2012 (12) TMI 1215 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance u/s 14A.
2. Disallowance on the value of tools.
3. Disallowance of loans given to sister concern.
4. Disallowance of design charges.
5. Allowability of property tax u/s 43B.

Summary:

1. Disallowance u/s 14A:
The assessee contested the disallowance of Rs. 16,99,179/- u/s 14A. The AO disallowed the amount, applying sec. 14A read with Rule 8D, despite the assessee's claim that no specific expenditure was incurred for earning exempt income. The CIT(A) upheld the AO's decision, citing amendments to sec. 14A and Rule 8D effective from AY 2008-09. The ITAT confirmed the disallowance, emphasizing that Rule 8D mandates a portion of administrative expenses be attributed to exempt income.

2. Disallowance on the Value of Tools:
The assessee claimed expenditure on tools, writing off 50% in the year of purchase and the remaining 50% in the following year. The AO disallowed this, citing lack of evidence for actual consumption in manufacturing. The CIT(A) upheld the AO's decision. The ITAT allowed the assessee's appeal, noting that the method had been accepted for 14 years and the revenue effect would be minimal whether treated as capital or revenue expenditure.

3. Disallowance of Loans Given to Sister Concern:
The AO disallowed interest on loans given to sister concerns interest-free, while the assessee was paying interest on its borrowings. The CIT(A) confirmed this. The ITAT allowed the appeal, noting no nexus was established between interest-bearing funds and interest-free advances, and presuming advances were from non-interest-bearing funds as per the Supreme Court's decision in Reliance Utilities and Power Ltd.

4. Disallowance of Design Charges:
The AO treated design charges of Rs. 1,72,32,337/- as capital expenditure and allowed depreciation. The CIT(A) confirmed this. The ITAT directed the AO to verify the claim that Rs. 1,31,05,337/- was salaries paid to R&D employees and allow it as revenue expenditure. The remaining design charges were remanded to the AO to determine if they provided an enduring benefit or were specific to customer requirements.

5. Allowability of Property Tax u/s 43B:
The Revenue appealed against the CIT(A)'s decision to allow property tax deposited per court directions u/s 43B. The AO had disallowed it, stating the liability had not crystallized. The CIT(A) allowed the claim, noting the liability was certain and any refund would be treated as income in the year of receipt. The ITAT dismissed the Revenue's appeal, agreeing with the CIT(A).

Order Pronounced:
The order was pronounced in the open court on 21st Dec, 2012.