2018 (7) TMI 751 - AT - Income Tax

Disallowance u/s. 14A read with rule 8D - Held that - We note that when assessee is possessed of mixed funds which includes its own funds in sufficient quantity, a presumption that its own funds were utilized for the advances is to be drawn as held by the Hon ble Bombay High Court in Reliance Utility & Power Ltd. Vs. CIT 2009 (1) TMI 4 - BOMBAY HIGH COURT . Relying on the aforesaid decision of the Hon ble Bombay High Court, we find force in this ground raised by the assessee. Therefore, we direct the AO to verify the facts stated above and if it is found that assessee had own funds to make investment in tax free securities, then no disallowance u/s. 14A of the Act is warranted. So this ground of assessee is allowed for statistical purpose. Whether the Ld. CIT(A) is justified in directing the AO compute the disallowance under rule 8D(ii) and 8D(2)(iii) by adopting those investments which have yielded exempted dividend during the relevant year? - Held that - This Tribunal has consistently followed the dictum of law laid down in REI Agro Ltd. Vs. DCIT 2013 (9) TMI 156 - ITAT KOLKATA in which the Tribunal held that only investment which has given rise to the exempted income should be taken into consideration while computing disallowance u/s. 14A read with Rule 8D (iii) of the Rules. This order has been upheld by the Hon ble Calcutta High Court 2013 (12) TMI 1517 - CALCUTTA HIGH COURT . CIT(A) order is confirmed only in respect to his direction for application of Rule 8D (iii) and since the Ld. DR was unable to bring on record any change in law or facts, we do not find any infirmity in the order of the Ld. CIT(A). Treatment to the expenses of ERP upgradation -revenue expenditure or capital - Held that - We note that the issue is squarely covered in favour of the assessee by the decision of ITAT in assessee s own case for AYs. 2003-04, 2004-05 and 2008-09 and the Ld. CIT(A) has given relief to the assessee by following aforesaid decisions, cited supra. Since the Ld. CIT(A) has directed the AO to consider the software expenses as allowable revenue expenses by following the aforesaid decisions of ITAT, supra and the Ld. DR was unable to bring on record any change in law or facts, we do not find any infirmity in the order of the Ld. CIT(A). Proportionate disallowance of interest attributable to CWIP - Held that - We note that the issue is squarely covered in favour of the assessee by the decision of ITAT in departmental case for AY 2008-09.

Summary

Issues:
1. Disallowance of expenses u/s. 14A read with rule 8D
2. Treatment of expenses of ERP upgradation
3. Proportionate disallowance of interest attributable to CWIP

Issue 1: Disallowance of expenses u/s. 14A read with rule 8D:
The dispute arose regarding the disallowance of expenses under section 14A read with rule 8D. The Assessing Officer (AO) computed the disallowance at a significant amount, which the assessee contested. The assessee argued that the disallowance offered was based on the percentage of salary cost of the Treasury Department involved in investments yielding exempt income. The AO, however, applied Rule 8D and calculated the disallowance at a much higher figure. The Commissioner of Income Tax (Appeals) directed the disallowance to be computed based on investments yielding exempted dividend during the relevant year, reducing the disallowance to a lesser amount. The Tribunal upheld this direction, citing relevant case laws and dismissed the appeals of both the revenue and the assessee.

Issue 2: Treatment of expenses of ERP upgradation:
The AO treated expenses on ERP upgradation as capital expenses, adding them back to the total income but allowed depreciation at 60%. On appeal, the CIT(A) directed the AO to consider these expenses as allowable revenue expenses based on previous decisions in the assessee's own case for other assessment years. The Tribunal upheld the CIT(A)'s decision, noting that the issue was already settled in favor of the assessee by previous ITAT decisions, and dismissed the revenue's appeal.

Issue 3: Proportionate disallowance of interest attributable to CWIP:
The AO had allocated interest expenses to CWIP on an ad hoc basis, which the CIT(A) found to be based on surmises and conjectures, deleting the disallowance. The CIT(A) also relied on a previous ITAT decision for AY 2008-09. The Tribunal upheld the CIT(A)'s decision, as the issue was covered in favor of the assessee by the previous ITAT decision, and dismissed the revenue's appeal.

In conclusion, the Tribunal upheld the CIT(A)'s decisions on all three issues, dismissing the appeals of the revenue and allowing the assessee's appeal for statistical purposes.