2013 (10) TMI 929 - AT - Income Tax

Disallowance u/s 14A of the Income tax act - Disallowance of expenses relating to exempt dividend income Held that - Placing reliance in case of Godrej Boyce Manufacturing Co Ltd. 2010 (8) TMI 77 - BOMBAY HIGH COURT have held that Rule 8D is applicable only from assessment year 2008-09 and in respect of prior years it has been held that disallowance of both indirect and indirect expenses has to be made on a reasonable basis after allowing opportunity of hearing to the assessee. The assessment year involved in the present appeal is assessment year 2007-08 and, therefore, Rule 8D is not applicable - Restored the matter to the file of AO for passing afresh order after necessary examination in the light of judgment of the Hon ble High Court of Bombay in case of Godrej Boyce Manufacturing Co Ltd. Allowability of claim of funds raising expenses - Assessee during the year had incurred expenditure of Rs. 2,70,35,500/- for issue of fresh capital through Qualified Institutional Placement (QIP) route. The expenditure had been claimed as revenue expenditure Held that - Taking note of the judgment of the Hon ble Supreme Court in the case of Punjab State Industrial Development Corporation 1996 (12) TMI 6 - SUPREME Court , it was held that expenditure incurred for expansion of capital base is capital in nature - Also rejected the alternate claim of the assessee for allowing the expenditure u/s 35D of the IT Act on the ground that there was no evidence for issue of capital in connection with extension of the existing business or for setting up of a new business Matter restored to the file of AO for passing afresh order after detailed examination and after allowing opportunity of hearing to the assessee Decided against the Assessee for statistical purpose.

Issues Involved:

1. Disallowance of funds raising expenses.
2. Disallowance of expenses under Section 14A of the IT Act.
3. Disallowance of interest under Section 36(1)(iii) of the IT Act.

Detailed Analysis:

1. Disallowance of Funds Raising Expenses:

The first dispute involves the disallowance of funds raising expenses. The assessee issued 20,00,000 equity shares at a premium and incurred an expenditure of Rs. 2,70,35,500/-, which was claimed as revenue expenditure. The AO disallowed this claim, treating it as capital expenditure based on the Supreme Court judgment in Punjab State Industrial Development Corporation Ltd Vs. CIT (225 ITR 792). The alternative claim under Section 35D was also rejected as the funds were not raised for the extension or setting up of a new industrial unit. The CIT(A) upheld the AO's decision, rejecting the claim under Section 35D as the funds were invested in other companies or subsidiaries. The Tribunal noted that a similar issue in the assessee's case for the assessment year 2006-07 was remanded to the AO for fresh examination. Consequently, the Tribunal set aside the CIT(A)'s order and restored the matter to the AO for fresh examination in light of the previous Tribunal decision.

2. Disallowance of Expenses under Section 14A of the IT Act:

The second dispute concerns the disallowance of expenses under Section 14A related to exempt dividend income. The AO applied Rule 8D retrospectively, leading to a disallowance of Rs. 10,90,851/-. The CIT(A) upheld this, following the decision from the previous assessment year. However, the Tribunal highlighted that Rule 8D is applicable only from the assessment year 2008-09, as per the Bombay High Court in Godrej Boyce Manufacturing Co Ltd. (328 ITR 81). For prior years, disallowance must be on a reasonable basis. Thus, the Tribunal set aside the CIT(A)'s order and remanded the matter to the AO for fresh examination in light of the Bombay High Court judgment.

3. Disallowance of Interest under Section 36(1)(iii) of the IT Act:

The third issue involves the disallowance of interest under Section 36(1)(iii). The AO noted substantial loans and investments/advances to related concerns and disallowed proportionate interest of Rs. 66,18,258/-, as the assessee failed to explain the business purpose. The CIT(A) accepted the assessee's explanation that the investments were on commercial expediency or interest-bearing and directed deletion of the disallowance. The Tribunal, noting that fresh material was considered by CIT(A) without AO verification, remanded the matter to the AO for necessary verification and fresh decision.

Assessment Year 2008-09:

1. Disallowance of Expenses under Section 14A:

For the assessment year 2008-09, the AO disallowed Rs. 46,33,215/- under Section 14A as per Rule 8D. The CIT(A) directed verification of figures while confirming the disallowance. The Tribunal emphasized that the AO must record dissatisfaction with the assessee's claim before applying Rule 8D. As this was not done, the Tribunal remanded the matter to the AO for fresh examination.

2. Disallowance of Expenses under Section 35D:

The second dispute for this year involves disallowance of Rs. 81,57,919/- claimed under Section 35D. The Tribunal noted that the claim depends on the decisions for the assessment years 2006-07 and 2007-08, which were remanded for fresh examination. Thus, the Tribunal remanded this issue to the AO for fresh decision in line with the earlier years' rulings.

3. Disallowance of Interest under Section 36(1)(iii):

For the assessment year 2008-09, the AO disallowed Rs. 62,05,065/- proportionate interest related to certain investments/advances. The CIT(A) accepted the assessee's claims without verification. The Tribunal, agreeing with the need for verification, remanded the matter to the AO for fresh examination and decision.

Conclusion:

In conclusion, all the appeals were allowed for statistical purposes, with the matters being remanded to the AO for fresh examination and necessary verification, ensuring that all claims and disallowances are reconsidered in light of relevant judgments and after allowing opportunities for hearing to the assessee.

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