2016 (5) TMI 1097 - AT - Income Tax

Disallowance made u/s 14A - Held that - A perusal of Balance Sheet as at 31-03-2008 shows that the assessee is having interest free funds of ₹ 4.25 crores and ₹ 5.81 crores as on 1.4.2007 and 31.3.2008 respectively. The investments held by the assessee stand at ₹ 2.11 crores and ₹ 2.00 crores as at the beginning of the year and end of the year respectively. These facts show that the own funds available with the assessee exceeds the amount of investments and hence the ratio of the decision rendered by the Hon ble jurisdictional High Court in the case of HDFC Bank Ltd.(2014 (8) TMI 119 - BOMBAY HIGH COURT ) shall apply to the instant case. Accordingly, we hold that there is no requirement of making any disallowance out of interest expenditure. Besides the above, the assessee has also received dividend income and Capital gains. All these factors show that there has been some activity with regard to the investment portfolio and hence we are of the view that a portion of administrative expenses is required to be disallowed. Since the factual details relating to the investment activity of the assessee are available, we are of the view that there is no requirement to adopt the methodology provided in Rule 8D of the I.T Rules. Considering the details of investment activity, we are of the view that the disallowance out of administrative expenses towards the above said investment activity may be estimated at 5% of the dividend income. Accordingly, we modify the order of Ld CIT(A) passed on this issue for AY 2008- 09 and direct the AO to restrict the disallowance u/s 14A at 5% of the dividend income received during the year under consideration. Disallowance out of administrative expenses - Held that - As we notice that the assessee has received dividend income of ₹ 2.25 lakhs and the fresh investment made was ₹ 48 lakhs. The assessee has redeemed investment to the tune of ₹ 41 lakhs. Thus, we notice that the level of investment activity has reduced during the year under consideration and the dividend income has also gone down considerably. Consistent with the view taken in the immediately preceding year, we direct the AO to restrict the disallowance towards administrative expenses to 5% of the dividend income. Inclusion of the amount disallowed u/s 14A of the Act to the Book profit computed u/s 115JB - Held that - Clause (f) of Explanation 1 given below sec. 115JB(2) provides that the expenditure relatable to income exempt u/s 10 is required to be added to the Net profit for the purpose of computation of Book profit. Accordingly, we do not find any merit in the submissions of the assessee. Accordingly, we modify the order of Ld CIT(A) on this issue and direct the AO to add the amount of disallowance computed as per our order discussed in the preceding paragraphs u/s 14A of the Act in the computation of Book profit u/s 115JB of the Act in both the years under consideration. Disallowance of repair expenses - Held that - Though the case of the assessing officer is that these expenses have enhanced the value of building and would give benefit of enduring nature, yet the fact remains that these expenses have not brought into existence any new asset. It is quite normal for a business man to carry out renovation expenses in new premises in order to suit his requirement of having good ambience and convenience. Hence, the purpose of incurring the renovation of expenses is to enable the assessee to carry on business operations smoothly. Since it is not shown that these expenses have brought any new asset and since the assessee has replaced old items with new ones and carried out repair/painting works, we are of the view that these expenses cannot be considered to be capital in nature. Accordingly, we set aside the order of Ld CIT(A) on this issue and direct the AO to delete the impugned disallowance. Addition relating to alleged suppression of sale value of property sold - Held that - There is merit in the contentions of the assessee. We notice that the AO has drawn conclusions without bringing any material to support his view. Even though the reasons for giving higher amount of brokerage were explained, yet the AO refused to accept the same on the suspicion that the broker might have been tutored by the assessee. It was submitted that the market value of the property is lesser than the sale value disclosed by the assessee. We further notice that the AO did not carry out any enquiries either from the market or from the buyer. Thus, we notice that the AO has arrived at the conclusion purely on surmises. Accordingly, we are of the view that the Ld CIT(A) was not justified in confirming the addition. Addition of brokerage amount - Held that - We notice that the property sold by the assessee is a depreciable asset falling in the block. Hence, the brokerage paid on the sale of the said asset requires to be deducted from the sale value of the asset. Accordingly, we are of the view that the AO was justified in disallowing the brokerage expenses and making necessary adjustments in the depreciation schedule. Disallowance of professional fee paid to the Chartered Accountant who is also one of the directors of the assessee company - addition u/s 40A(2)(b) - Held that - C.A has been paid retainer fee on monthly basis. It is quite common in trade circles to engage a professional as a retainer on the payment of monthly retainer fee. As against the monthly payment of ₹ 1.25 lakhs, the AO has restricted the same to ₹ 20,000/-. The assessing officer has done so with the observation that the payment is in excess of prevailing market price for the services rendered by the C.A. However, it is pertinent to note that the AO has not brought any material on record to support his conclusions. It is in the common knowledge of every one that the fee of a professional would depend upon the knowledge and experience of the professional. For similar type of work, two professionals may charge two different rates. Generally the public approaches a professional by considering various criteria such as knowledge, experience, name & fame in the market, reliability, dependability etc. Hence a professional is chosen depending upon the choice of a business man and after agreeing to the terms and conditions of the professional, the work is entrusted to him. In this scenario, we are of the view that the AO was not justified in questioning the reasonableness of payment made to the C.A by the assessee, when the assessee has taken a conscious decision to pay the same. The tax authorities cannot question the choice exercised by the assessee without bringing any material on record. We have also noticed that the disallowance has been made without bringing any material on record. For these reasons, we are of the view that the disallowance made u/s 40A(2)(a) is not justified. Accordingly we set aside the order of Ld CIT(A) on this issue and direct the AO to delete the disallowance. - Decide against revenue Disallowance relating to interest on FBT - disallowance u/s 40(a)(ic) - Held that - The assessee did not show as to how the provisions of 40(a)(ic) of the Act are not applicable to the disallowance. Accordingly, we confirm the decision taken by Ld CIT(A) observing that no argument was advanced against the disallowance - Decided against assessee

