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2018 (8) TMI 2133 - AT - Income TaxDisallowance u/s 14A r.w.r. 8D - expenses incurred in relation to earning of exempt income - Assessee contended that investments were made by the assessee company out of its own funds which was sufficient to cover the cost of investments and that no interest bearing funds were utilized to make investments which yielded the exempt income - HELD THAT - Admittedly investments in bonds and debentures and advance to subsidiaries could not have produced tax free income and for that reason sec. 14A was not applicable to it. Even the lower authorities have not made out any case that the borrowed funds were relatable to investment in bonds and debentures and advance to subsidiary and that the interest paid thereon was for non-business purposes and hence disallowable u/s. 36(1)(iii) of the Act. We therefore do not deem it fit or appropriate to entertain this argument at this stage as it would tantamount to enhancing the scope of appeal whereas the issue before us concerns only disallowance u/s. 14A - respectfully following the order of the Tribunal 2018 (5) TMI 255 - ITAT KOLKATA for AY 2008-09 we direct the AO to delete the disallowance of proportionate interest made u/s. 14A of the Act read with Rule 8D(2)(ii) of the Rules. Addition made u/r 8D(2)(iii) - Tribunal in assessee s own case for AY 2008-09 2018 (5) TMI 255 - ITAT KOLKATA following the decision of REI Agro Ltd. 2013 (9) TMI 156 - ITAT KOLKATA held that only dividend bearing investment in shares are to be considered for making disallowance u/s. 14A of the Act. Following the same we remand this issue back to the file of the AO with a direction to consider only investment in shares and units held on the opening and closing date of the previous year which yielded dividend income for the purpose of computing the disallowance u/s. 14A of the Act read with Rule 8D(2)(iii) Computation of deduction u/s. 10B and 80IA - allocation of 7.39% of directors remuneration and auditor s remuneration to be considered as deduction in arriving at the profits of the undertakings eligible for deduction u/s. 10B and 80IA - HELD THAT - On perusal of the separate audited accounts of the eligible undertakings we note that no expenses have been debited in respect of the audit conducted on these segmental accounts and in that view of the matter we hold that the auditor s remuneration debited in P L Account inter-alia comprised of the fees paid to auditors for auditing the separate accounts of the eligible undertakings. In absence of the break-up of fees paid to auditors we find no infirmity in the order of the lower authorities in allocating the auditor s remuneration to the eligible undertaking on pro-rata basis and hence the order of the lower authorities to that extent is confirmed. Director s remuneration - We find that the same can be bifurcated into remuneration and sitting fees paid to non-executive Directors and to the Managing Director. We note that the non-executive Directors do not participate in the day-to-day work of the company nor are in-charge of the operations of the undertakings and hence the remuneration paid to them did not have first degree nexus with the profits of the eligible undertaking. Non-executive directors attended the board meetings and were involved in policy decision making matters of corporate governance etc. which had no first degree nexus with the operations of the eligible undertaking DR could not controvert this particular fact therefore the AO/Ld. CIT(A) erred on facts and in law in allocating sums out of the Director s remuneration while arriving at the income eligible for deduction u/s. 80IA/10B of the Act and therefore we delete the allocation made on this issue. Remuneration paid to the Managing Director - We note that the Managing Director is involved in the day-to-day affairs of the company and is responsible for over-all operations of the company including the eligible undertaking. Managing Directors remuneration indeed have nexus with the functioning of the eligible undertaking and therefore we uphold the allocation made out of the Managing Directors remuneration to the profits of the eligible undertaking. Therefore ground nos. 4 and 5 are partly allowed. Deduction of prior period expenses - According to AO the assessee was unable to establish that this liability for expenses pertaining to earlier years had crystalised during the financial year and therefore disallowed the entire sum - CIT(A) deleted addition - HELD THAT - Since interest demand was raised by the payee only in the relevant year the Ld. CIT(A) rightly held that the liability for such expenses arose and crystalised in this year only. As regards other items of expenses CIT(A) observed that the bills for certain expenses for the FY 2007-08 were received by the assessee only in the next year i.e. the relevant FY 2008-09. Although the assessee had provided for the expenses on estimate basis in the earlier year but there was certain difference between the provisions estimated and the actual billed amount and it was this differential amount which was charged to the P L Account for the relevant year. CIT(A) correctly observed that since the bills were received after the end of the FY 2007-08 and in FY 2008-09 the differential amount had crystalised in the relevant year itself and therefore allowed the same. - Decided against revenue. CIT(A) in restricting the allocation of expenses on legal and professional and travelling and conveyance to the eligible undertaking u/s. 80IA and 10B - HELD THAT - From perusal of the schedule of expenses forming part of the audited accounts we find that legal and profession expenses as well as travelling and conveyance expenses incurred by these undertakings were debited to the stand alone account of these eligible undertakings and hence no further allocation on account of these items of expenses to the eligible undertakings was warranted. DR was unable to controvert this fact which is evident from the documents on record. Allocation of common expenses comprising of Director s remuneration Auditor s remuneration conveyance and travelling expenses and legal and professional expenses in working out the profits of the eligible undertakings u/s. 80IA and 10B -HELD THAT - Managing Director s remuneration and auditor s remuneration had nexus with the functioning of the eligible undertakings and accordingly confirm the orders of the lower authorities for making allocation out of these expenses against the income to be considered for the purpose of computing deduction u/s. 80IA and 10B of the Act. Similarly we find that the auditor had identified and allocated the expenditure relatable to the eligible undertakings on account of travelling and conveyance and legal and professional expenses and in that view of the matter we uphold the order of the Ld. CIT(A) that no further allocation on account of these two items of expenses was called for.
