for computing book profit. Therefore, the Tribunal allowed this ground in favor of the assessee.

Conclusion:
The Tribunal provided a detailed analysis of each issue, ultimately ruling in favor of the assessee on all counts. The disallowance under Section 14A was significantly reduced, the expenditure for access to the branch network was treated as revenue expenditure, and the addition of disallowed expenditure under Section 14A while computing book profit under Section 115JB was disallowed. The Tribunal's decision was based on previous judgments and a thorough examination of the facts and circumstances of the case.