2012 (3) TMI 100 - HC - Income Tax

Disallowance u/s 14A - The instruments resulting in tax free income were purchased the earlier years, whereas the bank loan was availed of in the present year - Further the bank loan was for a specific purpose, i.e. export of sugar and could not be used for any other purpose - Held that as far as administrative expenses is concerned, the matter has been remitted back to the Assessing Officer - Appeal is disposed of

Summary

Issues:
1. Valuation of Closing Stock
2. Deduction under Section 14A
3. Interest under Section 234 D

Issue 1 - Valuation of Closing Stock:
The appeal concerns the assessment year 2001-02 challenging the Income Tax Appellate Tribunal's order. Three substantial questions of law are framed regarding the valuation of closing stock. The Tribunal had deleted the addition made by the Assessing Officer on account of rejecting the method of valuation of closing stock followed by the assessee. The Tribunal accepted the net realizable value as declared by the respondent-assessee and did not adopt the cost price for computing the closing stock. Similar questions of law were decided in favor of the respondent assessee in a connected matter. The three questions of law were answered in favor of the respondent assessee and against the Revenue.

Issue 2 - Deduction under Section 14A:
The issue revolves around the deduction under Section 14A. The Assessing Officer disallowed administrative and interest expenses under Section 14A. The respondent/assessee challenged this, arguing that borrowed funds were not utilized for earning the exempt income. The CIT(A) held that no interest was paid for making investments in earning the exempt income, thus deleting the addition of interest expenses. However, the proportionate disallowance of administrative expenses was confirmed. The Tribunal found that no borrowed funds were used for investments in bonds or shares at the beginning of the year, leading to the deletion of the interest expenditure disallowance under Section 14A. The Tribunal held that no part of the interest expenditure could be disallowed under Section 14A.

Issue 3 - Interest under Section 234 D:
The Revenue raised an issue regarding charging of interest under Section 234D for the assessment year 2001-02. Citing a precedent, it was held that Section 234D is applicable only from the assessment year 2004-05 onwards and not for earlier assessment years. Consequently, the appeal was disposed of with no orders as to costs.

This comprehensive analysis covers the valuation of closing stock, deduction under Section 14A, and interest under Section 234 D, providing detailed insights into the legal judgment delivered by the Delhi High Court.