Summary

Issues Involved:
1. Delay in filing the appeal for AY 2008-09.
2. Disallowance under Section 14A of the Income Tax Act.
3. Inclusion of disallowed amount under Section 14A in the Book Profit under Section 115JB.
4. Disallowance of repair expenses as capital expenditure.
5. Alleged suppression of sale value of property and related brokerage expenses.
6. Disallowance of professional fee paid to a Chartered Accountant who is also a director.
7. Disallowance of interest on FBT.

Issue-Wise Detailed Analysis:

1. Delay in Filing the Appeal for AY 2008-09:
The appeal for AY 2008-09 was barred by a delay of 148 days. The assessee filed a petition to condone the delay, which was accepted by the Tribunal after considering the reasons provided. Consequently, the appeal was admitted for hearing.

2. Disallowance under Section 14A of the Income Tax Act:
The disallowance under Section 14A was contested for both AY 2008-09 and 2009-10. The assessee argued that interest-free funds exceeded the investments, relying on precedents from CIT Vs. Reliance Utilities & Powers Ltd. and DCIT Vs. HDFC Bank Ltd. The Tribunal observed that the assessee had sufficient interest-free funds and held that no disallowance of interest expenditure was required. However, for administrative expenses, the Tribunal noted investment activities and directed a disallowance of 5% of the dividend income for both years, modifying the order of the CIT(A).

3. Inclusion of Disallowed Amount under Section 14A in the Book Profit under Section 115JB:
The Tribunal upheld the inclusion of the disallowed amount under Section 14A in the computation of Book Profit under Section 115JB, citing clause (f) of Explanation 1 below Section 115JB(2), which mandates adding expenditure related to exempt income to the Net Profit.

4. Disallowance of Repair Expenses as Capital Expenditure:
For AY 2008-09, the assessee incurred expenses on renovation after shifting premises. The AO treated these as capital expenditure, but the Tribunal disagreed, stating the expenses did not create a new asset and were necessary for business operations. The Tribunal directed the AO to delete the disallowance.

5. Alleged Suppression of Sale Value of Property and Related Brokerage Expenses:
The AO alleged suppression of sale value based on brokerage calculations, adding ?7,30,000 to the income. The Tribunal found the AO's conclusions speculative and unsupported by evidence, directing the deletion of the addition. However, the brokerage expense was upheld as it related to a depreciable asset, requiring adjustment in the depreciation schedule.

6. Disallowance of Professional Fee Paid to a Chartered Accountant Who is Also a Director:
The AO disallowed part of the professional fee paid to a director, considering it excessive under Section 40A(2)(a). The Tribunal noted the lack of evidence supporting the AO's view and emphasized the commercial decision-making of the assessee. The Tribunal directed the deletion of the disallowance for both AY 2008-09 and 2009-10.

7. Disallowance of Interest on FBT:
For AY 2009-10, the AO disallowed interest on FBT under Section 40(a)(ic). The Tribunal upheld this disallowance as the assessee did not contest its applicability.

Conclusion:
Both appeals were partly allowed, with the Tribunal providing specific directions on each issue. The judgment reflects a detailed examination of the facts and legal principles, ensuring that decisions are based on substantive evidence and established precedents.