2016 (9) TMI 1500 - AT - Income Tax

Disallowance u/s 14A r.w.r 8D - HELD THAT - One cannot ignore the cost of time used by various staff members as well as officers at the helm of affairs who are required to give sufficient energy to select various scrips and mutual funds and to invest into selling off or switching off of the investments between various mutual funds arranging of funds out of the already invested funds as well as other services including idle business funds for use of banking services for the specific movement of funds round the year and more importantly towards safeguarding the investments against any possible losses. These all activities involve elements of cost of the company which being not calculable in general are thus taken care of by third limb of Rule 8-D of the Rules r.w.s. 14A of the Act. CIT(A) in his order deleting the impugned addition has observed that out of the dividend income of Rs. 8, 19, 154/- assessee has reinvested Rs. 6, 43, 206/- and also has observed that long term capital gain of Rs. 14, 55, 875/- on account of redemption of mutual funds was taxable in nature. Therefore we are of the view that as against 0.5% of the average investment of Rs. 11.35 crores working out at Rs. 5.67.450/- lump sum disallowance of Rs. 2, 50, 000/- will be justified towards administrative cost incurred on maintaining investment in shares and mutual funds. Accordingly total disallowance of Rs. 2, 80, 347/- (Rs.30, 347/- 2, 50, 000/-) is held to be Asst. Year 2009-10 disallowance u/s 14A of the Act. Accordingly the ground of Revenue is partly allowed. Interest expenses u/s. 36(l)(iii) - whether once the funds are put into the business they lose identity - HELD THAT - As decided in assessee s own case 2014 (5) TMI 81 - ITAT AHMEDABAD since assessee had sufficient profits generated this year and it had mixed funds and no nexus is established by the AO as to whether investment was made out of interest bearing funds disallowance of interest cannot be made. Similarly no disallowance out of administrative expenditure can be made as there is no direct nexus. As a result this ground is allowed. Disallowance of royalty payment - the said payment was made for the use of trademark - HELD THAT - As decided in assessee s own case 2014 (5) TMI 81 - ITAT AHMEDABAD CIT(A) has given a finding on fact that the assessee has not acquired any ownership rights. It has got the right of user only. Since AY 1989- 90 the user charges claimed as royalty have been allowed in the assessments the rate of user charges is 1% of the sales during the year under consideration. TDS has been made in respect of royalty payments. As it is a recurring expenditure payable on the basis of sales and the appellant has not acquired any capital asset or permanent right the payment of royalty is allowable as business expenditure. The Revenue has not controverted this fact by placing any material on record ground of revenue rejected.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Disallowance under Section 36(1)(iii) of the Income Tax Act.
3. Royalty payment treated as capital expenditure.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The Revenue challenged the deletion of the disallowance of Rs. 18,04,252/- under Section 14A of the Act. The Assessing Officer (AO) had applied Rule 8D to calculate the disallowance, which included interest expenditure and administrative costs. The AO's calculation was based on the method provided under Rule 8D, which is mechanical in nature. The assessee had made a specific disallowance of Rs. 30,347/- suo moto, asserting that no borrowed funds were used for investments generating exempt income. The CIT(A) deleted the disallowance, observing that the assessee had sufficient interest-free funds and that the interest expenditure was for working capital loans used for business purposes. The Tribunal upheld the CIT(A)'s decision, noting that no borrowed funds were used for investments and that the specific disallowance made by the assessee was adequate. The Tribunal also referenced previous decisions in the assessee's favor and the judgment of the Honorable Jurisdictional High Court in Principal CIT vs. India Gelatine and Chemicals Ltd. The Tribunal concluded that no further disallowance under the second limb of Rule 8D was warranted and justified a lump sum disallowance of Rs. 2,50,000/- towards administrative costs, resulting in a total disallowance of Rs. 2,80,347/- under Section 14A.

2. Disallowance under Section 36(1)(iii) of the Income Tax Act:
The Revenue contested the deletion of the disallowance of Rs. 70,05,000/- made on account of interest expenses under Section 36(1)(iii). The Tribunal had previously decided a similar issue in favor of the assessee in ITA No.2923/Ahd/2008, holding that the assessee had sufficient interest-free funds and had not diverted interest-bearing funds for investments. The Tribunal reiterated that the assessee had sufficient interest-free funds and that the Revenue had not demonstrated any change in facts or circumstances. Consequently, the Tribunal upheld the CIT(A)'s decision to delete the disallowance.

3. Royalty Payment Treated as Capital Expenditure:
The Revenue challenged the deletion of the disallowance of Rs. 50,32,500/- made on account of royalty payments. The Tribunal had previously addressed this issue in the assessee's favor in ITA No.2923/Ahd/2008, concluding that the royalty payments were for the use of trademarks and did not confer any ownership rights to the assessee. The payments were recurring expenses based on sales and were thus allowable as business expenditures. The Tribunal found no change in the facts and circumstances of the case and upheld the CIT(A)'s decision to delete the disallowance.

Conclusion:
The Tribunal partly allowed the Revenue's appeal, sustaining the CIT(A)'s deletions of disallowances under Sections 14A and 36(1)(iii) and treating royalty payments as business expenditures. The Tribunal justified a lump sum disallowance of Rs. 2,50,000/- towards administrative costs under Section 14A, resulting in a total disallowance of Rs. 2,80,347/-.