2015 (2) TMI 1340 - AT - Income Tax

Disallowance u/s 14A - HELD THAT - Calculation of disallowance as per Rule 8D(2)(iii) is erroneous, as the AO without assigning any reason did not reduce the investment in mutual funds and group concern which does not quire incurrence of major expenditure. We restore this ground back to the file of A.O. for fresh consideration in terms of our above discussion. Disallowance upfront brokerage fees - A.O. has disallowed the said expenses on the ground that assessee has changed its accounting policy with regard to expense on upfront brokerage fees - HELD THAT - Looking into the nature of expenses, the same were incurred in the revenue field and the same has been incurred wholly and exclusively for the purpose of business. The change in the accounting system is not violative of any regulations issued by regulatory authorities in this regard. Furthermore change in accounting policy is bonafide and in line with the industry practice. In earlier years the assessee witnessed many times either the clients exited from the scheme or they switched to the other scheme. The same has necessitated the assessee to change their accounting practice and the assessee followed the same in all the subsequent years. It was also brought to our notice that no disallowance was made in next year while framing assessment u/s 143(3) of the Act. Accordingly, we do not see any justification for the disallowance made in respect of upfront brokerage fees actually paid by the assessee during the year under consideration. Disallowance of office renovation expenses - HELD THAT - No doubt the expenses were actually incurred by the assessee. However, the same was disallowed on the plea that it was capital in nature. Looking to the fact that the premises were not occupied at all, therefore, there was complete loss of expenditure incurred by the assessee. In the interest of justice, this ground is also restored to the file of A.O. for fresh adjudication in terms of our above discussion and judicial pronouncement cited by ld. A.R.

Summary

Issues: Disallowance under section 14A of the Income Tax Act, 1961; Disallowance of upfront brokerage fees; Disallowance of office renovation expenses.

Disallowance under section 14A of the Income Tax Act, 1961:
The appeal filed by the Revenue challenged the order of the CIT(A) regarding disallowance of &8377; 81,08,683 under section 14A of the Income Tax Act, 1961 for the A.Y. 2009-10. The assessee argued that strategic investments made during the year should not be considered while computing disallowance under Rule 8D(2)(iii). The investments were mainly in schemes of HDFC Mutual Fund, driven by business policy, and did not involve major expenditure. Citing judicial precedents, the Tribunal held that the AO erred in not reducing the investment in mutual funds and group concerns that did not require significant expenditure. Consequently, the ground was remanded back to the AO for fresh consideration.

Disallowance of upfront brokerage fees:
The next issue pertained to the disallowance of upfront brokerage fees. The AO disallowed the expenses due to a change in the assessee's accounting policy, which the Tribunal found unjustified. The expenses were incurred for business purposes, and the change in accounting policy was legitimate and aligned with industry practices. The Tribunal noted that no disallowance was made in subsequent years, indicating the bona fide nature of the change. Consequently, the disallowance of upfront brokerage fees was overturned.

Disallowance of office renovation expenses:
Regarding the disallowance of office renovation expenses amounting to &8377; 1,35,71,810, the assessee contended that the expenditure was revenue in nature and did not result in any enduring benefit or capital asset. The Tribunal observed that the expenses were genuine and revenue in nature, with no dispute on their authenticity. Relying on a Delhi Tribunal decision, the Tribunal held that the expenses were allowable as business expenses under section 37(1) of the Act. Alternatively, if the expenses were considered capital in nature, the AO was directed to allow depreciation. The ground was remanded to the AO for fresh adjudication in light of the discussions and judicial pronouncements cited by the assessee's representative.

In conclusion, the Tribunal partially allowed the appeal of the assessee, directing a fresh consideration of the disputed issues by the AO.