2016 (5) TMI 1464 - AT - Income Tax

Additions u/s 14A - assessee contented formula under Rule 8D has been applied without establishing any nexus between exempt income and expenditure incurred thereon for earning such exempt income - Held that - The investments would definitely involve certain administrative and establishment cost since the decision to make investments, track investments, sale of such investments and follow-up of the receipt of income, sale proceeds etc have to be undertaken which entails definite costs. It is for this purposes that Rule 8D(2)(iii) provides that one half percent of the average value of the investments will be deemed to be expenditure incurred for the same. When the Act has specified a definite formula for working out the expenditure to be disallowed, the Department is not required to establish the nexus between the exempt income and expenditure incurred thereon for earning such exempt income. In view of the law laid down by the statute, since the assessee has not excluded any expenditure relatable to earning exempt income, AO has disallowed % of average value of the investments as per Rule 8D(2)(iii) as expenditure incurred for earning of exempt income and the ld. CIT(A) has rightly confirmed the disallowance made by the AO. - Decided against assessee. Disallowance under section 35D - Held that - In the present case, the assessee is stated to have incurred expenditure for creating intangible content of the motion picture industry. The expansion activity has not been completed in the assessment year under consideration as accepted by the assessee and therefore, either expansion activity has been completed or the production activity of the assessee has been carried out for which the assessee has claimed amortization of expenses under section 35D which in our opinion is not permissible. CIT(A) has elaborately discussed the issue with regard to claim of deduction u/s 35D by relying on various decisions and the assessee could not counter the findings of the CIT(A). Thus, we confirm the order of the CIT(A) - Decided against assessee.

Summary

Issues Involved:
1. Confirmation of additions under section 14A of the Income Tax Act, 1961.
2. Confirmation of disallowance under section 35D of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Confirmation of Additions under Section 14A of the Income Tax Act, 1961:

The Assessing Officer (AO) observed that the assessee had significant investments and incurred interest expenditure and financial charges. The AO noted that the assessee did not disallow any expenditure under section 14A related to earning exempt income. Despite the assessee's contention that the investments were made from surplus funds and that interest expenses were related to business loans, the AO applied Rule 8D to compute a disallowance of ?1,20,35,988/-.

On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, emphasizing the legislative intent behind section 14A to disallow expenses incurred in relation to exempt income. The CIT(A) cited various judicial precedents to support the view that expenses related to earning exempt income, including administrative and establishment costs, must be disallowed. The Tribunal confirmed the CIT(A)'s decision, noting that the statutory formula under Rule 8D must be applied regardless of the assessee's claims about the source of funds or the necessity of establishing a direct nexus between exempt income and related expenses.

2. Confirmation of Disallowance under Section 35D of the Income Tax Act, 1961:

The assessee claimed a deduction of ?1,58,64,973/- under section 35D for expenses incurred in connection with the extension of its industrial undertaking. The AO disallowed the claim, noting that the expansion was not completed in the relevant assessment year. The AO also observed that the expenses related to the issue of preference shares did not qualify for deduction under section 35D, as they were not connected to a public issue. Additionally, the assessee failed to provide details about the nature of services rendered by the parties to whom payments were made and whether TDS was deducted.

The CIT(A) upheld the AO's decision, referencing the case of Nirma Industries Ltd. v. ACIT, which held that deductions under section 35D are allowable in the year the industrial undertaking commences production or operation. The CIT(A) also noted that the assessee's expansion activities were not completed during the relevant accounting period and that the claimed expenses did not relate to the creation of tangible assets. The Tribunal confirmed the CIT(A)'s findings, emphasizing that the assessee did not provide sufficient details to substantiate the claim for deduction and that the expansion activity was not completed in the assessment year under consideration.

Conclusion:

The Tribunal dismissed the appeal filed by the assessee, confirming the disallowances under sections 14A and 35D of the Income Tax Act, 1961. The Tribunal upheld the AO's and CIT(A)'s findings that the assessee failed to provide adequate justification for the claimed deductions and that the statutory provisions and judicial precedents supported the disallowances. The order was pronounced on 27th May 2016 at Chennai.