2015 (3) TMI 57 - AT - Income Tax

Disallowance u/s 14A - Held that - The investment made by the assessee would be out of interest free funds available with the assessee and, consequently, no disallowance could be made u/s 14A of the Act. In view of the fact that the assessee s share capital with reserves and surpluses is far in excess of the amount invested in securities fetching exempt income, there can be no question of disallowance of interest amounting to ₹ 8,22,725/-. The disallowance to this extent is deleted. As regards the remaining part of disallowance at ₹ 1,23,503/-, we find that the same is in accordance with law as per Rule 8D(2)(iii), being an amount equal to % of the average of the value of investment. Since the assessment year under consideration is 2009-10, the mandate contained in Rule 8D applies as per the judgment Maxopp Investments Ltd. Vs. CIT (2011 (11) TMI 267 - Delhi High Court), therefore, sustain the disallowance u/s 14A at ₹ 1,23,503/-. - Decided partly in favour of assessee. Disallowance of prior period expenses - Held that - Commissioner of Industries, Government of NCT of Delhi, vide notice of demand dated 19.6.08, raised a demand of ₹ 42,000/- towards apportioned cost of common Effluent treatment plant. From a copy of this notice, which has been placed on record, it can be seen that the assessee was directed to pay ₹ 42,000/- towards demand pertaining to financial year 2006-07 and 2007-08. The otherwise deductibility of such expenses has not been disputed by the AO. Since this amount became payable by virtue of notice of demand issued by the Government on 19.6.08, the same, in our considered opinion, is rightly allowable as deduction. Overturning the impugned order on this score, we order for the deletion of addition. - Decided in favour of assessee. Disallowance of legal expenses - Held that - Advocate s fees of ₹ 7,500/- for seeking bail in respect of the offence committed by the assessee s driver is not allowable in terms of Explanation to section 37(1) which prohibits deduction of any expenditure incurred for any purpose which is an offence or which is prohibited by law. In so far as other component of the disallowance, namely, ₹ 3,000/- is concerned, we find that this is in respect of certification charges of the net worth of directors, which certificates were used for obtaining loans by the company from banks. This expenditure, in our considered opinion, is deductible as per law. - Decided partly in favour of assessee.

Summary

Issues:
1. Disallowance of expenses under section 14A of the Act
2. Disallowance of prior period expenses
3. Disallowance of legal expenses

Analysis:

Issue 1: Disallowance of expenses under section 14A of the Act
The appeal contested the disallowance of Rs. 9,46,228 under section 14A of the Act related to dividend income from shares and mutual funds. The Assessing Officer (AO) computed the disallowance under Rule 8D, which was upheld by the CIT(A). The Tribunal noted that the AO's failure to accept the assessee's explanation was rectified by the CIT(A) as per legal precedent. The Tribunal highlighted the co-terminus powers of the first appellate authority with the AO. The Tribunal further analyzed the disallowance, allowing Rs. 8,22,725 due to the availability of interest-free funds exceeding the investments' value. However, the remaining disallowance of Rs. 1,23,503 was sustained under Rule 8D(2)(iii) as per the jurisdictional High Court's judgment.

Issue 2: Disallowance of prior period expenses
The appeal challenged the disallowance of Rs. 42,000 on account of prior period expenses. The AO disallowed this amount, which was upheld by the CIT(A). However, the Tribunal observed that the Rs. 42,000 represented a demand raised by the Commissioner of Industries, Government of NCT of Delhi, and was rightly allowable as a deduction. Therefore, the Tribunal ordered the deletion of this addition.

Issue 3: Disallowance of legal expenses
The last ground of the appeal concerned the disallowance of Rs. 10,500 out of legal expenses. The AO disallowed Rs. 18,000, which was reduced to Rs. 10,500 by the CIT(A). The Tribunal found that the legal fees of Rs. 7,500 for seeking bail in a criminal case were not allowable under section 37(1). However, the certification charges of Rs. 3,000 for the net worth of directors, used for obtaining loans, were deemed deductible. Consequently, this ground was partly allowed.

In conclusion, the Tribunal partially allowed the appeal, addressing the disallowances under section 14A, prior period expenses, and legal expenses based on detailed legal analysis and relevant case laws.