2015 (10) TMI 1511 - AT - Income Tax

Disallowance under section 14A - CIT(A) restricted the addition - Held that - Ld. DR of the department could not point out any new fact or law arising out in the case under consideration which may justify our interference in the above well reasoned order of the CIT(A) that the interest expenditure was attributable to the business activities and not to the investment activity. Had there been no such investment, the interest expenditure would have remained the same. He therefore rightly held that the interest expenditure was not attributable to investment activity. He further observed from the balance sheet that there was a decrease in borrowed funds on which interest expenditure was incurred. Therefore, the increase in investment during the year could not be related to the borrowed funds. He further observed that as per cash flow statement in the balance sheet, the company was having cash balance which was increased during the year. He therefore considering the overall facts and circumstances of the case observed that no indirect interest expenses were attributable to investment activity and could not be related to earning of exempt dividend income. He therefore correctly deleted the disallowance of indirect interest expenditure of ₹ 98,50,220/- . The Ld. CIT(A) however upheld the disallowance of administrative and managerial expenses pertaining to management of investments which had yielded exempt dividend income made by the AO as per formula provided in sub clause (iii) of rule 8D(2) at ₹ 9,45,855/- - Decided against revenue. Disallowance of interest expenditure while computing the long-term capital gain on account of cost of improvement - CIT(A) deleted the addition - Held that - Admittedly, the compensation was paid to M/s. Tropicana for release of its rights over the said land in question. The interest component was part of the settlement. The principal amount of compensation had already been allowed by the AO as revenue expenditure. The interest expenditure paid for the said land for relinquishment of development rights by M/ s. Tropicana Properties Ltd, ultimately resulted in enhancement of value of the property and the development rights of the said land became available to the assessee on incurring of such interest expenditure. We therefore do not find any infirmity in the order of the CIT(A) in holding that the interest expenditure was nothing but cost of improvement allowable while computing the capital gains. Decided in favour of the assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income-tax Act.
2. Deletion of disallowance of interest expenditure while computing long-term capital gain on account of cost of improvement.

Issue-wise Detailed Analysis:

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

The Revenue contested the CIT(A)'s decision to restrict the disallowance under Section 14A to Rs. 98,50,220/-, arguing that the Assessing Officer (AO) was bound to compute the disallowance as per Rule 8D, which is mandatory from AY 2008-09 onwards as held by the Bombay High Court in Godrej & Boyce. The AO had initially added Rs. 1,07,96,075/- to the assessee's total income for not disallowing any corresponding expenditure attributable to the tax-exempt dividend income of Rs. 5,41,828/-.

The CIT(A) observed that the assessee had not made any direct expenses to earn the dividend income and that the interest expenditure was attributable to business activities, not investment activities. The increase in investments during the year could not be related to borrowed funds, and the company had sufficient cash balance. Thus, the CIT(A) deleted the disallowance of indirect interest expenditure but upheld the disallowance of administrative and managerial expenses at Rs. 9,45,855/-.

The Tribunal found no infirmity in the CIT(A)'s well-reasoned order and upheld the decision, noting that the department could not point out any new fact or law justifying interference.

2. Deletion of Disallowance of Interest Expenditure While Computing Long-term Capital Gain on Account of Cost of Improvement:

The AO had disallowed Rs. 1,23,02,586/- claimed by the assessee as cost of improvement under Section 48(ii) of the Act, arguing that interest on compensation paid does not qualify as cost of improvement under Section 55. The assessee had paid Rs. 4,69,52,055/- to Tropicana Properties Ltd. as interest over and above the principal payment to release properties from their lien, considering 25% of Rs. 4,16,00,000/- as cost of improvement.

The CIT(A) observed that the interest expenditure was related to obtaining clear title of the property, which was subsequently converted into stock-in-trade. The compensation of Rs. 8.14 crores and interest of Rs. 469.52 lakhs were necessary for relinquishing Tropicana's development rights, enhancing the property's value. Thus, the CIT(A) concluded that the interest expenditure was part of the cost of improvement and allowed it while computing the capital gains.

The Tribunal agreed with the CIT(A), noting that the interest expenditure resulted in the enhancement of the property's value and the development rights became available to the assessee. Therefore, the interest expenditure was rightly considered as cost of improvement allowable while computing the capital gains.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues. The disallowance under Section 14A was correctly restricted, and the interest expenditure was rightly considered as cost of improvement. The order was pronounced in the open court on 09.09.2015.