2018 (4) TMI 1600 - AT - Income Tax

Tribunal grants partial relief to assessee in tax dispute

Gujarat State Financial Services Ltd., The DCIT Circle-4 Versus The ACIT, Circle-4 Ahmedabad And Vice-Versa.

The Tribunal provided partial relief to the assessee by reducing the disallowance under Section 14A to Rs. 35 lacs, ruling that no disallowance on account ... Disallowance u/s. 14A r.w.r. 8D - A.O. found that the assessee has made disallowance u/s. 14A which was 1% of the total administrative expenses - Held that:- As per the directions of the Government of Gujarat, the assessee has parked its surplus funds in Government securities and bonds in earlier years. A.O. has mechanically computed the disallowance u/s. 14A as per Rule 8D without establishing any nexus between the borrowed funds and utilization thereof in making tax exempt investment. Common expenses which are to the allocated in terms of the formula under rule 8D will be only such interest expenses which are directly attributable to borrowings specifically used for tax free incomes. The interest income earned by the assessee is far more in excess of the interest expenditure and the interest free funds are sufficient to cover up investments and the investments are brought forward from earlier financial years. No disallowance on account of interest expenditure. For the administrative expenses there is no dispute that certain administrative expenses have to be apportioned towards earning of tax free income. The disallowance of ₹ 349242/- made by the assessee will not suffice. We find that the total administrative expenses claimed in the statement of total income are at ₹ 3.50 crores. In our considered opinion, at least 10% of such expenditure should be apportioned towards earning of exempt income. Therefore, a disallowance of ₹ 35 lacs should meet the ends of justice. We accordingly direct the A.O. to restrict the disallowance at ₹ 35 lacs. This ground alongwith all its sub ground and the additional ground are treated as partly allowed. Non granting of deduction contributed by the assessee to Gujarat Socio Economic Development Society (GSEDS) u/s. 37 r.w.s. 28 - claim of the assessee was denied on the ground that the assessee is a separate entity from the Finance Department of Government of Gujarat and the scope of business cannot be enlarged to an extent where the expenditure is incurred without commensurate benefit to its business - Held that:- It is true that as per directions of the Government of Gujarat, the assessee had made the contribution of ₹ 30 crores. The directions of Gujarat cannot override the provisions of the Income Tax Act. We find that the assessee has contributed 30% of its profit which is akin to appropriation of profit and this 30% cannot be construed as charge against profit. The contribution made by the assessee to GSEDS is eligible for deduction u/s. 80G of the Act and that has been allowed by the A.O. By making the contribution, the assessee has only followed the dictat of the Government of Gujarat but nowhere has demonstrated the nexus between the contribution and the commercial expediency vis-à-vis benefits to the assessee. The contribution so made is eligible for deduction u/s. 80G and therefore in our understanding of the facts, the claim of entire contribution as deduction u/s. 37 of the Act is not tenable. - Decided against assessee. Disallowance being expenses incurred towards renovation and modernization of Finance Department, Government of Gujarat - Held that:- There is no dispute that the entire business of the assessee comes from the Finance Department of the Government of Gujarat. It is also not in dispute that the M.D. Jt. M.D. and the Vice President of the assessee occupy office in the premises of the Finance Department of Govt. of Gujarat. In our considered opinion, the expenditure on account of renovation and modernization of Finance Department building was incurred by the assessee on account of commercial expediency and is therefore allowable u/s. 37 of the Act which has been rightly directed to be allowed by the First Appellate Authority. Disallowance of depreciation on assets purchased and lease back - Held that:- We find that the First Appellate Authority while giving relief to the assessee on this issue has followed the decision of the Co-ordinate Bench in earlier assessment year. Therefore, no interference is called for Issues Involved:1. Disallowance under Section 14A read with Rule 8D.2. Deduction of Rs. 30 crores contributed to Gujarat Socio Economic Development Society (GSEDS) under Section 37 read with Section 28.3. Disallowance of Rs. 82.74 lacs for renovation and modernization of the Finance Department, Government of Gujarat.4. Disallowance of depreciation on assets purchased and leased back.Detailed Analysis:1. Disallowance under Section 14A read with Rule 8D:The first grievance of the assessee relates to the disallowance made under Section 14A of the Act read with Rule 8D amounting to Rs. 17.54 crores. The Assessing Officer (A.O.) noticed that the assessee earned interest on bonds and debentures amounting to Rs. 3.99 crores and dividend of Rs. 60.72 lacs, which were claimed as exempt. The A.O. believed that the disallowance made by the assessee was not in line with the provisions of Section 14A read with Rule 8D and computed the disallowance at Rs. 17.54 crores. The assessee argued that investments were made from own funds and no borrowed funds were used. However, the A.O. did not find this explanation satisfactory. The Tribunal found that the assessee had sufficient interest-free funds to cover the investments and that the interest income exceeded the interest expenditure. The Tribunal concluded that no disallowance on account of interest expenditure was warranted but apportioned 10% of the administrative expenses towards earning of exempt income, directing the A.O. to restrict the disallowance to Rs. 35 lacs.2. Deduction of Rs. 30 crores contributed to GSEDS under Section 37 read with Section 28:The assessee contributed Rs. 30 crores to GSEDS, claiming it as a deduction under Section 37 on the grounds of commercial expediency. The A.O. denied the claim, stating that the contribution did not benefit the assessee's business directly. The Tribunal upheld this view, noting that the contribution was akin to an appropriation of profit and not a charge against profit. The contribution was eligible for deduction under Section 80G, but not under Section 37, as the nexus between the contribution and commercial expediency was not demonstrated.3. Disallowance of Rs. 82.74 lacs for renovation and modernization of the Finance Department, Government of Gujarat:The A.O. disallowed the expenditure of Rs. 82.74 lacs incurred by the assessee for the renovation and modernization of the Finance Department, Government of Gujarat. The assessee argued that the expenditure was incurred out of commercial expediency as the Finance Department mandated state PSUs to deposit surplus funds with the assessee. The CIT(A) allowed the claim, recognizing the commercial benefits and the fact that no new asset owned by the assessee was created. The Tribunal agreed, noting that the expenditure was for the benefit of the business and allowable under Section 37.4. Disallowance of depreciation on assets purchased and leased back:The Tribunal addressed an identical issue in the assessee's case for the assessment year 2005-06, following the decision of the Co-ordinate Bench for A.Y. 2004-05. The CIT(A) had granted relief based on these precedents, and the Tribunal saw no reason to interfere, thereby dismissing the Revenue's appeal on this ground.Conclusion:The appeals were decided with partial relief to the assessee on the disallowance under Section 14A, while the claims for the deduction of Rs. 30 crores to GSEDS were dismissed. The Tribunal upheld the CIT(A)'s decision on the renovation and modernization expenses and the depreciation on leased assets. The judgments were consistent across the assessment years 2008-09, 2009-10, and 2010-11, providing a comprehensive resolution to the issues raised.