2015 (10) TMI 3 - AT - Income Tax

Disallowance u/s.14A in accordance with Rule 8D - Held that - No doubt rule 8D is not mandatory for the current year, so that the Revenue is free to invoke any method, including that prescribed u/r. 8D, in making a reasonable estimate of the amount which stands to be disallowed, either on account of interest or other indirect expenses, i.e., u/s. 14A(1), in respect of income not forming part of the total income for the current year. The hon ble jurisdictional high court in Godrej & Boyce Mfg. Co. Ltd. vs. DCIT 2010 (8) TMI 77 - BOMBAY HIGH COURT has abundantly clarified the law in the matter. Disallowance u/s. 14A(1) is a statutory disallowance. The onus to prove that no expenditure in relation to income, which is tax-exempt, stands incurred and, further, with reference to its accounts, is on the assessee. In view of the foregoing, we, under the circumstances, only consider it fit and proper that the matter is restored back to the file of the AO to enable the assessee to present its case in the matter. Where, for instance, the loans on which the interest liability has been suffered, are dedicated loans, i.e., toward specified business purposes, and stand utilized for the same, interest thereon would stand to be allowed under section 36(1)(iii) in full, so that no disallowance under section 14A would ensue. In the absence of such utilization being shown or established by the assessee, the presumption of all the assets being proportionately funded cannot be faulted with for the purpose of disallowance u/s.14A(1). - Decided in favour of assessee for statistical purposes. Disallowance on account of finance charges paid to the Bank towards documentation and process expenses for securing finance - . CIT(A) considered the impugned expenditure toward stamping charges on the franking of various loan documents executed in respect of Windsor Term Loan from its bank (Union Bank of India), as being a part of interest, so that having been incurred prior to the date when the asset was put to use, would stand to be capitalized in terms of the extant law, i.e., section 43(6) r/w s. 36(1)(iii) - Held that - We are unable to appreciate the Revenue s case in-as-much as stamping charges cannot be equated with or considered at par with the service or other charges levied by the bank in respect of money borrowed or debt incurred. The same, though may be charged by the bank, are payable to the government exchequer as stamp duty on the debt or other related (as securitization or mortgage) transaction/s. The same is only revenue expenditure, no part whereof could be capitalized as a part of the cost of the asset. The law in the matter is well-settled, reference for which may be made to the decision in the case of India Cements Ltd. vs. CIT 1965 (12) TMI 22 - SUPREME Court also relied upon before us by the assessee. Similarly, the charges for valuation report (Rs.7,350/-) and notary (Rs.130/-) are again incidental charges incurred toward specific non-banking (financing), collateral services availed in relation to the debt transaction and, therefore, cannot be considered as part of the interest cost paid to the bank, deduction qua which is exigible u/s.36(1)(iii). The disallowance is thus misconceived and is hereby directed for deletion. - Decided in favour of assessee.

Summary

Issues:
1. Disallowance under section 14A of the Income Tax Act for the assessment year 2006-07.
2. Disallowance of finance charges paid to the bank for securing finance.

Issue 1: Disallowance under section 14A of the Income Tax Act for the assessment year 2006-07:

The appeal raised concerns regarding the disallowance under section 14A of the Income Tax Act. The Assessing Officer applied rule 8D to compute the disallowance, which was contested by the appellant. The Commissioner of Income-tax (Appeals) directed the AO to exclude certain investments in the calculation of the disallowance. The appellant argued that since the investments were financed by own capital, no disallowance should be made. On the other hand, the Revenue contended that disallowance under section 14A is statutory and should apply where the source of funding is not established. The Tribunal noted that rule 8D is not mandatory, and the burden of proof lies with the assessee to show no expenditure related to tax-exempt income was incurred. The matter was remanded back to the AO for further consideration based on specific criteria for disallowance, as established in various tribunal decisions.

Issue 2: Disallowance of finance charges paid to the bank for securing finance:

The second ground of appeal involved the disallowance of finance charges amounting to Rs. 2,92,200 paid for securing bank finance. The disallowance was based on the charges being categorized as 'interest' under the Income Tax Act. However, the Tribunal disagreed with this categorization. The charges, including stamping charges, valuation report fees, and notary charges, were considered revenue expenditures and not part of interest costs. The Tribunal referenced the law and previous court decisions to support this interpretation. Consequently, the disallowance of these charges was deemed misconceived and directed for deletion. The appeal on this ground was partly allowed in favor of the assessee.

In conclusion, the Appellate Tribunal ITAT Mumbai addressed the issues raised by the appellant regarding disallowances under section 14A of the Income Tax Act and finance charges paid to the bank for securing finance. The judgment provided detailed analysis and references to legal precedents to support the decisions made.