2021 (10) TMI 567 - AT - Income Tax

Disallowance u//s 14A - disallow the expenditure incurred in relation to earning of exempt income - contention of the assessee so far interest expenditure claimed by the assessee is concerned that related to specific loans and did not relate to the investment out of which the assessee had earned dividend income - HELD THAT - It is well settled law that for making disallowance u/s 14A of the Act, there has to be an expenditure related to the exempt income which has been charged in P L Account by the assessee. It is the contention of the assessee that so far interest expenditure is concerned, firstly, it related to specific loans and were not related to exempt income and secondly, the investment was made way back in the share of bankers of the assessee, such shares were kept in DEMAT account. So far, the administrative expenses i.e. are concerned, there is no dispute with regard to the fact that Rule 8D of the Income Tax Rules, 1962 is in operation for Assessment Year under consideration - we restrict the disallowance to the extent of the administrative expenses one-half percent of the average of the value of investment as on the first day and the last day of the previous year i.e. ₹ 9,44,000/- i.e. 4,720/-. Thus, Ground No.1 raised by the assessee is partly allowed. Disallowance of interest and not allowing the depreciation thereon which was treated by the AO being incurred on capital expansion - Capitalization of interest was rejected on the basis that before the Assessing Officer, such ground could not have been taken without claiming it in the return of income. In support of this, Ld.CIT(A) has placed reliance on the judgement of Goetze India Ltd. vs CIT 2006 (3) TMI 75 - SUPREME COURT - HELD THAT - CIT(A) has mis-directed himself as the judgement of the Hon ble Supreme Court does not put fetters on the power of the appellate authority below for entertaining such claim. Therefore, considering the totality of the facts and material placed before us, we deem it proper and in the principle of natural justice to restore this ground to the file of Ld.CIT(A) to decide the issue afresh - Appeal of assessee are allowed for statistical purposes. Disallowance of subscription and membership expenses - contentions of the assessee are, firstly, the expenditure was incurred for business expediency and secondly, the disallowance is highly excessive - HELD THAT - We find that the expenditure is related to subscription or membership fee and expenditure incurred for business meetings. It is the contention of the assessee that the facility was provided to senior managerial personnel of the company under the terms of employment for having meetings with senior executives and probable customers. We find merit in this contention of the assessee that such membership is used for furthering social relationship and also develop business communication - disallowance made by the AO is not justified. Hence, same is hereby deleted. This ground of assessee s appeal is allowed.

Summary

Issues Involved:
1. Disallowance under Section 14A of ?42,645/-
2. Disallowance of interest of ?1,29,63,747/-
3. Non-allowance of statutory deduction of depreciation on capitalized interest of ?1,29,63,747/-
4. Disallowance of subscription and membership expenses of ?3,62,992/-

Detailed Analysis:

1. Disallowance under Section 14A of ?42,645/-:
The assessee contended that no expenditure was incurred for earning exempt income, and thus, disallowance under Section 14A was unwarranted. The Assessing Officer (AO) disallowed expenses based on Rule 8D, considering the entire finance cost without distinguishing specific loans. The Tribunal noted that the CIT(A) confirmed the AO's findings mechanically. The Tribunal found merit in the assessee's argument that the investment in shares was made long ago and was held in a DEMAT account, with no direct expenditure incurred for earning the exempt dividend income. Consequently, the Tribunal restricted the disallowance to administrative expenses amounting to ?4,720/-, partially allowing the ground.

2. Disallowance of interest of ?1,29,63,747/-:
The AO disallowed interest on the loan from Mizuho Corporate Bank, treating it as capital expenditure. The CIT(A) confirmed the disallowance, noting non-compliance with Section 195 and Section 43B of the Income Tax Act. The Tribunal observed that the CIT(A) confirmed the disallowance on a different basis without notifying the assessee. The Tribunal highlighted that the CIT(A) misdirected himself by relying on the Supreme Court judgment in Goetze India Ltd. vs CIT, which does not restrict the appellate authority from entertaining such claims. The Tribunal restored the issue to the CIT(A) for a fresh decision after providing a reasonable opportunity to the assessee, allowing the ground for statistical purposes.

3. Non-allowance of statutory deduction of depreciation on capitalized interest of ?1,29,63,747/-:
This issue was interrelated with the disallowance of interest. The Tribunal noted that the CIT(A) rejected the ground based on the Supreme Court judgment in Goetze India Ltd. vs CIT, which was misapplied. The Tribunal restored the issue to the CIT(A) for a fresh decision, allowing the ground for statistical purposes.

4. Disallowance of subscription and membership expenses of ?3,62,992/-:
The assessee argued that the subscription fees for DLF Golf Club and Panchshila Club were for senior managerial personnel to meet executives and customers, aiding business relations. The AO disallowed the expenses, and the CIT(A) confirmed the disallowance. The Tribunal found merit in the assessee's contention that such memberships facilitated business communication and social relationships, crucial for business operations. The Tribunal deleted the disallowance, allowing the ground.

Conclusion:
The appeal was partly allowed. The Tribunal provided relief on the disallowance under Section 14A by restricting it to administrative expenses, restored the issue of interest disallowance and depreciation on capitalized interest to the CIT(A) for a fresh decision, and deleted the disallowance of subscription and membership expenses.