2016 (9) TMI 649 - AT - Income Tax

Disallowances of expenses u/s 14A - Held that - It is true that the authorities below have erred in applying Rule 8D to the year under appeal i.e. AY 2006-07 whereas Rule 8D has been held by various judicial pronouncements to be applicable prospectively from AY 2008-09. Further, on a perusal of the orders of the authorities below, it is seen that the AO as well as the Ld. CIT (A) have not recorded any finding as to how the disallowance of ₹ 32,875/- made by the assessee was incorrect. The authorities below have also not pointed out the nexus between the investments and the expenditure incurred. The Assessing Officer has adopted the formula for estimating expenditure on the basis of investments but the justification for calculating the disallowance is missing. Thus the disallowance u/s 14A was made without due deliberation and analysis by the Assessing Officer and the Ld. CIT (A) was also patently wrong in confirming the disallowance without testing the sustainability of the disallowance. Hence, we set aside the findings of the Ld. CIT (A) on this issue and restore the matter to the file of the AO for fresh adjudication after due verification of the claim of the assessee Addition on account of alleged difference in valuation of stock - Held that - The assessee has been consistently valuing the stock of shares on FIFO basis and the it is undisputed that the department has accepted this method of valuation in preceding as well as subsequent assessment years. The AO has not been able to justify the need for the change in valuation and the Ld. CIT (A) has also confirmed the action of the AO in this regard. However, even in the arguments before us, the Ld. DR could not give a cogent reason that warranted a change in the method of valuation especially when the method was accepted by the department in earlier as well as subsequent years. It is also seen that due credit for the difference in valuation of closing stock in the year under appeal has also not been incorporated by the department in the valuation of opening stock by the department in AY 07- 08. Hence, we find that the stock valuation figure has been disturbed without any basis whatsoever and we find ourselves unable to agree with the stand of the department on this issue. We, accordingly, set aside the order of the Ld. CIT (A) on this issue and direct the AO to delete this addition. Addition on account of extra depreciation claimed on computer peripherals and accessories - Held that - This issue has been settled in favour of the assessee in a plethora of judicial pronouncements and the ld. CIT(A) has also followed the reasoning that the computer is of no use if it does not have any support of printer/mouse/UPS etc. Hence, on this issue also we find no reason to interfere with the findings of the ld. CIT(A) and we uphold the same. Rebate u/s 88E - Held that - The case of the assessee is squarely covered by the decision of the Hon ble Jurisdictional High Court in CIT vs. Jaypee DSC Ventures Limited 2011 (3) TMI 309 - Delhi High Court wherein held that the interest earned by the assessee on the FDRs has intrinsic and inseggregable nexus with the work undertaken and, therefore, the interest earned by the assessee is capital in nature and shall go towards adjustment against the project expenditure and the same cannot be assessed as income from other sources. CIT has rightly adjudicated the issue by directing the AO to allow rebate u/s 88E of the Act and we find no reason to interfere with the same. MAT compuation - Rebate in respect of securities transaction tax u/s 88E - adjustment from the tax as payable for the purpose of Section 115JB - Held that - As decided in CIT vs MBL & Co. Ltd 2013 (5) TMI 669 - DELHI HIGH COURT there is no reason why the remission in tax which is available u/s 88E of the Act to an assessee be not available on the tax as computed under the Minimum Alternate Tax Scheme as both section 115JB of the Act as well as the other provisions of the Act referred above have been enacted to provide the machinery for computing total income of an assessee which is exigible to Income Tax. The rebate u/s 88E of the Act provides for certain rebates available on the tax payable by an assessee. In our view, there would be no rationale to limit the plain words of sec. 88E of the Act to hold that the rebate in payment of the tax is only applicable to tax as determined under the normal provisions of the Act and not available with respect to Minimum Alternative Tax as computed u/s 115JB of the Act. The purpose of section 88E of the Act is to grant an assessee, to a limited extent, credit in tax on account of security transaction tax already borne by him in respect of the business carried out by him in dealing in securities. This rebate would be equally applicable to tax as computed under section 115JB of the Act as under the normal provisions of the Act

Summary

Issues Involved:
1. Disallowance under Section 14A
2. Addition on account of valuation of closing stock
3. Disallowance of interest expenses
4. Depreciation on computer peripherals and accessories
5. Rebate under Section 88E
6. Applicability of Section 115JB (Minimum Alternate Tax - MAT)

Detailed Analysis:

1. Disallowance under Section 14A:
The assessee challenged the disallowance of ?333,821 under Section 14A, arguing that the provisions were not applicable as the assessee had already calculated an expenditure of ?32,875 towards earning exempt income. The Tribunal noted that Rule 8D was applied erroneously for AY 2006-07, as it is applicable prospectively from AY 2008-09. The authorities failed to record any finding on the correctness of the assessee's claim or the nexus between investments and expenditure. The Tribunal cited the Delhi High Court's decision in Maxopp Investment Ltd. and the Punjab & Haryana High Court's decision in Hero Cycles Ltd., emphasizing that disallowance under Section 14A requires a finding of incurred expenditure. The Tribunal set aside the findings and remanded the matter to the AO for fresh adjudication.

2. Addition on Account of Valuation of Closing Stock:
The assessee contested the addition of ?200,099 due to alleged undervaluation of closing stock, asserting that the stock was valued correctly on a FIFO basis, a method consistently accepted by the department in previous and subsequent years. The Tribunal found no justification for the change in valuation method and noted that the department did not incorporate the difference in the opening stock valuation for the subsequent year. The Tribunal directed the AO to delete the addition, siding with the assessee.

3. Disallowance of Interest Expenses:
The department appealed against the deletion of ?1,861,445 out of the total disallowance of ?1,863,226 made by the AO on account of interest expenses. The CIT(A) found that the assessee had sufficient share capital and free reserves, and the loans to subsidiaries were out of commercial expediency. The Tribunal upheld the CIT(A)'s decision, noting that the AO failed to establish a direct nexus between borrowed funds and the alleged diversion for non-business purposes.

4. Depreciation on Computer Peripherals and Accessories:
The department challenged the deletion of ?863,806 on account of extra depreciation claimed on computer peripherals and accessories. The Tribunal noted that this issue has been settled in favor of the assessee in various judicial pronouncements and upheld the CIT(A)'s reasoning that peripherals and accessories are integral to the functioning of computers.

5. Rebate under Section 88E:
The department contested the CIT(A)'s direction to allow rebate under Section 88E for tax payable on brokerage income, interest income, interest on IT refund, and miscellaneous income. The Tribunal found that the interest income from FDRs, kept as margin money with stock exchanges, was inextricably linked to the business of trading in shares and thus eligible for rebate under Section 88E. The Tribunal upheld the CIT(A)'s decision, referencing the Delhi High Court's judgment in CIT vs. Jaypee DSC Ventures Ltd.

6. Applicability of Section 115JB (MAT):
The department argued that the provisions of Section 115JB were applicable. The Tribunal noted that the tax payable under normal provisions was higher than the tax computed under MAT. The Tribunal upheld the CIT(A)'s decision that Section 115JB was not applicable, citing the Delhi High Court's decision in CIT vs. MBL & Company Limited, which held that rebate under Section 88E is applicable to tax computed under MAT as well.

Final Result:
The appeal of the assessee was allowed, and the appeal of the department was dismissed. The Tribunal's order was pronounced in the open court on 05/08/2016.