2009 (3) TMI 901 - AT - Income Tax

Interest under Section 244A taxable on receipt; AO to reassess expenses under Section 14A per Tribunal's directions.

Both appeals by the department were partly allowed. The Tribunal held that interest under Section 244A should be taxed in the year of receipt, reversing ... Taxability of Interest received u/s.244A - Whether CIT(A) erred in deleting the addition that the order granting interest u/s 244A has not reached finality - return for AY 2001-02 was filed showing loss - assessment order passed u/s 143(3), determined loss - additions made by AO, representing interest on refund allowed by the Department u/s 244A - CIT(A) deleted this addition - ITAT in its order (supra), in the assessee’s own case for the AY 1984-85, decided the issue in favour of the assessee. HELD THAT:- We will proceed to discuss the decision of the ITAT, (SB) in the case of Avada Trading Co. P. Ltd. [2006 (1) TMI 465 - ITAT MUMBAI], held that the interest, granted by the Department to the assessee u/s 244A , along with the refund, fully satisfies the requirements of sections 4 and 5 and, therefore, it has to be taxed in the year of its receipt. The judgment of the Supreme Court in the case of E. D. Sassoon and Co. Ltd. v. CIT[1954 (5) TMI 2 - SUPREME COURT] squarely supports this view. The fact that the quantum of such interest might vary at a later date, because of one of the reasons mentioned in sub-section (3) of section 244A, does not affect this conclusion. Therefore, we respectfully follow the decision of the Tribunal (SB) in Avada Trading Co. P. Ltd [2006 (1) TMI 465 - ITAT MUMBAI] and reverse the orders of CIT(A) on this point and restore those of the both the years. The ground is accordingly, allowed. Issues Involved:1. Deletion of addition on interest under Section 244A.2. Allocation of administrative expenses to dividend income under Section 14A.Issue-Wise Detailed Analysis:1. Deletion of Addition on Interest Under Section 244A:The department contended that the CIT(A) erred in deleting the addition of interest granted under Section 244A, arguing that it should be taxable in the year of receipt. The assessee, a public limited company engaged in manufacturing paper and paper boards, had filed returns showing significant losses. The AO added Rs. 1,92,43,578 as interest on refunds under Section 244A, which the CIT(A) deleted. The department challenged this deletion, citing the ITAT, Mumbai (Special Bench) decision in Avada Trading Co.(P) Ltd. v. Asst. CIT.The assessee argued that the issue was covered in their favor by a previous ITAT, Chennai decision in their own case for AY 1984-85. They contended that the facts in Avada Trading Co.(P) Ltd. were distinguishable and not applicable. The CIT(A) had deleted the addition on the grounds that the orders giving rise to the interest were under appeal and had not reached finality, thus the right to receive the interest was in dispute and could not be taxed in the year under appeal.The ITAT, Chennai, in its previous order, held that interest granted by the department is assessable as income only when the proceedings which gave rise to the refund and interest reach finality. However, the ITAT, Mumbai (Special Bench) in Avada Trading Co.(P) Ltd. held that interest under Section 244A accrues when the refund becomes due, creating an enforceable debt, and thus should be taxed in the year of receipt. The Special Bench emphasized that the right to interest is not contingent on the final outcome of appeals but is an enforceable debt created upon the grant of refund.The Tribunal concluded that the decision of the Special Bench in Avada Trading Co.(P) Ltd. was applicable, and the interest granted under Section 244A should be taxed in the year of receipt. Therefore, the orders of the CIT(A) were reversed, and the AO's additions were restored.2. Allocation of Administrative Expenses to Dividend Income Under Section 14A:The department argued that the CIT(A) erred in holding that allocation of administrative expenses to dividend income is not permissible unless the expenditure is incurred specifically for that purpose. The department contended that the ITAT had previously directed an estimated disallowance of 2% on gross dividend income in similar cases.The issue related to the disallowance of Rs. 1,52,022 representing proportionate administrative expenses relating to dividend income under Section 14A. The Tribunal referred to the ITAT, Mumbai (Special Bench) decision in Daga Capital Management Pvt. Ltd., which held that the provisions of Section 14A are applicable to dividend income earned by an assessee engaged in trading shares, and the disallowance should be computed with reference to the mandate of Section 14A read with rule 8D.The Tribunal remitted the matter back to the AO for both years, directing the AO to re-examine the issue in light of the Special Bench decision in Daga Capital Management Pvt. Ltd. and to pass fresh orders after giving the assessee an adequate opportunity of being heard.Conclusion:Both appeals filed by the department were partly allowed. The interest under Section 244A was to be taxed in the year of receipt, reversing the CIT(A)'s deletion, and the issue of administrative expenses allocation to dividend income was remitted back to the AO for re-examination.