Issues Involved:
1. Disallowance under Section 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962. 2. Allocation of Director’s remuneration and Auditor’s remuneration for computing profits eligible for deduction under Sections 10B and 80IA of the Income-tax Act. 3. Deduction of prior period expenses. 4. Allocation of common expenses for computing profits eligible for deduction under Sections 10B and 80IA of the Income-tax Act. Issue-wise Detailed Analysis: 1. Disallowance under Section 14A read with Rule 8D: The assessee had derived dividend income, which was claimed exempt under Section 10(34) of the Income-tax Act. The assessee had suo moto disallowed a sum under Section 14A, but the Assessing Officer (AO) applied Rule 8D and made a higher disallowance. The CIT(A) confirmed the disallowance but rectified computational errors. The Tribunal, referencing the assessee’s own case for earlier years and the Jurisdictional High Court’s decision in Pr.CIT vs. Rasoi Ltd, held that no borrowed funds were used for investments yielding exempt income. Hence, no disallowance of interest under Rule 8D(2)(ii) was warranted. For Rule 8D(2)(iii), the Tribunal directed the AO to consider only investments yielding exempt income for disallowance computation. 2. Allocation of Director’s and Auditor’s Remuneration: The AO allocated Director’s remuneration and Auditor’s remuneration to the eligible undertakings for deduction under Sections 10B and 80IA. The CIT(A) confirmed the allocation for these expenses. The Tribunal, referring to the Supreme Court’s decision in Liberty India Vs. CIT and other precedents, held that only expenses with a direct nexus to the eligible undertakings should be considered. The Tribunal bifurcated Director’s remuneration into non-executive and Managing Director’s remuneration, disallowing the allocation for non-executive directors due to lack of direct involvement in day-to-day operations, but upheld the allocation for the Managing Director’s remuneration. Auditor’s remuneration was upheld for allocation due to its direct relevance to the eligible undertakings. 3. Deduction of Prior Period Expenses: The AO disallowed prior period expenses, but the CIT(A) allowed them, noting that the demand for interest paid to the Deputy Director of Mines crystallized during the relevant year. The Tribunal upheld the CIT(A)’s decision, confirming that the liability arose and crystallized in the relevant year, making the expenses deductible. 4. Allocation of Common Expenses: The AO allocated common expenses such as legal and professional fees, and travelling and conveyance expenses to the eligible undertakings on a pro-rata basis. The CIT(A) found that the auditors had already allocated these expenses in Form 10CCB and thus no further allocation was required. The Tribunal upheld the CIT(A)’s decision, noting that the expenses were already debited to the standalone accounts of the eligible undertakings. Conclusion: The appeals of the assessee were partly allowed, and those of the revenue were dismissed. The Tribunal directed the AO to delete the disallowance of proportionate interest and to recompute the disallowance under Rule 8D(2)(iii) considering only investments yielding exempt income. The allocation of non-executive directors’ remuneration was disallowed, while the allocation of the Managing Director’s remuneration and auditor’s remuneration was upheld. Prior period expenses were allowed as deductible, and no further allocation of common expenses was warranted.
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