2016 (4) TMI 1135 - AT - Income Tax

Tribunal Upholds Disallowance of Expenditures under Income Tax Act: Section 14A & 43A

The Tribunal upheld the Assessing Officer's disallowance of expenditures under Section 14A of the Income Tax Act, citing the statutory presumption of ... Disallowance under section 14A read with Rule 8D - expenditure incurred in relation to exempt income - presumptive computation of disallowance under Rule 8D - capital nature of foreign exchange fluctuation adjusted to cost under section 43ADisallowance under section 14A read with Rule 8D - presumptive computation of disallowance under Rule 8D - expenditure incurred in relation to exempt income - Validity of disallowance of expenditure under section 14A read with Rule 8D for the assessment years 2009-10, 2010-11 and 2011-12 - HELD THAT: - The Tribunal upheld the Assessing Officer's application of section 14A read with Rule 8D to disallow a percentage of average investments yielding no exempt income. The Tribunal held that Rule 8D supplies a statutory presumptive mechanism for computing disallowance even where the assessee claims no expenditure was incurred, and that factual inquiry is replaced by the statutory presumption. Reliance placed by the assessee on earlier decisions rendered before introduction of Rule 8D was held inapplicable. Authorities recognising the applicability of Rule 8D and the statutory presumption (including the Tribunal and High Court decisions cited in the order) support the view that the AO correctly disallowed the expenditure; the CIT(A)'s confirmation of the AO's disallowance was therefore sustained.Disallowance under section 14A read with Rule 8D sustained for AYs 2009-10, 2010-11 and 2011-12.Capital nature of foreign exchange fluctuation adjusted to cost under section 43A - Whether the forex loss arising on payment for acquisition of a dredging machine is revenue or capital in nature for assessment year 2009-10 - HELD THAT: - The Tribunal agreed with the CIT(A) that the exchange difference on payments made towards acquisition of the dredging machine is capital in nature and must be adjusted to the cost of the asset under section 43A. The Assessing Officer's disallowance of the revenue claim was therefore confirmed, but the CIT(A) correctly observed that the assessee is entitled to claim depreciation on the enhanced cost as per section 43A. The Tribunal found the conclusion to be in conformity with the jurisdictional High Court authority and statutory provision.Forex loss on acquisition treated as capital; disallowance of revenue claim confirmed and entitlement to depreciation under section 43A recognised.Final Conclusion: Appeals dismissed: disallowance under section 14A read with Rule 8D upheld for AYs 2009-10, 2010-11 and 2011-12; forex loss on purchase of dredging machine held capital and to be added to asset cost with depreciation allowable under section 43A; stay petitions dismissed as infructuous. Issues Involved:1. Disallowance of expenditure under Section 14A of the Income Tax Act.2. Direction of the CIT(A) regarding the claim of forex loss as revenue expenditure.Issue-wise Detailed Analysis:1. Disallowance of expenditure under Section 14A of the Income Tax Act:The primary issue in these appeals is the disallowance of expenditure under Section 14A of the Income Tax Act. The Assessing Officer (AO) invoked the provisions of Section 14A read with Rule 8D of the Income Tax Rules, disallowing expenditures of Rs. 98,16,104/-, Rs. 1,69,84,915/-, and Rs. 2,39,01,020/- for the assessment years 2009-10, 2010-11, and 2011-12, respectively. The CIT(A) confirmed the AO's findings, prompting the assessee to appeal.The assessee's representative argued that the disallowance should not exceed the exempt income earned, citing various judicial precedents, including the Delhi High Court's decision in Joint Investments Pvt. Ltd. v. CIT, which emphasized that disallowance under Section 14A should not exceed the exempt income. However, the Department's representative countered that the CBDT Circular No.5/2014 mandates disallowance even if no exempt income is earned in a particular year.Upon reviewing the case, the Tribunal noted the assessee's investments and the resulting exempt income for the relevant years. The Tribunal upheld the AO's disallowance under Section 14A read with Rule 8D, referencing the Tribunal's decision in M/s. Lakshmi Ring Travellers and the Karnataka High Court's judgment in Pradeep Kar v. ACIT, which supported the statutory presumption of expenditure related to exempt income.The Tribunal concluded that the AO's action was correct, as the provisions of Section 14A read with Rule 8D were applicable. The Tribunal also noted that the judgment in Simpson & Co. Ltd. cited by the assessee's representative was not applicable, as it pertained to an assessment year before the introduction of Rule 8D. Consequently, the Tribunal dismissed this ground of appeal.2. Direction of the CIT(A) regarding the claim of forex loss as revenue expenditure:The second issue pertains to the CIT(A)'s direction to the AO not to allow the claim of forex loss as revenue expenditure. The assessee incurred a forex loss of Rs. 16,47,436/- during the assessment year 2009-10 due to the depreciation of the rupee while repaying a loan for purchasing dredging machinery. The AO disallowed this loss, treating it as capital in nature.The CIT(A) upheld the AO's decision, referencing Section 43A of the Income Tax Act, which stipulates that any fluctuation in exchange rates affecting the liability of an assessee for a business asset should be treated as capital expenditure and adjusted against the asset's cost. The CIT(A) also cited the jurisdictional High Court's decision in CIT v. South India Viscose Ltd., which supported this view.The Tribunal agreed with the CIT(A)'s decision, noting that it was consistent with Section 43A and the jurisdictional High Court's ruling. However, the Tribunal observed that the assessee would be entitled to depreciation on the enhanced value of the asset as per Section 43A. Thus, the Tribunal dismissed this ground of appeal.Conclusion:The Tribunal dismissed all the appeals and the stay petitions filed by the assessee, upholding the AO's disallowance under Section 14A read with Rule 8D and the CIT(A)'s direction regarding the forex loss. The Tribunal's decision was pronounced on April 6, 2016, in Chennai.