2015 (9) TMI 544 - AT - Income Tax

ITAT upholds disallowances under 14A, ESI deduction, and interest expenditure for mutual funds.

Spandana Sphoorty Financial Ltd. Versus Addl. Commissioner of Income-tax, Range – 3, Hyderabad.

The ITAT dismissed both the assessee's and revenue's appeals, affirming the decisions on disallowances under section 14A, ESI contribution deduction, and ... Disallowance u/s 14A - Held that:- The issue in dispute is squarely covered by the decision of the ITAT in assessee’s own case for AY 2009-10 [2014 (11) TMI 229 - ITAT HYDERABAD ] wherein the Tribunal sustained the disallowance under Rule 8D(2)(ii) by observing as so far as disallowance @ 0.5% on the average value of investment under rule 8D(2)(III) is concerned, we are of the view that the same is in order. Reading of the provision contained u/s 14A and more specifically sub-section(3) of section 14A read with rule 8D(2)(iii) makes it clear, even where the assessee claims that he has not incurred any expenditure for earning exempt income, disallowance of expenditure deemed to have been incurred has to be worked out @ 0.5% on the average value of investments. As the AO has correctly computed disallowance in terms with rule 8D(2)(iii), the same deserves to be upheld. Accordingly, we sustain the addition made u/s 14A by the AO. - Decided against assessee. ESI contribution from the employees - disallowance u/s 36(1)(va) as amount deposited beyond prescribed due date - Held that:- As observed that different high courts while considering identical nature of dispute have held that employees contribution to PF and ESI, if, have been remitted to govt. account within the due date of filing of return u/s 139(1), the same will be an allowable deduction. See CIT Vs. Nipso Polyfabriks Ltd.[2012 (11) TMI 592 - HIMACHAL PRADESH HIGH COURT] and CIT Vs. Ghatge Patil Transport Ltd. [2014 (10) TMI 402 - BOMBAY HIGH COURT] - Decided in favour of assessee. Disallowance of interest expenditure u/s 36(1)(iii) - CIT(A) delted the addition - Held that:- It is well settled principle of law that unless a nexus is established between borrowed funds and the investment made for earning exempt income, no disallowance could be made on notional basis. In the present case, there is no dispute to the fact that borrowed funds were for specific purpose. It is not the case of the department that assessee during the year has not lent any money to its customers. That being the case, it cannot be said that borrowed funds were utilized for non-business purpose. Unless the department establishes a nexus between investment made and the borrowal of funds, no disallowance of interest expenditure on presumptive basis can be made. Further, it is not disputed that assessee was having enough surplus and reserves to make the investment in mutual funds. The Hon’ble Bombay High Court in case of CIT Vs. Reliance Utilities and Power Ltd. (2009 (1) TMI 4 - HIGH COURT BOMBAY) has held that if assessee is having own funds as well as borrowed funds, the presumption would be own funds have been utilized for making investment. In view of the aforesaid, since the revenue has failed to establish that borrowed funds were utilized for making investments, no disallowance of interest expenditure can be made notionally.- Decided in favour of assessee. Issues:1. Disallowance of amount under section 14A of the Income Tax Act.2. Allowability of deduction for the assessee's contribution towards ESI.3. Disallowance of interest expenditure under section 36(1)(iii) for investments made in mutual funds.Issue 1: Disallowance under Section 14A:The assessee appealed against the disallowance of Rs. 73,76,416 under section 14A of the Income Tax Act related to exempt dividend income earned from mutual funds. The Assessing Officer (AO) disallowed administrative expenditure under Rule 8D, which the assessee contested, arguing that a direct nexus between expenditure and investments is necessary for disallowance. However, the CIT(A) upheld the disallowance based on a previous ITAT decision, emphasizing that Rule 8D(2)(ii) does not require establishing a direct link. The ITAT, following precedent, affirmed the CIT(A)'s decision, dismissing the assessee's appeal.Issue 2: Allowability of ESI Contribution Deduction:The revenue challenged the CIT(A)'s decision to allow deduction for the assessee's contribution towards ESI, despite a delay in depositing a portion of the amount. The CIT(A) relied on the omission of the second proviso to section 43B by the Finance Act, 2003, making contributions allowable if paid before the due date for filing the return. Citing judicial precedents, including decisions from High Courts, the ITAT upheld the CIT(A)'s decision, emphasizing that timely remittance to the government account suffices for deduction.Issue 3: Disallowance of Interest Expenditure for Mutual Fund Investments:The AO disallowed interest expenditure of Rs. 7,85,32,001 under section 36(1)(iii) for investments in mutual funds, alleging diversion of borrowed funds to non-business activities. The assessee contended that investments were made from own surplus funds, supported by bank loan terms restricting fund usage. The CIT(A) ruled in favor of the assessee, considering the surplus funds available for investments. The ITAT concurred, highlighting the lack of evidence linking borrowed funds to investments and upheld the CIT(A)'s decision, dismissing the revenue's appeal.In conclusion, both the assessee's and revenue's appeals were dismissed by the ITAT, affirming the decisions on disallowances under section 14A, ESI contribution deduction, and interest expenditure for mutual fund investments.