2021 (6) TMI 1082 - AT - Income Tax

Tribunal directs AO on failed IPO expense & 14A disallowance, sets limits for reassessment

The Tribunal allowed the appeal partially, directing the Assessing Officer to treat the expenditure on the failed IPO as revenue expenditure based on ... Disallowance of expenditure incurred on failed IPO (failed Public issue) - Allowable revenue expenditure or not? - HELD THAT:- The issue in the present appeal is squarely covered in favour of the assessee by the decision of the Hon’ble Jurisdictional High Court in the case of Nimbus Communication Ltd. [2011 (12) TMI 696 - BOMBAY HIGH COURT] wherein the Hon’ble Jurisdictional High Court following its earlier decision in the case of M/s. Essar Oil Limited [2008 (10) TMI 649 - BOMBAY HIGH COURT] confirmed the decision of the Tribunal allowing the aborted IPO expenditure as revenue expenditure u/s 37. Similarly, the Hon’ble Madras High Court in the case of Tamilnadu Magnesite Ltd.[2018 (6) TMI 1236 - MADRAS HIGH COURT] held that the expenditure incurred for setting up of new project viz. Chemical Beneficiation Plant which is abandoned following State Government Order is allowable as revenue expenditure. Disallowance u/s 14A - contention of the appellant that no interest bearing funds were utilized for the purpose of making any investment which yielded the exempt income - HELD THAT:- We direct the Assessing Officer not to make any addition on account of interest expenditure under Rule 8D of the Income Tax Rules, 1962 (‘the Rules’). As regards to indirect expenses incurred for earning exempt income, the submission the assessee that amount of disallowance should be restricted lower of the exempt income and 0.5% of average value of investment, which yielded the exempt income / merits acceptance. It is very well settled position of law that the amount of disallowance u/s 14A cannot exceed the exempt income. While computing the amount of disallowance under clause (iii) of Rule 8D(2) of the Rules, the average value of investments which yielded the exempt income alone to be considered for the purpose of arriving at average value of investment - Therefore, this ground of appeal is remitted to the file of the Assessing Officer to calculate the amount of disallowance under clause (iii) of Rule 8D(2) on the above lines indicated above. Thus, this ground of appeal is partly allowed. Issues Involved:1. Disallowance of expenditure on failed IPO.2. Allocation and disallowance of expenditure for earning exempt income under section 14A.Issue-wise Detailed Analysis:1. Disallowance of Expenditure on Failed IPO:The appellant, a company engaged in the manufacture of automobile and brake system components and generation of power through windmill, incurred an expenditure of Rs. 88,84,356/- on a failed IPO. The Assessing Officer (AO) disallowed this expenditure, considering it capital in nature, referencing the cases of Brook Bond and Punjab State Industrial Development Corporation. The CIT(A) upheld the AO's decision, rejecting the appellant's reliance on the Jurisdictional High Court's decision in CIT vs. Nimbus Communication Ltd., which allowed such expenses as revenue expenditure under section 37 of the Income Tax Act, 1961.Upon appeal, the Tribunal noted that the issue was covered by the Jurisdictional High Court's decision in Nimbus Communication Ltd., which followed the earlier decision in CIT vs. M/s. Essar Oil Limited, where aborted share issue expenditure was allowed as revenue expenditure under section 37. The Tribunal also referred to the Madras High Court's decision in Tamilnadu Magnesite Ltd. vs. ACIT, which held that expenditure on an abandoned project is revenue in nature if no new asset or enduring benefit is created. Given that no new asset or enduring benefit resulted from the failed IPO expenditure, the Tribunal directed the AO to allow the expenditure as revenue expenditure.2. Allocation and Disallowance of Expenditure for Earning Exempt Income under Section 14A:The AO disallowed Rs. 42,62,687/- under section 14A, rejecting the appellant's contention that no interest-bearing funds were used for investments yielding exempt income. The CIT(A) upheld this disallowance based on previous assessments for 2009-10 to 2011-12. However, the Tribunal found that in the year of investment (2007-08), the CIT(A) had determined that no borrowed funds were used for the investment, and this finding remained undisturbed.The Tribunal directed the AO not to make any addition on account of interest expenditure under Rule 8D of the Income Tax Rules, 1962. Regarding indirect expenses, the Tribunal accepted the appellant's submission that the disallowance should be restricted to the lower of the exempt income or 0.5% of the average value of investments that yielded exempt income. The Tribunal cited several judicial decisions, including Principal Commissioner of Income-tax-2 vs. Caraf Builders & Constructions (P.) Ltd., which established that disallowance under section 14A cannot exceed the exempt income.The Tribunal remitted the issue back to the AO to calculate the disallowance under clause (iii) of Rule 8D(2) based on the average value of investments that yielded exempt income. Thus, the ground of appeal was partly allowed.Conclusion:The appeal was partly allowed for statistical purposes, with directions to the AO to allow the failed IPO expenditure as revenue expenditure and to reassess the disallowance under section 14A in accordance with the Tribunal's guidelines.