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2020 (11) TMI 277 - HC - Income TaxDisallowance u/s 14A r.w.s 8D - method of calculation of disallowance - profits and gains of business or profession are taxed after deducting expenditure from income - Is the Tribunal right in deleting the additions made by the AO under section 14 A of the IT Act, read with Rule 8D? - HELD THAT - Tribunal noted that the AO only discussed the provisions of section 14A(l) but has not justified how the expenditure the Assessee incurred during the relevant year related to the income not forming part of its total income. AO, according to the Tribunal, straightaway applied Rule 8D. Indeed, there must be a proximate relationship between the expenditure and the tax-exempt income. Only then would a disallowance have to be effected. This Court, we may note, on more than one occasion, has held that the onus is on the Revenue to establish that there is a proximate relationship between the expenditure and the exempt income. That is, the application of section 14A and rule 8D is not automatic in each and every case, where there is income not forming part of the total income. No doubt, the expenditure under section 14A includes both direct and indirect expenditure, but that expenditure must have a proximate relationship with the exempted income. Surmise or conjecture is no answer. Reiterate that before rejecting the disallowance computed by the Assessee, the Assessing Officer must give a clear finding with reference to the Assessee s accounts as to how the other expenditure claimed by the Assessee out of the non-exempt income is related to the exempt income. no valid reasons to upset the Tribunal s well-reasoned judgment on this substantial question of law - Decided against revenue. Addition as capital expenditure - Is the Tribunal right in deleting the addition made by the AO on account of capital expenditure? - HELD THAT - In LH. Sugar Factory and Oil Mills 1980 (8) TMI 1 - SUPREME COURT has concluded that if the advantage consists merely in facilitating the assessee s business operations or enabling management and conduct of the assessee s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. Thus, guided precedentially by all the above decisions, Salgaocar Mining Industries 2019 (7) TMI 707 - BOMBAY HIGH COURT has accepted the Respondent-Assessee s contention that it is revenue expenditure. So must it be here. We see no other compelling reason to take a different stand. - Decided against revenue.
Issues Involved:
1. Deletion of additions under Section 14A of the Income Tax Act, read with Rule 8D of the Income Tax Rules. 2. Deletion of addition of ?35,15,625/- as capital expenditure. Issue-wise Detailed Analysis: Substantial Question of Law (I): Is the Tribunal right in deleting the additions made by the AO under section 14A of the IT Act, read with Rule 8D of the IT Rules? The Assessee received dividend income of ?13,85,03,376/- which was exempt under the IT Act. The Assessee claimed no expenditure was incurred to earn this dividend, as investments were made using surplus funds through bankers and financial institutions, with mutual fund officials handling the necessary formalities. The AO disagreed, invoking Rule 8D and disallowing ?1,90,83,548/-. The CIT(A) confirmed this disallowance, but the Tribunal reversed it. Section 14A, inserted by the Finance Act 2001, disallows expenditure incurred in relation to income not forming part of the total income. Rule 8D provides the method for calculating this disallowance. The Tribunal noted that the AO did not justify how the expenditure related to the exempt income and applied Rule 8D without establishing a proximate relationship between the expenditure and the tax-exempt income. The Court referenced its earlier decision in CIT, Goa v. M/s. Sociedade De Fomento Industrial Pvt. Ltd., where it was held that the onus is on the Revenue to establish a proximate relationship between the expenditure and the exempt income. The Court emphasized that the application of Section 14A and Rule 8D is not automatic and requires clear findings from the AO. Consequently, the Tribunal's judgment was upheld as it was well-reasoned and supported by facts. Substantial Question of Law (II): Is the Tribunal right in deleting the AO’s addition of ?35,15,625/- as capital expenditure, by ignoring the Allahabad High Court’s decision in Raza Buland Sagar Co. Ltd., and also by ignoring section 37(i) which prohibits the allowing of capital expenditure? The Assessee contributed ?35,15,625/- for constructing a bridge essential for transporting iron ore. The AO and CIT(A) treated this as capital expenditure, but the Tribunal accepted it as revenue expenditure. The Court referenced a similar case, Commissioner of Income Tax v. Salgaocar Mining Industries Ltd., where contributions for constructing a bridge were held as revenue expenditure. The Court noted the Supreme Court’s decision in L.B. Sugar Factory and Oil Mills (P) Ltd. v. CIT, which held that expenditure facilitating business operations without altering fixed capital is revenue expenditure. The Court concluded that the Assessee's contribution facilitated its business operations without altering its fixed capital, making it revenue expenditure. Thus, the Tribunal's decision was upheld. Result: The Court found no error in the ITAT's judgment and order, answering the substantial questions of law against the Revenue and in favor of the Assessee. Consequently, the appeal was dismissed with no order as to costs.
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