2015 (10) TMI 1713 - AT - Income Tax

Disallowance of expenses incurred for increasing the Authorized Share Capital of the Assessee - Held that - This ground of the Assessee has to be decided against it in view of the decision of Hon ble Supreme Court in the case of Brooke Bond India Ltd. vs. CIT (1997 (2) TMI 11 - SUPREME Court ) - Decided against assessee. Disallowance made u/s. 14A - Held that - When there is no change in the value of investments or its composition from that of earlier years and when in earlier year the fact of non utilization of interest bearing funds having been accepted, we are of the view that no disallowance on account of interest in the year under consideration is called for. As far as disallowance of administrative expenses is concerned, we find that that in appeal for A.Y. 07-08, the disallowance was restricted to ₹ 50,000/- by the Co-ordinate Bench but however for the year under consideration being A.Y. 2008-09 and since provisions of Rule 8D are held to be mandatory, we are of the view that the disallowance on account of administrative expenses be made as per the formula prescribed i.e. 0.5% of average investments meaning thereby that the disallowance u/s.14A be restricted to ₹ 1,78,175/- as against ₹ 10,20,670/- made by A.O. - Decided partly in favour of assessee.

Summary

Issues:
1. Disallowance of expenses for increasing authorized share capital
2. Disallowance made under section 14A of the Income Tax Act
3. Charging of interest under section 234B

Issue 1: Disallowance of expenses for increasing authorized share capital

The Assessee, a manufacturing company, filed an appeal against the order of CIT(A)-IV, Baroda for A.Y. 2008-09. The Assessee claimed expenses of &8377; 11 lac for increasing the Authorized Share Capital, contending it was incurred for business purposes. However, the A.R. argued that the ground should be decided against the Assessee based on the decision in Brooke Bond India Ltd. vs. CIT. Consequently, the claim for expenses was dismissed.

Issue 2: Disallowance made under section 14A of the Income Tax Act

The A.O. noticed that the Assessee had investments of &8377; 3.56 crores, earning tax-free income, and paid significant interest. Consequently, a disallowance under section 14A was calculated at &8377; 10,20,670, comprising interest and administrative expenses. The CIT(A) upheld this disallowance, emphasizing the need for the Assessee to prove that investments were not made from borrowed funds. The Assessee argued that no fresh investments were made during the year and cited a previous Tribunal decision. The ITAT considered the continuity of investments and the absence of fresh investments, leading to a partial allowance of the appeal. The disallowance on account of administrative expenses was restricted to &8377; 1,78,175.

Issue 3: Charging of interest under section 234B

The Assessee raised a ground against the charging of interest under section 234B, which was deemed consequential. The ITAT directed the A.O. to re-compute the interest based on the final income determined post the order.

In conclusion, the ITAT partially allowed the Assessee's appeal, dismissing the claim for expenses related to share capital increase, partially allowing the appeal regarding the disallowance under section 14A, and directing a re-computation of interest under section 234B.