TMI Blog2016 (8) TMI 1219X X X X Extracts X X X X X X X X Extracts X X X X ..... that assessee has not borrowed any capital for acquisition of an asset which the plot at Noida or construction thereon, we are of the view that the claim of the assessee is not hit by the first proviso 36(1)(iii) and therefore no disallowance on account of interest to be capitalized for that asset can be made. Disallowance of expenditure as capital expenditure - R&D expenditure - Held that:- We do not find that the assessee has purchased any new capital asset or has acquired enduring benefit. It is only an operational benefit that has arisen to the assessee, which does not result, into any capital asset and therefore the expenditure is allowable as revenue expenditure. Even otherwise, the provision of section 35(1) allows deduction with respect to capital expenditure as well as revenue expenditure both on account of research and development expenditure. Therefore, we reverse the finding of the ld CIT(A) with respect of disallowance of research and development expenditure. Purchase of accounting software - Held that:- As it is stated that it is an annual expenditure for the license of the software. Such software license purchase cannot be held to be capital expenditure as it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. That the Hon'ble Commissioner of Income Tax (Appeals) has grossly erred in confirming expenditure of ₹ 3,86,388/- (216888 + 19500+ 150000) as capital expenditure on the basis of conjectures, surmises without appreciating the facts of the case. The disallowance of ₹ 3,86,388/- as capital expenditure merits allowance. 2. The brief facts of the case are that the assessee is a private ltd company engaged in the business of manufacturing of telephone, VCD and other electrical items. The assessee filed its return of income on 30.09.2008 showing income of ₹ 64509870/-. Against this the assessment u/s 143(3) of the Income Tax Act was framed wherein amongst other disallowance u/s 14A of ₹ 9243/-, disallowance of interest of ₹ 129000/- treating as it capital expenditure and disallowance of ₹ 386388/- out of research and development, software expenditure and architect fees treated as capital expenditure. Against this disallowance, the assessee preferred an appeal before the ld CIT(A), who in turn confirmed the same. Therefore, the assessee is in appeal before us. 3. The first ground of appeal is general in nature therefore the same is d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the earning of exempt income is equal to aggregate of the amount of expenditure directly relatable to the income which does not form part of the total income i.e. Rule 8D(2)(i) and the disallowance of interest as provide under Rule 8D(2)(ii) and further disallowance computed under Rule 8D(2)(iii) of the Income Tax Rules. The disallowance made by the appellant on account of direct expenditure relatable to the earning of exempt income i.e. fee paid for portfolio management totaling ₹ 13,95,065/- is disallowable under Rule 8D(2)(i) of the Income Tax Rules. Under the provisions of Rule 8D(2)(ii) the interest relatable to the investment in tax free funds is to be computed and as per the working of the assessee itself the same comes to ₹ 10,49,851/-. Consequently, we direct the Assessing Officer to disallow ₹ 10,49,851/-being the interest so relatable to the earning of exempt income. We find no merit in the alternate plea raised by the assessee that no disallowance of interest is called for after setting off the interest paid and interest received, where there is no interest payment. Admittedly the appellant had paid total interest of ₹ 2.92 crores out of which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee dividend, etc., but there was no tangible material to record his satisfaction, disallowance made was unjustified as under :- 10. Section 14A of the Act requires the Assessing Officer to record satisfaction that interest bearing funds have been used to earn tax free income. The satisfaction to be recorded must be based upon credible and relevant evidence. The onus, therefore, to prove that interest bearing funds were used, lies squarely on the shoulders of the revenue. Thus, if the Assessing Officer is able to refer to relevant material while recording satisfaction that borrowed funds were used to earn interest free income as opposed to the assessee's own funds, the Assessing Officer may legitimately disallow such a claim. The Assessing Officer, however, cannot, by recording general observations, particularly where the assessee has denied using interest bearing funds, proceed to infer that interest bearing income must has been used to earn exempted income. Section 14A of the Act, being in the nature of an exception, has to be construed strictly and only where the Assessing Officer records satisfaction, on the basis of clear and cogent material, shall an order be passed u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO following the decision of Hon ble Punjab Haryana High Court in case of Abhishek Industries Ltd Vs. CIT 286 ITR 1 disallowing the interest by applying section 43(1) read with Section 36(1)(iii) of the Act and and disallowed the sum of ₹ 129000/-. The assessee carried the matter before the ld CIT(A), who in turn confirmed the action of the ld AO relying on the decision of the Madras High Court in case of CIT Vs. Venkatswarn 222 ITR 163(Mad). Against this assessee has preferred an appeal before us. 10. The ld AR submitted that the assessee has not borrowed any sum taken for capital work in progress and therefore provision of section 43(1) cannot apply. As the main argument was that borrowing is not taken for the purpose of financing capital work in progress and therefore no interest is paid for that . Second argument was that even otherwise it has enough non interest bearing funds to fund the capitalization. To demonstrate this he submitted a chart tabulating the above details . He further stated that netting of the interest should also be considered in the present case, if the issue is decided against assessee. 11. The ld DR relied upon the orders of the lower author ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the first proviso 36(1)(iii) of the Income Tax Act and therefore no disallowance on account of interest to be capitalized for that asset can be made. Hence, we reverse the finding of the ld CIT(A) and allow ground No. 3 of the appeal of the assessee. 13. Ground No. 4 of the appeal of the assessee is against the disallowance of expenditure of ₹ 386388/- as capital expenditure. During the year the assessee has incurred expenditure on research and development expenditure, software purchase and building repairs and maintenance expenditure. These expenditures were disallowed by ld AO for the reason that the research and development expenditure incurred by the assessee is for acquisition of new capital asset. Regarding software development expenditure he held that it is a onetime investment and regarding building repair and maintenance work a sum of ₹ 1,50,000/- is paid for woodwork and glass work in office along with payment to architect , hence, held to be a capital expenditure. Thus an expenditure of ₹ 386388/- was disallowed as capital expenditure. The assessee carried the matter before the ld CIT(A) who upheld that disallowance made by the ld AO. 14. The ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eriod not culminating in to any enduring benefit to the assessee. Therefore we reverse the finding of the ld CIT (A) with respect to software expenditure and direct the same to be allowed as revenue expenditure. Regarding the repairs and maintenance expenditure assessee has submitted that its factory is surrounded by agriculture area which was infected by termite and therefore certain wooden partitions are changed and glass were fitted into that. We have perused the details of such expenditure submitted at page 15 to 28 of the Paper Book. The bill of the architect also shows that it was renovation expenditure of the premises. The assessee also incurred repairs expenditure for premises etc. looking to the details of such expenses, which are petty in nature and routine, looking to the total assets of the company as on 31.03.2008 having gross block of ₹ 4.36 crores. The above expenditure has also not resulted in to new asset and further no new construction has been allegedly undertaken by the assessee. Assessee has also explained reasons about why these expenditure are necessary. In view of this fact we reverse the finding of the ld CIT(A) in confirming the disallowance of ͅ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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