2015 (9) TMI 1113 - AT - Income Tax

Disallowance u/s 14A read with rule 8D - Held that - AO has made the disallowance u/s 14A and has mechanically followed Rule 8D without pinpointing any expenditure relatable to earning of exempt income. From the details of disallowance made by AO, we find that AO has not made any disallowance on account of interest. We find that Hon ble Punjab & Haryana High Court in the case of CIT vs. Hero Cycles (2009 (11) TMI 33 - PUNJAB AND HARYANA HIGH COURT) has held that disallowance u/s 14A requires finding of incurring of expenditure and where it is found that for earning exempt income no expenditure was incurred disallowance cannot be made. We find that assessee had debited all expenses related to project under the head work in progress and had reduced dividend income from work in progress which means that assessee had not claimed in the P & L account any expenditure for earning of exempt income. The profit and loss account as placed in paper book page 8 do not reflect any expenditure relatable to earning of exempt income. Moreover, we find that assessee had deployed its surplus funds in mutual funds and for investment in mutual funds advisors do not charge any fee and, whatever fee or charges are charged they are deducted from the amount of investment itself. Therefore, also the assessee cannot be said to have incurred any expenditure directly or indirectly for earning of exempt income. Thus we need not refer to sub Rule (2) to Rule 8D of the Rules as conditions mentioned in sub Section (2) to Section 14A of the Act read with sub Rule (1) to Rule 8D of the Rules were not satisfied and the Assessing Officer erred in invoking sub Rule (2) , without elucidating and explaining why the voluntary disallowance made by the assessee was unreasonable and unsatisfactory. We do not find any such satisfaction recorded in the present case by the Assessing Officer, before he invoked sub Rule (2) to Rule 8D of the Rules and made the re-computation. Therefore, the respondent assessee would succeed and the appeal should be dismissed. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Addition on account of brokerage expenses related to various projects.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act, 1961:
The first issue pertains to the disallowance under Section 14A read with Rule 8D of the Income Tax Rules, 1962. The assessee had earned dividend income amounting to Rs. 3,06,88,926 from investments in mutual funds and had not allocated any expenditure to earn this exempt income. The Assessing Officer (AO) made an addition of Rs. 46,12,728 as disallowance under Section 14A, calculated in accordance with Rule 8D. The CIT(A) upheld the disallowance, stating that the disallowance was mandatory. The relevant findings noted that the appellant had surplus funds invested in mutual funds, and the dividend income was reduced from the cost of the project in progress as per Accounting Standard 16. The CIT(A) asserted that earning dividend income is not a passive activity and involves management decisions, thus justifying the disallowance of 0.5% of the average investments.

The assessee argued that the dividend income was inextricably linked with the project and had been offered to tax by reducing the cost of the project, following the guidance of ICAI and the Supreme Court decision in CIT vs. Bokaro Steel Ltd., where it was held that income from funds linked with the project reduces the cost of the project and is not taxable. The Tribunal found merit in the assessee's argument, noting that the AO did not record any satisfaction regarding the incurrence of expenditure for earning exempt income and had mechanically applied Rule 8D. The Tribunal referenced the Delhi High Court decision in CIT vs. Taikisha Engineering India Ltd., emphasizing that the AO must record satisfaction before invoking Rule 8D. Consequently, the Tribunal allowed the assessee's appeal on this issue.

2. Addition on account of brokerage expenses related to various projects:
The second issue involves the addition of Rs. 1,81,53,159 made by the AO on account of brokerage expenses. The AO observed that the assessee, following the Percentage of Completion Method (POCM) for revenue recognition, had claimed the entire brokerage expenses in the year, which should have been proportionately booked. The CIT(A) allowed the appeal of the assessee, stating that brokerage expenses are selling costs and cannot be capitalized with the cost of inventory. The CIT(A) referenced his earlier orders and the Hon'ble ITAT's decision in favor of the group company DLF Ltd., asserting that brokerage expenses should be allowed in the year incurred.

The Tribunal upheld the CIT(A)'s decision, noting that the issue was covered in favor of the assessee by the Delhi High Court in CIT vs. DLF Universal Ltd., where similar expenses were allowed. The Tribunal emphasized that brokerage expenses are selling costs and must be allowed in the year incurred, aligning with the accounting standards and judicial precedents.

Conclusion:
The Tribunal dismissed the revenue's appeal, confirming the deletion of the addition on brokerage expenses, and allowed the assessee's appeal, overturning the disallowance under Section 14A. The Tribunal's decision was based on the principles of accounting standards, judicial precedents, and the lack of AO's satisfaction in applying Rule 8D.