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2017 (4) TMI 239 - AT - Income TaxDisallowance under Section 14A - Held that - Rule 8D has come into effect only from 24.03.2008. Therefore, in the case of the assessee for assessment year 2007-08, Rule 8D cannot be applied. 2% of the exempt income would suffice for disallowance under Section 14A of the Act. Therefore we hereby direct the Ld. AO to disallow 2% of the exempt income as the expenditure incurred for earning exempt income. Depreciation on building - Held that - From the facts of the case it is apparent that the assessee had purchased the building on 31.03.2007. The property was registered on the very same day. Therefore, though the assessee might have taken possession of the property on 31.03.2007, there was no possibility for the building to be put to use on the same day. It is obvious that after purchase of the building some basic maintenance work would have been required before putting the asset to use. Therefore we do not find any merit in the arguments advanced by the Ld. AR. Accordingly this ground is decided against the assessee and the orders of the Revenue authorities are upheld on this issue. Applicability of the provisions of the Section 14A with respect to subsidiary companies (for the assessment years 2008-09 & 2010-11) - Held that - Remit back the matter to the file of the Ld. AO to consider the issue afresh in the light of the above order of the Tribunal and pass appropriate order in accordance with merits and law. We also make it clear that for the investments made in mutual funds, provisions of Section 14A read with Rule 8D will be applicable since the assessee would incur some expenditure at least for the decision making process as to in which mutual fund the investment has to be made and at what point of time exit from such funds.
Issues Involved:
1. Delay in filing the appeals. 2. Disallowance under Section 14A of the Act for the assessment years 2005-06 and 2007-08. 3. Depreciation on building for the assessment year 2007-08. 4. Applicability of Section 14A with respect to investments in subsidiary companies for the assessment years 2008-09 and 2010-11. Detailed Analysis: 1. Delay in Filing the Appeals: The assessee filed appeals with a delay of 74 days, attributing the delay to office renovation work that disrupted operations. The Tribunal, while not fully appreciating the reason, condoned the delay in the interest of justice and proceeded to hear the appeals on merits. 2. Disallowance under Section 14A of the Act for the Assessment Years 2005-06 and 2007-08: The assessee contested the disallowance of 5% of exempt income for the year 2005-06 and the application of Rule 8D for the year 2007-08. The Tribunal noted that Rule 8D is applicable from 24.03.2008, thus not applicable for the assessment years in question. Citing the Hon’ble Jurisdictional Madras High Court's decision in India Nippon Electricals Limited vs. DCIT, the Tribunal directed the AO to disallow 2% of the exempt income as expenditure incurred for earning exempt income. 3. Depreciation on Building for the Assessment Year 2007-08: The assessee claimed depreciation on a building purchased on 31.03.2007. The AO disallowed the claim as the assessee could not prove that the building was put to use on the same day. The CIT(A) upheld the AO's decision. The Tribunal also upheld the disallowance, reasoning that it was improbable for the building to be put to use immediately upon purchase, requiring basic maintenance before use. 4. Applicability of Section 14A with Respect to Investments in Subsidiary Companies for the Assessment Years 2008-09 and 2010-11: The AO invoked Section 14A and Rule 8D for disallowance related to investments in subsidiary companies. The assessee argued that these investments were made out of interest-free funds for strategic purposes. The Tribunal found merit in the assessee's contention, referencing several precedents where investments in subsidiary companies for strategic purposes were not subject to Section 14A disallowance. The Tribunal remitted the matter back to the AO to re-examine the issue, directing the AO to exclude investments in subsidiary companies from the disallowance calculation but to apply Section 14A read with Rule 8D to investments in mutual funds. Conclusion: - The appeal for the assessment year 2005-06 was allowed. - The appeal for the assessment year 2007-08 was partly allowed. - The appeals for the assessment years 2008-09 and 2010-11 were allowed for statistical purposes, with directions for re-examination by the AO. Order Pronounced: The order was pronounced on 23rd March 2017 at Chennai.
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