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2013 (5) TMI 553 - AT - Income TaxDisallowance u/s. 14A r.w.r. 8D - Asst. Years 2006-07 & 2007-08revenue appeal against part relief granted by CIT(A) - Held that - With regard to indirect expenditure, it is in agreement with the assessment of the same by the Revenue at 0.5% of the average value of the investments held during the year. However, as indicated above, rule 8D being not mandatory, the said average value would have to be worked out with reference to the assessee s accounts, reflecting the timing of the said investment rather than in a presumptive manner by according equal weight to the opening and the closing values of the investment. The matter would therefore require being set aside back to the file of the FAA for adjudication afresh in accordance with law per a speaking order. Entire expenditure stands carried over in the form of work-in-progress (WIP) for the relevant years. As such, no disallowance for the current year/s would arise, as the disallowance would only result in reduction of the WIP to the extent of the amount/s disallowed. Merit in this alternate argument, which of course would be required to be verified at the end of the A.O. Assessment Year 2008-09 - disallowance u/s.14A. with reference to rule 8D - Held that - Rule 8D being mandatory for the current year. This is as the assessee has not been able to substantiate its claim that no expenditure whatsoever stands incurred in relation to the tax-free investments, which in fact have again witnessed an increase for the current year, i.e., at an average of Rs.871.76 lakhs, as against at Rs.579.88 lakhs for the immediately preceding year. Considering large scale movement in funds during the year & Not only has the investment portfolio witnessed a (net) increase of approximately Rs.2 crores, the interest expenditure stands reduced to a mere fraction, i.e., to Rs.8.72 lakhs (for the current year) from Rs.67.82 lakhs for A.Y. 2007-08, signifying retirement of debt to a substantial extent. Under the circumstances, therefore, the interest disallowance on a generalized basis, particularly considering that the assessee has not made out any case, cannot be faulted with. The disallowance is, therefore, confirmed.
Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act. 2. Disallowance of unverifiable expenses. 3. Treatment of work-in-progress (WIP) in relation to disallowed expenses. Issue-wise Detailed Analysis: 1. Disallowance under Section 14A of the Income Tax Act (A.Y. 2006-07, 2007-08, and 2008-09): - Revenue's Appeal and Assessee's Cross-Appeal: The primary issue was the partial deletion of the disallowance under Section 14A by the Commissioner of Income Tax (Appeals) [CIT(A)]. The Assessing Officer (AO) had computed the disallowance using Rule 8D of the Income Tax Rules, 1962, but the CIT(A) retained only the administrative (indirect) expenses component, calculated at 0.5% of the average investment for the year. - Interest Disallowance: The Tribunal noted that the AO did not analyze the utilization of interest-bearing borrowed funds for making investments, nor did he consider the cash flow statement provided by the assessee. The CIT(A) also failed to examine this aspect or call for a remand report. The Tribunal emphasized that the onus was on the assessee to substantiate its claim of no interest expenditure with reference to its accounts. The Tribunal highlighted the need for a fund flow analysis instead of a cash flow analysis to ascertain the application of borrowings. - Indirect Expenditure: The Tribunal agreed with the Revenue's assessment of indirect expenditure at 0.5% of the average value of investments. However, it emphasized that Rule 8D was not mandatory for the relevant years, and the average value should be computed based on the timing of the investments rather than a presumptive manner. - Conclusion: The Tribunal set aside the matter to the file of the CIT(A) for fresh adjudication in accordance with the law, issuing a speaking order after affording both parties a proper opportunity of hearing. 2. Disallowance of Unverifiable Expenses (A.Y. 2006-07 and 2007-08): - Assessee's Appeal: The issue concerned the partial confirmation of the disallowance of certain expenses by the AO at 10% due to unverifiability. The CIT(A) allowed relief for expenses borne by cheque, subject to verification by the AO. The assessee claimed that the entire expenditure was carried over as work-in-progress (WIP). - Tribunal's Observation: The Tribunal found merit in the assessee's alternate argument that if the entire expenditure was carried over as WIP, no disallowance for the current year would arise. The Tribunal restored the matter to the AO to verify the assessee's claim and issue definite findings. 3. Treatment of Work-in-Progress (WIP) in Relation to Disallowed Expenses (A.Y. 2006-07, 2007-08, and 2008-09): - Assessee's Claim: The assessee argued that the disallowed expenses were part of the WIP and should not reduce the profit for the current year. The Tribunal agreed that if the expenses were carried over as WIP, the disallowance would result in a corresponding reduction in the WIP, affecting the profit in the year the WIP translates into income. - Conclusion: The Tribunal directed the AO to verify the assessee's claim regarding WIP and issue findings after allowing a reasonable opportunity of hearing. Assessment Year 2008-09: - Disallowance under Section 14A: The AO worked out the disallowance with reference to Rule 8D, which was mandatory for the current year. The CIT(A) confirmed the disallowance as the assessee failed to substantiate its claim of financing investments from interest-free funds. The Tribunal noted significant fund movements and reduced interest expenditure, confirming the disallowance. - Unverifiable Expenses: The issue was similar to the preceding years, with the CIT(A) restricting the disallowance to 10%. The Tribunal confirmed the disallowance in principle, subject to verification of the WIP as directed for the earlier years. Final Order: - The appeals for A.Y. 2006-07 and 2007-08 were allowed for statistical purposes. - The appeal for A.Y. 2008-09 was partly allowed for statistical purposes. Order Pronouncement: The order was pronounced in the open court on 15th May 2013.
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