2015 (8) TMI 1151 - AT - Income Tax

Disallowance u/s.14A - assessee earned dividend income which was claimed as exempt under sec.10(34) - AO observed that funds for a company come in a common kitty. and they compromise of borrowed funds, share capital and retained earnings (reserves and surplus) - Held that - AO made he disallowance by invoking the provisions of sec.14A read with Rule 8D. Rule 8D was inserted by the IT (Fifth Amdt.) Rules, 2008, w.e.f. 24.3.2008. Since, Rule 8D has no retrospective effect, it cannot be applied for the assessment year 2007-08. Further, there is every chance of incurring expenditure towards maintaining of investment which yields exempt income and this cannot be ruled out. Therefore, we direct the AO to allow ₹ 10 lakhs of expenditure attributable towards exempted income. The ld. AR relied on the order of the Tribunal in assessee s own case for the A.Y. 2008-09, which is for the subsequent year and it cannot be applied for this assessment year. Decided partly in favour of assessee. Disallowance on account of syndication charges/guarantee fee paid u/s.40A(2)(b) - CIT(A) deleted addition - Held that - Similar issue was considered in the case of M/s. AIG Home Finance India Ltd. 2011 (5) TMI 408 - ITAT, Chennai wherein held 0.5% of guarantee fee paid by the assessee is not excessive or unreasonable but is well within the range as paid by the assessee to third parties and much lower than the percentage fixed by National Housing Board, which itself is an undertaking promoted by Reserve Bank of India. Therefore, we are of the view that the findings of the ld. CIT(Appeals) on this issue in deleting the disallowance is on right footing. - Decided against revenue. Disallowance under sec.36(1)(viii) - processing and other administrative charges - CIT(A) deleted addition - Held that - Similar issue was considered in the case of M/s. AIG Home Finance India Ltd. 2011 (5) TMI 408 - ITAT, Chennai wherein held that securitization amount is nothing but the interest on the housing loan which is discounted to the present net value. This amount would obviously be the income of the assessee from the long term housing loan disbursed by the assessee. In the circumstances, we are of the view that the securitization income is an income from business of long term housing finance. We are of the view that the same is eligible for deduction under Section 36(1)(viii) of the Act. Therefore, we uphold the finding of the ld. CIT(Appeals) in deleting the disallowance of the claim of deduction under Section 36(1)(viii) of the Act, which is on right footing and does not call for any interference - Decided against revenue.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Disallowance of syndication charges/guarantee fee under Section 40A(2)(b) of the Income Tax Act.
3. Disallowance under Section 36(1)(viii) of the Income Tax Act.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The primary issue was the disallowance of Rs. 20 lakhs out of Rs. 25,36,790/- under Section 14A of the Income Tax Act made by the Assessing Officer (AO). The assessee had earned dividend income of Rs. 49,102/- and claimed it as exempt under Section 10(34). The AO applied Rule 8D and disallowed Rs. 25,36,790/- as expenditure attributable to earning the exempt income. The Commissioner of Income-tax (Appeals) noted that Rule 8D, notified from 24.03.2008, was not applicable for the assessment year 2007-08. Instead, the AO should have applied Section 14A(1) to ascertain the expenditure incurred to earn the tax-free income. The CIT(A) found that the assessee had incurred expenses for earning the dividend income, and a reasonable disallowance of Rs. 20 lakhs was made. The Tribunal upheld this view, directing the AO to allow Rs. 10 lakhs as expenditure attributable to exempt income, partly allowing the assessee's appeal and dismissing the Revenue's appeal.

2. Disallowance of Syndication Charges/Guarantee Fee under Section 40A(2)(b) of the Income Tax Act:
The second issue was the disallowance of Rs. 58,49,022/- paid as syndication charges/guarantee fee to M/s. Weizmann Ltd., the holding company of the assessee. The AO disallowed the payment under Section 40A(2)(b), arguing that the holding company should have provided the services free of cost. The CIT(A) observed that the payment was not excessive or unreasonable and was within the typical range charged by third parties. The Tribunal upheld this view, noting that the National Housing Board allowed a 0.75% guarantee fee and public sector banks charged 1.5%. The Tribunal found the 0.5% fee paid to M/s. Weizmann Ltd. reasonable and dismissed the Revenue's appeal.

3. Disallowance under Section 36(1)(viii) of the Income Tax Act:
The third issue was the disallowance of Rs. 9,14,264/- under Section 36(1)(viii). The assessee, engaged in long-term housing finance, claimed a deduction of Rs. 41,00,000/- (40% of profits) transferred to a special reserve. The AO excluded processing and administrative charges amounting to Rs. 1,79,06,298/- from the income attributable to long-term housing finance, reducing the deduction to Rs. 31,87,536/-. The CIT(A) allowed the deduction, referencing previous Tribunal decisions in the assessee's favor. The Tribunal upheld this view, noting that securitization income from long-term housing loans was eligible for deduction under Section 36(1)(viii), and dismissed the Revenue's appeal.

Conclusion:
The Tribunal partly allowed the assessee's appeal regarding the disallowance under Section 14A, directing the AO to allow Rs. 10 lakhs as expenditure attributable to exempt income. The Tribunal dismissed the Revenue's appeals on the disallowance of syndication charges under Section 40A(2)(b) and the disallowance under Section 36(1)(viii), upholding the CIT(A)'s decisions. The order was pronounced on 31st July 2015 at Chennai.