2014 (2) TMI 1209 - AT - Income Tax

Disallowance of interest u/s 14A read with rule 8D - CIT(A) deleted the disallowance in part - Held that - CIT(A) observing that the facts are identical to the facts of the Assessment Year 2005-06, by following the order of the Tribunal passed in the case of the assessee itself in Assessment Year 2005-06 has restricted the disallowance u/s 14A to 2% of the dividend income and deleted the balance amount of disallowance. - Decided against revenue Disallowance being 50% of payment made to related party towards fees and legal charges - CIT(A) deleted the disallowance - Held that - The genuineness of the payment is not in dispute. The Assessing Officer after observing about the loss incurred by the assessee company has brought no material on record after making investigation to show that the assessee has not received the services for which payments were made by the assessee. Rather, on the other hand, the allowance of deduction at the rate of 50% shows that the Assessing Officer also agreed that services of the staff of the payee company were utilized by the assessee company for its business purpose. No material was brought on record to show that the consideration for services received by the assessee was so excessive as to warrant any disallowance out of the same. It is also observed that the amount of consideration paid was as per Memorandum of Understanding entered into by the assessee with the payee company. In view of the above facts and circumstances, we do not find any good reason to interfere with the order of the Ld. CIT(A) - Decided against revenue Disallowance u/s 36(1)(va) read with section 2(24)(x) being the employees contribution to Provident Fund not deposited within the stipulated time - Held that - Hon ble Gujarat High Court in the case of CIT Vs. Gujarat State Road Transport Corporation (2014 (1) TMI 502 - GUJARAT HIGH COURT ) held that with respect to the sum received by the assessee firm from any of his employees to which provisions of sub-clause (x) of clause (24) of section (2) applies, the assessee shall be entitled to deduction in computing the income referred to in section 28 with respect to such sum credited by the assessee to the employees account in the relevant fund or funds on or before the due date mentioned in explanation to section 36(1)(va).the issue was covered in favour of the Revenue by the above cited decision of the Hon ble Gujarat High Court. Therefore, we set aside the order of the Ld. CIT(A) and restore back the order of the Assessing Officer. - Decided in favour of revenue

Issues Involved:
1. Disallowance of interest and administrative expenses under Section 14A read with Rule 8D.
2. Disallowance of payment to a related party for fees and legal charges.
3. Disallowance of employees' contribution to Provident Fund under Section 36(1)(va) read with Section 2(24)(x).

Detailed Analysis:

1. Disallowance of Interest and Administrative Expenses under Section 14A read with Rule 8D
The primary issue was the disallowance of Rs. 6,42,822/- by the Assessing Officer (AO) under Section 14A read with Rule 8D, which was attributable to the exempt dividend income of Rs. 73,84,488/- earned by the assessee. The AO asserted that administrative and managerial expenses must have been incurred to handle tax-free investments, and these expenses could not be segregated with certainty. The AO, therefore, disallowed interest expenditure of Rs. 1,37,027/- and administrative expenditure of Rs. 5,85,697/-.

On appeal, the CIT(A) referred to the Bombay High Court's decision in Godrej & Boyce V/s DCIT, which held that Rule 8D could not be applied retrospectively for Assessment Year 2007-08. The CIT(A) followed the Tribunal's decision in the assessee's own case for the preceding year (A.Y. 2005-06) and restricted the disallowance to 2% of the dividend income, deleting the interest expenditure disallowance of Rs. 57,125/-.

The Tribunal upheld the CIT(A)'s order, noting that the facts were identical to the preceding year, and no specific defect in the CIT(A)'s order was pointed out by the Revenue. Hence, this ground of appeal by the Revenue was dismissed.

2. Disallowance of Payment to a Related Party for Fees and Legal Charges
The second issue concerned the disallowance of Rs. 12,00,000/- out of Rs. 24,00,000/- paid to Dharnidhar Chemicals Private Limited, a related party, for fees and legal expenses. The AO allowed only 50% of the claimed amount, deeming the payment excessive due to the related party incurring a loss.

The CIT(A) deleted the disallowance, observing that the payment was made as per a Memorandum of Understanding (MOU) and that the AO had not disputed the genuineness of the services rendered. The CIT(A) found no evidence that the payment was excessive or that the assessee had not utilized the services.

The Tribunal supported the CIT(A)'s findings, noting that the AO had allowed 50% of the payment, implicitly agreeing that services were rendered. No material evidence was provided by the AO to justify the disallowance. Therefore, this ground of appeal by the Revenue was also dismissed.

3. Disallowance of Employees' Contribution to Provident Fund under Section 36(1)(va) read with Section 2(24)(x)
The third issue involved the disallowance of Rs. 1,50,848/- for late payment of employees' contribution to the Provident Fund. The AO disallowed this amount as it was not deposited within the stipulated time under the relevant Act.

The CIT(A) allowed the deduction, relying on various judicial precedents, including decisions from the Karnataka High Court and the Delhi High Court, which held that contributions made before the due date for filing the return under Section 139(1) were allowable.

However, the Tribunal reversed the CIT(A)'s decision, citing the Gujarat High Court's ruling in CIT Vs. Gujarat State Road Transport Corporation, which mandated that contributions must be deposited by the due date specified in the Provident Fund Act. Consequently, this ground of appeal by the Revenue was allowed.

Conclusion:
The Tribunal's judgment addressed three main issues:
1. Disallowance under Section 14A was restricted to 2% of the dividend income, with the Tribunal upholding the CIT(A)'s decision.
2. Disallowance of fees and legal charges paid to a related party was deleted, with the Tribunal agreeing with the CIT(A) that the payment was genuine and not excessive.
3. Disallowance of employees' contribution to Provident Fund was upheld, following the Gujarat High Court's ruling that contributions must be deposited within the stipulated time.

The appeal of the Revenue was partly allowed, with the Tribunal affirming and reversing the CIT(A)'s decisions on different grounds.

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