2016 (9) TMI 1634 - HC - Income Tax

Disallowance u/s 14A - assessee had received dividend income - HELD THAT - As in terms of the previous decision in Commissioner of Income Tax VI v. Taikisha Engineering India Ltd. 2014 (12) TMI 482 - DELHI HIGH COURT there has to be express opinion formation before invocation of Rule 8D. Rule 8D is itself premised upon an understanding that not the entire investment but that part of the investment which yields tax exempt income is what ought to be considered as one of the elements. This in accordance with the rule held in ACB India Ltd. 2015 (4) TMI 224 - DELHI HIGH COURT For these reasons we see no reason to interfere with the order of the ITAT under Section 14A. The first question is answered accordingly. Product development expenditure - Assessee had claimed it to be on the revenue s side - AO was of the opinion that the product in question i.e. samples would result in something of an enduring advantage to the assessee and that it could claim 1/3rd of the expenditure for this year from the balance in the succeeding two years - CIT (A) allowed the assessee s contention and the ITAT affirmed it - HELD THAT - As it is purely a question of fact which this Court would not interfere with. That apart the Court notices that the product in question developed was connected with the assessee s export business in garments. For the relevant year it had reported total receipts to the tune of 686 crores. Given the nature of the article in question i.e. its seasonal characteristics this Court is in agreement with the reasoning of the CIT (A) and ITAT. Furthermore the revenue had been accepting similar expenditure on the revenue side for the previous years.

Summary

Issues:
1. Disallowance under Section 14A
2. Nature of product development charges claimed as revenue expenditure

Disallowance under Section 14A:
The revenue raised two questions of law in the appeals: (i) Whether the deletion of the amounts added under Section 14A was justified, and (ii) Whether the product development charges claimed as revenue expenditure were of enduring nature. The Assessing Officer (AO) calculated a disallowance of &8377; 1,45,72,152 under Section 14A, which the CIT (A) partly upheld by disallowing &8377; 18,02,231. However, the ITAT rejected this and upheld the assessee's contentions. The AO's rejection of the assessee's explanation was based on lack of substantiation, but the court referred to a previous case emphasizing the need for scrutiny of accounts before disallowance. The court held that Rule 8D should be invoked only after express opinion formation and that only the part of the investment yielding tax-exempt income should be considered. Consequently, the court found no reason to interfere with the ITAT's order under Section 14A.

Nature of product development charges claimed as revenue expenditure:
Regarding the product development expenditure claimed as revenue expenditure, the assessee asserted &8377; 11.87 crores on the revenue side. The AO believed that the product developed would provide an enduring advantage and allowed 1/3rd of the expenditure for the current year with the rest spread over the following two years. The CIT (A) and ITAT supported the assessee's stance, considering it a factual matter not warranting court interference. The court noted that the product was linked to the assessee's export business in garments, with significant receipts reported for the year. Given the seasonal nature of the product and past acceptance of similar expenditures by the revenue, the court agreed with the decisions of the lower authorities. Consequently, the court concluded that no substantial question of law arose and dismissed the appeals.