2018 (4) TMI 12 - AT - Income Tax

Disallowance u/s 14A - Held that - There are funds available both interest-free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption is established. - Decided in favour of assessee. Nature of expenditure - website creation expenditure is a revenue expenditure and not a capital expenditure. See CIT vs. Mahindra Realty & Inf. Developers Ltd. 2013 (9) TMI 113 - ITAT MUMBAI

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D.
2. Treatment of software expenses related to website/portal as revenue expenditure.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:

The primary issue was whether the Commissioner of Income Tax (Appeals) [CIT(A)] erred in restricting the disallowance to ?73,69,364/- as against ?32,59,61,000/- made by the Assessing Officer (AO) under Section 14A read with Rule 8D of the Income Tax Act, 1961.

Facts and Arguments:
- The assessee company earned substantial exempt income from dividends and long-term capital gains, totaling ?35,62,89,403/-. The assessee disallowed ?73,39,364/- under Section 14A(1) in its return, attributing this to common expenses incurred at its registered office.
- The AO was not satisfied with the assessee's method of computation and invoked Rule 8D, resulting in an additional disallowance of ?32,59,61,000/-.

CIT(A)'s Findings:
- CIT(A) referenced the Bombay High Court's decision in Godrej & Boyce Mfg. Co. Ltd. vs. DCIT, which mandates that the AO must first determine the correctness of the assessee's claim regarding the expenditure related to exempt income.
- The AO failed to objectively assess the correctness of the assessee's claim before invoking Rule 8D. The AO's reason for invoking Rule 8D was merely the existence of Rule 8D, which is not sufficient.
- CIT(A) upheld the assessee's method of allocating common expenses in the ratio of exempt income to total income and disallowed the additional ?32,59,61,000/-.

ITAT's Decision:
- The ITAT upheld CIT(A)'s order, noting that the AO did not record any objective satisfaction before invoking Rule 8D.
- ITAT referenced its own decision in the assessee's case for the earlier assessment year, where it was established that the assessee had sufficient interest-free funds to cover the investments in tax-free securities.
- ITAT concluded that the AO's disallowance was not warranted as the assessee's method of disallowance was reasonable and in line with judicial precedents.

2. Treatment of Software Expenses Related to Website/Portal as Revenue Expenditure:

The second issue was whether the CIT(A) erred in allowing software expenses related to the website/portal as revenue expenditure.

Facts and Arguments:
- The assessee debited ?1,03,57,910/- as website creation expenses under "Other Administrative Expenses." The AO treated ?62,36,529/- of this amount as capital expenditure, arguing that it was of an enduring nature.

CIT(A)'s Findings:
- CIT(A) held that a website facilitates information dissemination and does not result in the acquisition of a capital asset or enduring advantage.
- CIT(A) relied on judicial decisions that consistently treated such expenses as revenue in nature and deleted the addition made by the AO.

ITAT's Decision:
- ITAT agreed with CIT(A) that website creation expenses should be treated as revenue expenditure.
- ITAT noted that the same issue had been decided in the assessee's favor in earlier years and upheld CIT(A)'s order.

Conclusion:
- The appeal by the Revenue was dismissed, affirming CIT(A)'s orders on both issues.
- The ITAT's decision emphasized the need for objective satisfaction by the AO before invoking Rule 8D and supported the treatment of website creation expenses as revenue expenditure.

Order Pronounced:
- The order was pronounced in the open court on 09.03.2018.