2013 (10) TMI 277 - AT - Income Tax

Disallowance u/s 14A of the Income Tax Act Held that - If there are funds available both interest free and overdraft and/or loan taken, then a presumption would arise that investments would be out of interest free funds generated or available with the company, if the interest free funds were sufficient to meet the investments - Looking at the facts in the present case, since the shareholders funds are far in excess of the investments, it can be presumed that investments are out of interest free shareholders funds and therefore no disallowance on account of interest can be made in the present case Decided against the Revenue. Allowance of de-merger expenses of Rs. 1,66,666/- - Held that - There is a break up of de-merger expenditure amounting to Rs. 3,27,332/- - Same has to be borne by Madhusudan Oils and facts Ltd. is not available from details filed - Fact remains that this is a capital expenditure which is required to be disallowed - At the same time, in view of clear provisions of law appellant s claim of deduction u/ 35DD has to be allowed - If 50% is borne by Madhusudhan Oils and Fats Ltd. then the Assessing Officer would take the balance of Rs. 1,63,666/- for the purpose of section 35DD and allow 1/5th of the same Decided partly against the Revenue. Prior period expenses allowability Held that - Appellant have four divisions where the net figure after adjustment of prior period expenses had been worked out. However, while examining the same, the Assessing Officer has made a mistake to the extent of taking the net figure where short provision of earlier years have also been written back and adjusted with provisions made relating to earlier years expenses Only expenditure related to prior period is disallowed - Therefore, out of disallowance of Rs. 5,17,785/-, Rs. 2,10,807/- is hereby confirmed.

Summary

Issues Involved:
1. Computation of deduction under Section 80HHC.
2. Penalty under Section 271(1)(c).
3. Disallowance under Section 14A.
4. De-merger expenses.
5. Prior period expenses.

Issue-Wise Detailed Analysis:

1. Computation of Deduction under Section 80HHC:
The primary issue was whether the deduction under Section 80HHC should be computed unit-wise or for the business as a whole. The Assessing Officer (AO) had reworked the deduction by considering all units, including loss-making ones. The CIT(A) directed the AO to compute the deduction unit-wise without insisting on a revised auditor's report. The Tribunal upheld the CIT(A)'s decision, referencing a similar ruling in the assessee's favor for A.Y. 2001-02, emphasizing consistency in the application of the law.

2. Penalty under Section 271(1)(c):
The AO had imposed a penalty of Rs. 31,31,710/- for alleged concealment of income due to a wrong claim of deduction under Section 80HHC. The CIT(A) deleted the penalty, noting that the assessee had disclosed all material facts and that the issues were debatable with possible divergent opinions. The Tribunal upheld the CIT(A)'s decision, reiterating that no penalty is leviable when the issue is debatable and all necessary particulars have been disclosed.

3. Disallowance under Section 14A:
The AO disallowed Rs. 6,56,080/- under Section 14A, attributing it to interest and administrative expenses related to exempt income. The CIT(A) provided partial relief, reducing the disallowance of administrative expenses to Rs. 25,000/-. The Tribunal followed its earlier decision in the assessee's favor for A.Y. 2000-01, where it was held that no disallowance on account of interest could be made if interest-free funds exceeded investments. The Tribunal also noted that without pinpointing specific expenses incurred for earning exempt income, no disallowance for management expenses could be made.

4. De-merger Expenses:
The AO disallowed Rs. 3,27,332/- incurred for de-merger, considering it a capital expenditure. The CIT(A) directed the AO to allow deduction under Section 35DD, which permits amortization of de-merger expenses over five years. The Tribunal upheld the CIT(A)'s decision, agreeing that the expenditure was capital in nature but deductible under Section 35DD.

5. Prior Period Expenses:
The AO disallowed Rs. 5,17,785/- as prior period expenses. The CIT(A) confirmed the disallowance of Rs. 2,10,807/- but granted relief for the remaining amount, noting that some expenses were incorrectly classified. The Tribunal upheld the CIT(A)'s decision, finding no reason to interfere with the partial relief granted.

Conclusion:
The Tribunal dismissed the Revenue's appeals regarding the computation of deduction under Section 80HHC and the penalty under Section 271(1)(c). It also upheld the CIT(A)'s decisions on disallowance under Section 14A and de-merger expenses. However, it partly allowed the Revenue's appeal on prior period expenses, confirming the partial disallowance. The assessee's appeal was partly allowed, providing relief on the disallowance under Section 14A but upholding the disallowance of de-merger and prior period expenses.