2012 (6) TMI 83 - AT - Income Tax

Dis-allowance u/s 14A of interest expenditure and administrative expenses on ground of same attributable to exempt income earned on account of dividend and long term capital gain - assessee is in the business of making investments, besides other business - earlier, it was carrying on the activity of manufacturing and dealing in Textiles - Held that - CIT(A) have rightly deleted dis-allowance of interest expenditure on ground that no interest expenditure stands shown as relating to the period during which the assessee company was only an investment company. Entire interest expenditure actually related to the earning of taxable income from the Textile Division. Since no nexus was brought by the AO between the borrowed funds and the tax free investment. That being so, disallowance of interest on borrowed funds was entirely uncalled for. Administrative expenses - Held that - It cannot be gainsaid that the disallowance u/s 14A of the Act cannot be made on an ad-hoc basis and it is the Department s responsibility to justify any such disallowance by bringing material on record to show that any expenditure was incurred for earning the exempt income. In the absence of such evidence, it was wrong on the part of the AO to proceed to compute disallowance of the expenses u/s 14A of the Act by merely applying Rule 8D(2)(iii) of the Rules. Deduction u/s 80IA/80IB - denial of deduction u/s 80 IA/80 IB for pre-demerger period to assessee company or resulting company regarding the assessee s three units which stood demerged pursuant to the Demerger Scheme - denial also on ground that same has not been claimed in Return - Held that - Circular No. 15/5/63 IT(A-I) dated 13.12.63 relates that the Board agreed that the benefit of section 84 attached to the undertaking and not to the owner thereof and that the successor would be entitled to the benefit of the unexpired period of 5 years, provided the undertaking was taken over as a running concern. It is on record that audit report in form No. 10 CCB, has been filed, in which deductions u/s 80 IA(12)/80 IB(12) were duly certified to have been claimed by the assessee. It is undisputed that the claim was made by way of a Note appended to the original return of income. It cannot be gain-said that the Note to the return of income formed an integral part of the return. Thereby, it cannot be held that the deduction was not claimed in the return of income. Therefore, AO erred in denying the deduction u/s 80 IA(12)/80 IB(12) - Decided in favor of assessee.

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Disallowance of fines and penalties.
3. Verification and exclusion of interest income from UTI.
4. Allowance of additional depreciation.
5. Deduction under Sections 80IA/80IB of the Income Tax Act.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The Assessing Officer (AO) disallowed Rs. 2,08,83,181/- under Section 14A, attributing expenses to income exempt under Section 10. The AO applied Rule 8D retrospectively, which was contested by the assessee. The CIT(A) restricted the disallowance to Rs. 16,54,531/-, considering the demerger of the Textile Division and the transfer of interest-bearing liabilities to the resulting company, STIL. The Tribunal upheld the CIT(A)'s decision, noting that the AO failed to establish a nexus between borrowed funds and tax-free investments, and Rule 8D was not applicable retrospectively as per "Godrej & Boyce Manufacturing Co. Ltd. v. DCIT."

2. Disallowance of fines and penalties:
The AO disallowed Rs. 5,000/- for fines related to traffic violations. The CIT(A) deleted this disallowance, following the Tribunal's decision for the assessment year 1990-91, which allowed similar expenses. The Tribunal upheld the CIT(A)'s decision, confirming the deletion of the disallowance.

3. Verification and exclusion of interest income from UTI:
The AO was directed by the CIT(A) to verify the claim of the assessee regarding the exclusion of interest income from UTI and allow the balance 50% of additional depreciation. The Tribunal found the CIT(A)'s directions proper, emphasizing the need for factual verification. The Tribunal rejected the Department's appeal on this ground, confirming the CIT(A)'s directions.

4. Allowance of additional depreciation:
The AO refused additional depreciation for plant and machinery installed in the preceding year. The CIT(A) directed the AO to verify the claim and allow the balance 50% of additional depreciation if found correct. The Tribunal upheld the CIT(A)'s directions, noting that the eligibility for deduction was admitted since 50% was already allowed in the previous year.

5. Deduction under Sections 80IA/80IB of the Income Tax Act:
The AO disallowed the deduction for the pre-demerger period, stating it was allowable only to the resulting company under Section 80IA(12). The CIT(A) upheld this view. The Tribunal, however, found that the deduction related to the eligible undertaking and transferred with it, as clarified by CBDT Circular No. 15/5/63. The Tribunal held that the deduction should be allowed for the profits earned by the undertaking during the pre-demerger period, as claimed in the Notes to the return of income, and allowed the assessee's cross-objection.

Conclusion:
The Tribunal dismissed the Department's appeal and allowed the assessee's cross-objections, confirming the CIT(A)'s decisions on disallowance under Section 14A, fines and penalties, and additional depreciation, while overturning the disallowance under Sections 80IA/80IB for the pre-demerger period.

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