2019 (12) TMI 1220 - AT - Income Tax

Disallowance of expenses relatable to exempt income by invoking the provisions of section 14A of the Act read with Rule 8D - HELD THAT - Once the assessee s own interest free funds in the shape of share capital and reserve and surplus is more than investment in giving tax free bonds of Unit Trust of India no disallowance on account of can be made. Hence we delete the addition. Disallowance of administrative expenses - HELD THAT - We noted that the CIT(A) has restricted the disallowance at Rs.38, 690/- as against the amount offered by suo mot at Rs.60, 913/-. We find no infirmity in the order of CIT(A) and this issue of the assessee s appeal is dismissed. Disallowance of commission expenses simplicitor - revised return filed on 19.12.2009 was invalid return filed belatedly - HELD THAT - We are of the view that this issue needs detailed verification at the level of AO afresh. Hence we set aside the orders of the lower authorities i.e. the order of CIT(A) and that of the AO and remand the matter back to his file for fresh adjudication. The assessee committed before us that he will file all the required details to prove the commission expenses before the AO and incase assessee fails to explain the same the AO can repeat the addition. Hence this issue is set aside to the file of the AO. Claim of deduction in respect of education cess - HELD THAT - Education-cess is part of the Income tax and cannot be allowed as deduction. See K. SRINIVASAN 1971 (11) TMI 2 - SUPREME COURT Deduction under section 80IA - HELD THAT - We noted that the Revenue has now only relied on the assessment order and no arguments were made. We noted that even this issue is covered by the CBDT Circular No 1/2016 dated15.02.2016 wherein the initial assessment order is defined. Even this provision is interpreted by the Hon ble Supreme Court in the case of Velayudhaswamy Spinning Mills (P) Ltd. 2012 (10) TMI 1125 - SC ORDER . Hence we are of the view that the CIT(A) has rightly allowed the claim of the assessee and we upheld the same. This issue of Revenue s appeal is dismissed. Addition u/s 14A - disallowance of interest expenditure under Rule 8D(2)(ii) - Disallowance under Rule 8D(2)(iii) being administrative expenses - HELD THAT - The assessee s own funds as on 31.03.2008 is amounting to Rs.174.78 crores on account of reserve and surplus and share capital whereas investment capable of yielding tax free income amounting to Rs.22.3 crores and hence presumption is that the entire investment has been made out of own funds and not out of borrowing. The learned Counsel for the assessee relied on the decision of Hon ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT . The facts and circumstance are exactly identical what to AY 2007-08 hence this interest disallowance cannot be sustained and we delete the same We direct the AO to include the investments for the disallowance of expenses under Rule 8D(2)(iii) to the extent of investments which give rise to exempt income only. We direct the AO accordingly. Charging of interest u/s 234B - HELD THAT - In view of the provisions of section 234B(2)(1) only an amount of interest paid as a part of self-assessment tax ought to be reduced from tax paid under section 140A of the Act while computing the interest under section 234B of the Act. Hence we find no infirmity in the order of CIT(A) directing the AO to recompute the interest accordingly under section 234B

Summary

Issues Involved:
1. Computation of disallowance of expenses relating to exempt income under Section 14A of the Income-tax Act.
2. Disallowance of commission expenses.
3. Claim of deduction in respect of education cess.
4. Claim of deduction under Section 80IA(4)(iv) of the Income-tax Act.
5. Charging of interest under Section 234B of the Income-tax Act.

Detailed Analysis:

1. Computation of Disallowance of Expenses Relating to Exempt Income under Section 14A:
The assessee appealed against the disallowance of Rs. 3,34,685 under Section 14A. The assessee had earned tax-free interest bonds amounting to Rs. 5,20,918 and made a suo moto disallowance of Rs. 60,913. The AO disallowed Rs. 71,21,033 in interest and Rs. 9,30,863 in administrative expenses. The CIT(A) restricted the disallowance to Rs. 2,95,995. The Tribunal found that since the assessee’s own interest-free funds exceeded the investment in tax-free bonds, no disallowance on account of interest could be made, and thus deleted the addition. However, the disallowance of administrative expenses was upheld as restricted by the CIT(A).

2. Disallowance of Commission Expenses:
The assessee had incurred Rs. 9.76 crores in commission expenses, which were claimed in the original return but later foregone during assessment proceedings. The AO and CIT(A) disallowed the commission expenses, considering them bogus based on the assessee’s admission during the assessment. The Tribunal noted that the revised return was invalid and the issue required detailed verification. Hence, the matter was remanded back to the AO for fresh adjudication, with the assessee committed to providing all required details.

3. Claim of Deduction in Respect of Education Cess:
The assessee claimed a deduction for education cess, which was not initially claimed due to lack of clarity. The Tribunal referred to the Supreme Court’s decision in CIT vs. K. Srinivasan, which held that education cess is part of income tax and cannot be allowed as a deduction. Consequently, the additional ground raised by the assessee was dismissed.

4. Claim of Deduction under Section 80IA(4)(iv):
The Revenue appealed against the CIT(A)’s decision allowing the assessee’s deduction claim under Section 80IA(4)(iv) without setting off earlier years' losses. The Tribunal upheld the CIT(A)’s decision, noting that the initial assessment year for deduction purposes was AY 2005-06 when the assessee first claimed the deduction, not the year the unit started generating power. This was consistent with the Madras High Court’s decision in Velayuthasamy Spinning Mills (P) Ltd. and the CBDT Circular No 1/2016.

5. Charging of Interest under Section 234B:
The Revenue challenged the CIT(A)’s direction to recalculate interest under Section 234B by reducing interest paid as part of self-assessment tax. The Tribunal upheld the CIT(A)’s decision, referencing the ITAT’s decision in Hind Rectifiers Ltd., which supported the reduction of interest paid as part of self-assessment tax from the assessed tax while computing interest under Section 234B.

Conclusion:
The Tribunal provided a detailed analysis of each issue, making significant adjustments and remanding certain matters for further verification. The decisions were consistent with existing legal precedents and interpretations of the Income-tax Act. The appeals were partly allowed, with specific directions provided for each issue.