2018 (5) TMI 2166 - AT - Income Tax

Disallowance u/s 14A read with Rule 8D - disallowance of expenditure incurred for earning exempted income - Assessee added no expenditure was incurred in relation to earning exempt income - HELD THAT - It has been consistently held by various Hon ble Courts that if the assessee possesses sufficient capital and reserves as well as interest free funds and if there is no finding by the revenue authorities that interest bearing funds have been applied for investing in shares and securities it has to be presumed that the assessee has invested its own capital and reserves i.e. interest free funds for making the investments. We find support from the judgment of Reliance Utilities 2009 (1) TMI 4 - BOMBAY HIGH COURT and HDFC Bank 2014 (8) TMI 119 - BOMBAY HIGH COURT We therefore respectfully following the above judgments of the Hon ble Courts are of the considered view that the learned Commissioner of Income Tax (Appeals) has rightly deleted the interest disallowance. As regards the disallowance of administrative expenditure we find no reason to interfere with the finding of the learned Commissioner of Income Tax (Appeals) who has sustained the addition by keeping in view the investments made in quoted shares as well as unquoted shares as well as looking to the aspect that the assessee is engaged in the business of purchase and sale of shares. Disallowance of penalty levied by Stock Exchange for procedural defaults such a delay in submission of return etc. - Allowable business expenditure or not? - HELD THAT - From a perusal of the finding of CIT (Appeals) as well as going through the submissions given by the assessee in the light of the judgment of the Hon ble High Court of Bombay in the case of CIT vs The Stock Bond Trading Company 2011 (10) TMI 172 - BOMBAY HIGH COURT we are of the considered view that the assessee made no offence prohibited by law which can be contemplated to be covered under Explanation to section 37 of the Act and therefore the payment of penalty made by the assessee to the Stock Exchange is a regular business expenditure and the impugned disallowance has rightly been deleted by the learned Commissioner of Income Tax (Appeals). We uphold the same. Disallowance of prior period expenses - HELD THAT - As we find that the payment related to service tax and the necessary proof of payment was placed on record. Therefore as the liability has crystalised during the year the learned Commissioner of Income Tax (Appeals) has rightly allowed the assessee s claim of expenditure - No interference is therefore called for in the findings of CIT(Appeals).

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules.
2. Deletion of addition on account of disallowance of penalty and prior period expenses.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules:

Facts and Findings:
- The assessee declared an income of Rs. 3,14,87,710/- for the assessment year 2013-14.
- The Assessing Officer (AO) observed that the assessee made investments in shares and incurred interest expenditure but did not disallow any expenditure under Section 14A.
- The AO applied Rule 8D, disallowing Rs. 52,26,627/- (interest disallowance of Rs. 42,64,143/- and administrative expenses of Rs. 9,62,484/-).

Appeal and Cross Objection:
- The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the interest expenditure disallowance but sustained Rs. 5,77,013/- for administrative expenses.
- The revenue appealed against the CIT(A)'s order, while the assessee filed a cross objection.

Tribunal's Analysis:
- The Tribunal noted that the assessee had sufficient own funds (share capital and reserves) exceeding the investments made.
- Investments were primarily in unquoted shares of subsidiaries, which did not yield any income.
- The assessee's net interest income was positive, and the interest expenditure was related to working capital borrowings for business purposes.
- The Tribunal upheld the CIT(A)'s finding that no interest-bearing funds were used for investments yielding exempt income.
- Various judgments were cited to support the contention that if sufficient interest-free funds are available, it is presumed that investments are made from these funds.
- The Tribunal distinguished the assessee's case from the Maxopp Investment Ltd. case, highlighting that the investments were not made from borrowed funds and did not yield exempt income.
- The administrative expense disallowance was upheld by the Tribunal, considering the nature of the investments and the assessee's business activities.

Conclusion:
- The Tribunal dismissed the revenue's appeal on the disallowance under Section 14A, affirming the deletion of interest disallowance and sustaining the partial administrative expense disallowance.

2. Deletion of Addition on Account of Disallowance of Penalty and Prior Period Expenses:

Facts and Findings:
- The AO disallowed Rs. 1,62,098/- as penalty paid to the Stock Exchange and Rs. 15,508/- as prior period expenses.
- The CIT(A) deleted these disallowances.

Tribunal's Analysis:
- The penalty was for procedural defaults, not for any infringement of law, and was considered a regular business expenditure.
- The Tribunal relied on the judgment of the Bombay High Court in CIT vs. Stock & Bond Trading Company, which held that payments to the stock exchange for regulation violations are not offenses prohibited by law.
- The prior period expense related to service tax was allowed as the liability crystallized during the year.

Conclusion:
- The Tribunal upheld the CIT(A)'s deletion of the penalty and prior period expenses, dismissing the revenue's appeal on these grounds.

Final Judgment:
- Both the revenue's appeal and the assessee's cross objection were dismissed, with the Tribunal affirming the CIT(A)'s order. The judgment was pronounced in open court on May 31, 2018.