2017 (4) TMI 469 - AT - Income Tax

Disallowance of assessee s claim on depreciation on assets acquired on demerger - Held that - Tribunal has upheld the order of the departmental authorities in disallowing assessee s claim of depreciation on assets acquired on demerger in earlier AYs. Addition u/s 14A - Held that - As regard being had to subsection (2) of section 14A, the provision does not empower the AO to apply Rule 8D straightaway without considering the correctness of assessee s claim in respect of expenditure incurred in relation to exempt income. If one applies the aforesaid legal principle to the facts of the present case, it emerges that though the assessee along with return of income has furnished a computation of inadmissible expenditure u/s. 14A, the AO has neither examined such claim of the assessee nor has recorded any satisfaction with regard to the correctness or otherwise of assessee s claim with reference to the books of account. That being the case, the disallowance made by applying Rule 8D is not only against the statutory mandate but contrary to legal principles laid down in the judicial precedents referred to above. In the aforesaid view of the matter, the disallowance made by the AO and partly sustained by the CIT(A) would have no leg to stand. Accordingly, the addition made deserves to be deleted. However, the disallowance made u/s. 14A by the assessee itself is also required to be disallowed while computing the book profit u/s. 115JB in view of the decision of the Tribunal in assessee s own case for A.Ys. 2005-06 to 2010-11 as referred to above. While deciding the additional ground raised by the assessee in the earlier part of the order, we have deleted the disallowance made by the AO u/s. 14A read with Rule 8D for the reasons discussed therein. That being the case, the issue raised by the department in the present appeal would no more survive. Suffice to say the CIT(A) has deleted the addition made on account of interest expenditure for the reason that the assessee had sufficient interest free surplus fund to make the investment. In fact, the AO himself in assessment order has stated that the assessee had substantial surplus fund available with it. That being the case, the interest expenditure under no circumstances can be disallowed u/s. 14A read with Rule 8D(2)(ii). The ground raised by the department is therefore dismissed.

Summary

Issues Involved:
1. Disallowance of assessee’s claim on depreciation on assets acquired on demerger.
2. Disallowance of claim of expenditure on brand improvement.
3. Disallowance made under Section 14A read with Rule 8D.

Detailed Analysis:

1. Disallowance of Assessee’s Claim on Depreciation on Assets Acquired on Demerger:

The assessee claimed depreciation on assets acquired from Godrej Appliances Ltd. pursuant to demerger. The AO disallowed part of the depreciation claim citing an amendment to Explanation 2B to Section 43(6) from AY 2004-05, reducing the depreciation claim by ?3,09,61,631/-. The CIT(A) upheld this disallowance, referencing ITAT decisions against the assessee in previous years (AYs 2003-04 to 2010-11). The ITAT, following its consistent view, upheld the CIT(A)’s decision and dismissed the ground raised by the assessee.

2. Disallowance of Claim of Expenditure on Brand Improvement:

The assessee claimed ?88,93,432/- as revenue expenditure for professional fees paid to Interbrand UK for brand maintenance. The AO classified this as capital expenditure, allowing only 25% depreciation. The CIT(A) upheld this view. However, the ITAT noted that in previous years (AYs 2008-09 to 2010-11), similar expenditures were allowed as revenue expenses by the Tribunal. Respecting this precedent, the ITAT deleted the addition made by the AO and allowed the assessee’s claim.

3. Disallowance Made Under Section 14A Read with Rule 8D:

The assessee raised additional grounds challenging disallowances made under Section 14A read with Rule 8D, arguing:
- Dividend from shares/units of mutual funds is subject to dividend distribution tax and should not attract Section 14A.
- The AO did not record satisfaction regarding the correctness of the assessee’s expenditure claim.
- Strategic investments should be excluded from the computation under Rule 8D.
- Disallowance under Section 14A should not affect book profit computation under Section 115JB.

The AO disallowed ?5,11,85,000/- comprising interest and administrative expenses. The CIT(A) sustained the administrative expense disallowance but deleted the interest expense disallowance, noting sufficient interest-free funds were available.

The ITAT observed that the AO did not record satisfaction regarding the assessee’s claim as required by Section 14A(2). Citing the Bombay High Court’s decision in Godrej & Boyce Manufacturing Co. Ltd. v. DCIT, the ITAT held that without such satisfaction, disallowance under Rule 8D is invalid. Consequently, the ITAT deleted the disallowance made by the AO and partly sustained by the CIT(A), while maintaining the assessee’s self-disallowance under Section 14A for book profit computation under Section 115JB.

The department’s appeal on the deletion of interest expenditure was dismissed since the CIT(A) correctly noted the availability of sufficient interest-free funds, and the AO’s own acknowledgment of substantial surplus funds.

Conclusion:

The assessee’s appeal was partly allowed, and the department’s appeal was dismissed. The order was pronounced on April 5, 2017.