2012 (7) TMI 210 - AT - Income Tax

Dis-allowance u/s 14A of interest expenditure under Rule 8D(2)(ii) and 0.5% of the average value of investments under Rule 8D(2)(iii) - Held that - It is observed that major portion of interest is paid on vehicle loan taken by the assessee and the other payments are either to the tax department or to the bank. Thus, Rule 8D(2)(ii) is not applicable in the instant case and hence disallowance of proportionate interest expenditure is not in accordance with law. However, since assessee made huge investments in shares, it is not possible to ascertain the ratio of expenditure which is relatable to exempt income, it is found that AO has rightly applied the formulae of 0.5% of the average value of investment for dis-allowance, which is in accordance with law - Decided partly in favor of assessee Foreign travel undertaken by the Director and his wife for business purpose - dis-allowance - travel scheduled from 22.04.2008 to 05.05.2008 - AY 08-09 - Held that - Following matching principle, expenditure deserves to be considered in subsequent year and not in the year under consideration. Dis-allowance of amount paid to SEBI for non compliance of certain regulations of SEBI on the ground as levy for infraction of statutory law - assessee contended that non-compliance do not result in any harm to investors, promoters or any other parties - Held that - No material was placed to contradict the claim of the assessee. In light of decision in case of CIT vs. Prasad and Co (2012 (2) TMI 124 (HC)) amount paid to SEBI is allowable as deduction.

Summary

Issues Involved:

1. Disallowance of expenditure under section 14A of the Income Tax Act by applying Rule 8D.
2. Disallowance of foreign travel expenses.
3. Disallowance of penalty paid to SEBI.

Issue-wise Detailed Analysis:

1. Disallowance of expenditure under section 14A of the Income Tax Act by applying Rule 8D:

The assessee invested Rs.42,77,023 in shares and received a dividend income of Rs.12,157. The AO applied Rule 8D to disallow Rs.1,24,506, which included Rs.9,031 under Rule 8D(2)(ii) for interest and Rs.1,15,475 under Rule 8D(2)(iii) as 0.5% of the average value of investments. The CIT(A) upheld the AO's decision, noting that the assessee had loans and interest-bearing funds which could have been used for investments. The Tribunal, however, found that major interest payments were for vehicle loans and tax payments, not for share investments, and thus Rule 8D(2)(ii) was not applicable. The disallowance of Rs.9,031 was deemed incorrect, but the disallowance of Rs.1,15,475 under Rule 8D(2)(iii) was upheld as per legislative intent.

2. Disallowance of foreign travel expenses:

The AO and CIT(A) disallowed Rs.7,89,597 for foreign travel expenses, including Rs.4,69,511 for the Director's wife, and Rs.3,20,086 for advance travel bookings for the next year. The Tribunal agreed with the CIT(A) that the advance booking expenses should be considered in the subsequent year for accurate profit reflection. For the Director's wife's expenses, the Tribunal found no evidence supporting the claim that her travel was for business purposes. The decisions cited by the assessee were distinguishable as they involved Board resolutions, which were absent in this case.

3. Disallowance of penalty paid to SEBI:

The AO and CIT(A) disallowed Rs.2,75,000 paid to SEBI, treating it as a penalty. The assessee argued it was for a technical breach and not a statutory penalty. The Tribunal, referencing the Delhi High Court decision in CIT vs. Prasad and Co. and ITAT Chandigarh's decision in Master Capital Services Ltd. vs. DCIT, found that such fines are deductible as they are incurred in the natural course of business. The Tribunal directed the AO to allow the deduction.

Conclusion:

The appeal was partly allowed. The Tribunal upheld the disallowance under Rule 8D(2)(iii) but not under Rule 8D(2)(ii). The foreign travel expenses were disallowed, but the penalty paid to SEBI was allowed as a deduction.