2017 (6) TMI 601 - HC - Income Tax

Disallowance of expenditure in respect of interest and administrative expenses under Section 14A - Held that - The assessee was already having its own surplus fund and that too to the extent of ₹ 1981.55 Crores against which investment was made of ₹ 144.51 Crores, there was no question of making any disallowance of expenditure in respect of interest and administrative expenses under Section 14A of the Act, therefore, there was no question of any estimation of expenditure in respect of interest and administrative expenses under rule 8D of the Rules. - Decided in favour of assessee. Disallowance of expenditure incurred towards consultancy charges - Held that - When the assessee incurred expenses towards consultancy charges in order to make investment, the Assessing Officer was not justified in treating and considering the expenses incurred towards consultancy charges as capital expenditure, disallowable under Section 37 of the Act. Under the circumstances, the learned Tribunal has rightly deleted the disallowance incurred by the assessee towards consultancy charges. We are in complete agreement with the view taken by the learned Tribunal.- Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of expenditure in respect of interest and administrative expenses under Section 14A of the Income-tax Act, 1961.
2. Disallowance of expenditure incurred towards consultancy charges under Section 37 of the Income-tax Act, 1961.

Analysis:

1. Disallowance of Expenditure in Respect of Interest and Administrative Expenses under Section 14A:

The primary issue was whether the Tribunal erred in deleting the disallowance of ?90,97,470/- made by the Assessing Officer (AO) under Section 14A of the Income-tax Act, 1961. The AO made this disallowance, which was initially confirmed by the CIT (A), based on the premise that the expenditure was related to earning exempt income. However, the Tribunal found that the assessee had a substantial reserve fund of ?1981.55 Crores and had made investments of only ?144.51 Crores. The Tribunal noted that the investments were made from the surplus interest-free funds, not from interest-bearing funds. Additionally, the assessee had offered ?19.22 Crores for taxation as short/long term capital gain for the relevant assessment year, indicating that the investments were not generating exempt income.

The Tribunal referenced the Delhi High Court's judgment in Maxopp Investment Limited, emphasizing that the AO must record dissatisfaction with the assessee's claim regarding the expenditure before determining the amount under Rule 8D. The Tribunal observed that the AO did not provide specific findings or reasons for dissatisfaction with the assessee's claim. Consequently, the Tribunal concluded that the disallowance under Section 14A was unjustified as the assessee had sufficient interest-free funds. The High Court upheld this view, agreeing that no disallowance was warranted under Section 14A since the investments were made from surplus funds.

2. Disallowance of Expenditure Incurred Towards Consultancy Charges under Section 37:

The second issue was whether the Tribunal erred in deleting the disallowance of ?24,37,500/- incurred towards consultancy charges, which the AO had treated as capital expenditure under Section 37 of the Act. The CIT (A) had deleted this disallowance, considering the expenditure as revenue in nature. The Tribunal affirmed this view, noting that the consultancy charges were not directly linked to the purchase of investments but were incurred to keep track of the investments. The Tribunal reasoned that if the expenses were not capitalized in the investment, they should be considered revenue expenses.

The High Court agreed with the Tribunal's conclusion, stating that the consultancy charges were incurred for managing investments and not for acquiring them, making the expenditure revenue in nature and allowable under Section 37. The High Court found no error in the Tribunal's decision and upheld the deletion of the disallowance.

Conclusion:

The High Court dismissed the Revenue's appeal, affirming the Tribunal's decisions on both issues. The Court agreed that the disallowance under Section 14A was not justified due to the availability of sufficient interest-free funds and that the consultancy charges were correctly treated as revenue expenditure under Section 37. No substantial question of law was found to warrant further consideration.