2018 (6) TMI 416 - AT - Income Tax

Disallowance of expenditure - Held that - The assessee has debited expenditure under these heads in the assessment year 2008-09. While examining the correctness of the ITAT s order, the Hon ble High Court has observed that for the purpose business, the assessee has to maintain goodwill and continuity of business being provided by important members. Thus, in order to boost its business, the assessee could plan for providing certain incentives to the members. Following decision of the Hon ble jurisdictional High Court in the case assessee s own case, we allow this ground of appeal and delete disallowance. Disallowance of amortized premium - Held that - The assessee is entitled for amortization of premium paid by it in acquiring scrip which were held till maturity. The ld.CIT(A) has appreciated this controversy, and hence this ground of appeal is rejected. Addition u/s 14A - Held that - A presumption could be drawn that the assessee used interest free funds for earning such income. No interest could be disallowed as such. As far as half percent of average investment required to be considered for making disallowance is concerned, the ld.CIT(A) has already upheld disallowance upto ₹ 9.50 lakhs. The assessee has not challenged confirmation of such disallowance. It has raised grounds of appeal, but did not press at the time of hearing. Therefore, after taking into consideration the finding of the ld.CIT(A) we do not find any reason to interfere in it.

Summary

Issues Involved:
1. Disallowance of ?1,24,39,012/- out of various expenditures.
2. Addition of ?9.50 lakhs under section 14A r.w.s Rule 8D.
3. Initiation of penalty proceedings under section 271(1)(c).
4. Charging of interest under section 234/B and 234/C.
5. Deletion of disallowance of amortized premium amounting to ?2,80,22,415/-.
6. Restricting disallowance to ?9,50,000/- under section 14A.

Issue-wise Detailed Analysis:

1. Disallowance of ?1,24,39,012/- out of various expenditures:
The assessee, a cooperative society engaged in banking, filed a return declaring total income of ?56,03,03,650/-. The AO disallowed ?1,24,39,012/- debited under Business Promotion Member’s Gift, scholarships, and payments to nominee/legal heirs of members, questioning their business relevance. The assessee argued these expenses were for business promotion and maintaining goodwill. Previous ITAT orders for AY 2008-09 and 2009-10, upheld by the High Court, allowed similar expenses. The Tribunal followed these precedents and deleted the disallowance, recognizing the business necessity of such expenditures.

2. Addition of ?9.50 lakhs under section 14A r.w.s Rule 8D:
The assessee did not press this ground of appeal. Consequently, the Tribunal did not adjudicate on this issue, and the addition was upheld.

3. Initiation of penalty proceedings under section 271(1)(c):
The Tribunal deemed this issue premature as the penalty had not yet been imposed. Thus, no separate adjudication was required, and the ground was rejected.

4. Charging of interest under section 234/B and 234/C:
No arguments were advanced on this issue, and it was considered sequential in nature. The Tribunal rejected this ground due to lack of specific arguments.

5. Deletion of disallowance of amortized premium amounting to ?2,80,22,415/-:
The AO disallowed the amortization of premium on government securities. The CIT(A) allowed it based on ITAT's previous orders. The Tribunal upheld CIT(A)’s decision, referencing the Gujarat High Court’s ruling in Rajkot District Co-op. Bank Ltd., which supported amortization of premium on securities held till maturity as per RBI guidelines.

6. Restricting disallowance to ?9,50,000/- under section 14A:
The AO disallowed ?26,35,056/- under section 14A for earning tax-free income. The CIT(A) restricted the disallowance to ?9,50,000/-, considering only administrative expenses. The Tribunal upheld CIT(A)’s decision, noting the assessee's substantial interest-free funds and net interest income, which justified the restricted disallowance.

Conclusion:
The appeal of the assessee was partly allowed, specifically regarding the disallowance of ?1,24,39,012/-. The appeal of the Revenue was dismissed, affirming the deletion of disallowance of amortized premium and the restricted disallowance under section 14A.