2013 (9) TMI 407 - AT - Income Tax

Disallowance u/s 14A - Disallowance of interest expenditure - Held that - if there is sufficient material on record to establish that investment in shares/units was made out of non-interest bearing funds, then no disallowance has to be made out of interest debited to Profit & Loss account, even if there is dividend income from such investment. Where the expenditure incurred could not be related to exempted income, the provisions of section 14A would also not be attracted. It is also a settled law that the theory of apportionment of expenditure between taxable and non-taxable income, has been accepted. However, Assessing Officer has to satisfy himself and such satisfaction must be arrived at on the objective basis. If benefit arising from investment in shares out of interest-bearing fund is the dividend income exempt u/s.10(34) of the Act, the related expenditure has to be disallowed - fact of the present case was that the Assessing Officer had not enquired the issue in the light of the above legal pronouncements. Specially the pronouncement of the Hon ble Bombay High Court was not available at that time, hence, the Assessing Officer s assessment order was devoid of merits as also applicable law. Now we have got certain guidelines, though can not be said to be exhaustive or complete, but on these lines, the Assessing Officer is expected henceforth to compute the correct disallowance, needless to say after providing an adequate opportunity of hearing to the assessee - Following decision of Commissioner of Income Tax-II Versus M/s Hero Cycles Ltd. 2009 (11) TMI 33 - PUNJAB AND HARYANA HIGH COURT - Decided in favour of assessee. Disallowance of foreign travel expenditure - Held that - although written notices were furnished before the AO but the details of the expenditure, purpose of the expenditure and the business connection of those expenditures could not be established. Certain expenditures which were stated to be incurred for the visit of Ms. Year R. Amin, were restaurant expenditure, florist expenditure, etc., which is bearing at page 37 of the paper book. Likewise on page 91, there is a short note about the purpose of the visit but the assessee is required to produce the direct evidence to establish the genuineness of the claim. We, therefore, restore this ground also back to the stage of the AO, so that the assessee can avail this opportunity to produce certain evidences through which it could be established that the foreign travel was in fact undertaken for the purpose of the business of the assessee - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D.
2. Disallowance of foreign travel expenditure.

Issue-Wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:

Facts and Background:
The assessee, a company engaged in the manufacturing of glassware items, received dividend income of Rs. 1.84 crores, which was claimed as exempt under Section 10(34) of the IT Act. The assessee made a self-disallowance of Rs. 6.29 lacs under Section 14A. However, the Assessing Officer (AO) computed the disallowance at Rs. 71.41 lacs, resulting in an additional disallowance of Rs. 65.12 lacs.

AO's Computation:
The AO calculated the disallowance using the average value of investments and assets, apportioning the interest expense of Rs. 206.98 lacs proportionately. The total disallowance was computed at Rs. 71.41 lacs, with Rs. 65.12 lacs being the further disallowance after considering the assessee's self-disallowance.

First Appellate Authority's Decision:
The CIT(A) affirmed the AO's action, agreeing with the apportionment method used.

Tribunal's Analysis:
The Tribunal noted that the provisions of Section 14A read with Rule 8D were not correctly appreciated. They cited precedents, including the case of Godrej & Boyce Mfg. Co. Ltd., which upheld the constitutional validity of Section 14A and provided guidelines for determining the disallowance. The Tribunal emphasized that the AO must determine whether the assessee incurred any expenditure related to exempt income and must provide a reasonable opportunity for the assessee to present relevant material.

Conclusion:
The Tribunal restored the matter to the AO for a fresh determination based on the guidelines from higher courts, allowing the assessee's ground for statistical purposes.

2. Disallowance of Foreign Travel Expenditure:

Facts and Background:
The assessee claimed Rs. 29.53 lacs under foreign travel expenses, including Rs. 7,81,757/- for the Director's visits to London and Bangkok. The AO disallowed this amount, citing a lack of reliable evidence to prove the business purpose of the travel.

First Appellate Authority's Decision:
The CIT(A) upheld the AO's disallowance, agreeing that the claim was not substantiated.

Tribunal's Analysis:
The Tribunal referred to an earlier decision in the assessee's case for A.Y. 2003-04, where similar foreign travel expenses were allowed. However, they noted that the requisite details were not fully furnished during the assessment proceedings. The Tribunal emphasized the need for direct evidence to establish the business connection of the expenses, citing specific expenditures like restaurant and florist bills that required further scrutiny.

Conclusion:
The Tribunal restored this ground to the AO for re-examination, directing the assessee to provide evidence to substantiate the business purpose of the foreign travel. This ground was allowed for statistical purposes.

Final Judgment:
In conclusion, the appeal of the assessee was allowed for statistical purposes, with both issues being remanded back to the AO for fresh consideration based on the guidelines provided.