2017 (2) TMI 641 - AT - Income Tax

Disallowance u/s 14A - Held that - AO is clearly in error in computing the disallowance u/s 14A of the Act on the basis of Rule 8D of the Rules given the fact that the said rule is not applicable for the assessment year under consideration, as held by the Hon ble Bombay High Court in the case of Godrej Boyce Mfg Co. (2010 (8) TMI 77 - BOMBAY HIGH COURT ). As considering that the assessee has itself asserted that certain expenditure was incurred in relation to such exempt income, it would be in the fairness of things that a reasonable estimate be made of such expenditure. In order to arrive at such estimation we have perused the explanation furnished by the assessee to the Assessing Officer, which has been reproduced in the assessment order. The assessee that no significant activity is required in monitoring the investments inasmuch as the investments have been made in preference shares of subsidiary company and that the earnings from mutual fund is also on account of deployment of funds in the in-house mutual fund schemes. On this basis, the assessee estimated a portion of the cost of person looking after the banking matters as an expenditure disallowable u/s 14A of the Act. In our considered opinion, it would be in the fitness of things that on an estimated basis a sum of ₹ 5,00,000/- is considered as overhead expenditure incurred in relation to earning of the exempt income. Expenses debited in the Profit & Loss Account as Research expenses - revenue or capital expenditure - AO contends that such expenditure is capital in nature, yet he proceeds to treat 10% of such expenditure as revenue in nature - Held that - The fact-situation in the present case clearly brings out that the research reports obtained by the assessee are for use in carrying on assessee s business of investment banking, involving advising its clients for raising of funds, financial restructuring, mergers & acquisitions and project advisory, etc. Therefore, the benefits to assessee are purely in the field of generation of business and profits thereof. The plea of Revenue that the benefit of research may extend beyond the year under consideration is of no significance so long as it is clear that such benefit is in the revenue field and not in the capital field. Judgement of Hon ble Supreme Court in the case of Empire Jute Co. Ltd. (1980 (5) TMI 1 - SUPREME Court ) is fully attracted inasmuch as the expenditure which results in benefits over a period of time is allowed as revenue expenditure so long as such benefit is in the revenue field. Therefore, as the uncontroverted assertion of learned representative for the assessee that in the past and in the subsequent years no such disallowance have been made, we deem it fit and proper to uphold the plea of assessee that the expenditure incurred by way of payments to JM Morgan Stanley Securities Pvt. Ltd. on account of research reports is fully allowable as revenue expenditure. - Decided in favour of assessee

Summary

Issues:
1. Disallowance under section 14A of the Income Tax Act, 1961.
2. Treatment of research expenses as capital expenditure.

Issue 1: Disallowance under section 14A of the Income Tax Act, 1961:
The appellant, a financial services company, challenged the disallowance made by the Assessing Officer under section 14A of the Act regarding exempt income earned. The Assessing Officer computed the disallowance using Rule 8D of the Income Tax Rules, even though the rule was not applicable for the assessment year. The appellant argued that no specific expenditure was incurred for earning the exempt income, proposing a disallowance of only ?72,371. The Tribunal held that while Rule 8D was not applicable, some expenditure was indeed incurred by the appellant. After reviewing the explanation provided by the appellant, the Tribunal estimated an overhead expenditure of ?5,00,000 related to earning the exempt income, partially allowing the appeal.

Issue 2: Treatment of research expenses as capital expenditure:
The second dispute arose from the Assessing Officer treating a portion of research expenses as capital expenditure. The appellant, engaged in investment banking, incurred research expenses to provide professional advice and maintain service quality. The Assessing Officer considered 10% of the expenses as revenue expenditure and treated the rest as capital expenditure. The Tribunal noted that the research reports obtained were essential for the appellant's business activities, generating profits. Citing legal precedent, the Tribunal emphasized that if the benefits of expenditure are in the revenue field, it should be treated as revenue expenditure. As past and subsequent years did not face disallowance on similar grounds, the Tribunal upheld the appellant's claim that the research expenses were fully allowable as revenue expenditure. Consequently, the appeal was partly allowed, affirming the appellant's position on this issue.

In conclusion, the Tribunal partially allowed the appeal, ruling in favor of the appellant on both issues discussed in the judgment.