2016 (11) TMI 1730 - AT - Income Tax

Disallowance u/s 14A r.w. Rule 8D - disallowance pertaining to proportionate interest and administrative expenditure - HELD THAT - As held in Morgan Stanley India Securities Pvt 2014 (1) TMI 1412 - ITAT MUMBAI interest disallowance is to be computed on net interest figure instead of the gross one. The Revenue does not dispute this legal position. We thus find force in assessee s contention on this limited aspect of interest disallowance and direct the AO to proceed on net interest basis only. We agree with ld. CIT(A) s findings in principle and remit the issue back to the Assessing Authority to re-compute the impugned interest disallowance afresh after affording adequate opportunity of hearing to the assessee. The assessee s only substantive ground as well as its appeal partly succeeds for statistical purposes. Nature of expenditure - business development expenditure - HELD THAT - Both the ld. Representatives are ad idem that this tribunal s order in assessee s own case for AYs 2005-06 to 2009-10 2016 (2) TMI 1353 - ITAT AHMEDABAD follows yet another decision in its case pertaining to AY 2001-02 holding identical business development expenditure to be Revenue in nature. Ld. Departmental Representative fails to point out any distinction on the relevant facts involved. We thus find no reason to interfere in the CIT(A) s conclusion under challenge. The Revenue fails in its first substantive ground. Addition of outstanding creditors liability - AO invoked the above statutory provision for the reason that the assessee had been showing the impugned liabilities for a time period exceeding three years - HELD THAT - The case file indicates that this tribunal in AY 2009-10 2016 (2) TMI 1353 - ITAT AHMEDABAD follows hon ble jurisdictional high court s decision in CIT vs. Nitin S. Garg 2012 (5) TMI 30 - GUJARAT HIGH COURT to hold that such a reason in absence of any evidence proving remission or cessation of liability is not sustainable. The Revenue does not point any exception thereto in facts of the instant case. We accordingly follow judicial consistency to uphold the CIT(A) s findings under challenge. This latter ground as well as Revenue s appeal is declined.

Summary

Issues Involved:
1. Challenge to disallowance under Section 14A r.w. Rule 8D.
2. Disallowance of business development expenditure.
3. Addition of outstanding creditors liability under section 41(1).

Issue 1: Challenge to disallowance under Section 14A r.w. Rule 8D:
The assessee contested the disallowance of Rs.61,74,046 under Section 14A r.w. Rule 8D, relating to interest and administrative expenditure. The Assessing Officer invoked Rule 8D for computing the disallowance due to exempt income from investments. The assessee argued that the investments were made from non-interest bearing funds and self-disallowed a portion. However, the Assessing Officer disagreed, noting interest debited in the P&L Account and the need for borrowed funds for investments. The CIT(A) upheld the disallowance, citing lack of proof of nexus between non-interest bearing funds and investments. The tribunal acknowledged the facts and directed the Assessing Officer to compute the interest disallowance on a net basis, following a similar precedent. The tribunal partially allowed the assessee's appeal on this issue.

Issue 2: Disallowance of business development expenditure:
The Revenue challenged the deletion of disallowance of Rs.3,21,91,284 for business development expenditure, treated as capital expenditure by the Assessing Officer. Both parties agreed that previous decisions held such expenditure as revenue in nature. The tribunal found no distinction in the facts and upheld the CIT(A)'s decision to delete the disallowance. The Revenue's challenge on this ground was dismissed.

Issue 3: Addition of outstanding creditors liability under section 41(1):
The Revenue sought to revive the addition of Rs.2,53,48,895 under section 41(1) for outstanding creditors' liability. The Assessing Officer made the addition due to the extended period of showing the liabilities. However, the CIT(A) reversed this decision, citing a judicial precedent that without evidence of remission or cessation of liability, such additions are not sustainable. The tribunal followed the consistent judicial approach and upheld the CIT(A)'s findings, declining the Revenue's challenge on this ground.

In conclusion, the tribunal partially allowed the assessee's appeal on the disallowance under Section 14A r.w. Rule 8D, dismissed the Revenue's challenge on business development expenditure disallowance, and declined the addition of outstanding creditors liability under section 41(1). The orders were pronounced on November 10, 2016, in Ahmedabad.