2015 (3) TMI 1135 - AT - Income Tax

Disallowance u/s 14A - interest payment to the partners on their capital balance - Held that - It is pertinent to note that the profit of the partnership firm is distributed among the partners in the ratio of their profit sharing. The interest payment to the partners on their capital balance is not revenue neutral as the same is taxable in the hands of the partners. In a case where no interest is provided on the capital account of partners, the corresponding profit/income of the partnership firm is assessed to tax and the share of the partner is exempt in their hands. Therefore when there is a direct relation between the share in the profit of the firm and the interest on capital account then the said interest cannot be treated as an expenditure to be attributable for earning the dividend income. Accordingly, in the facts and circumstances of the case, we delete the addition to the extent of disallowance u/s 14A on account of interest expenditure which is not on the borrowed fund but on the capital contributed by the partners - Decided partly in favour of assessee Disallowance on account of foreign commission payment u/s 40(a)(i) for want of TDS - Held that - The income from the offshore supplies is not taxable in the hands of the assessee under the regular provisions of Income tax Act, 1961. In such a situation there is no need to examine the provisions of DTAA for ascertaining whether there is a permanent establishment of the assess in India or not - Decided in favour of assessee

Summary

Issues:
1. Disallowance of interest expenditure u/s 14A of the Income Tax Act.
2. Addition u/s 40(a)(i) of the Income Tax Act regarding foreign commission payment.

Issue 1: Disallowance of interest expenditure u/s 14A of the Income Tax Act:
The case involved a partnership firm engaged in manufacturing and trading of textile goods, receiving exempt dividend income. The Assessing Officer disallowed interest expenditure u/s 14A, considering interest on capital as an expense for earning dividend income. The CIT(A) upheld the disallowance. However, the Authorized Representative argued that interest on capital is not an expense for earning dividend income. The Tribunal agreed, stating that interest on capital is taxable in the partners' hands, making it not revenue neutral. The Tribunal concluded that interest on capital cannot be treated as an expenditure for earning dividend income. Citing various decisions, the Tribunal partially allowed the appeal by deleting the disallowance on interest expenditure not related to borrowed funds.

Issue 2: Addition u/s 40(a)(i) of the Income Tax Act regarding foreign commission payment:
The Assessing Officer disallowed a foreign commission payment for lack of TDS under section 40(a)(i). The CIT(A) reversed this disallowance, referencing CBDT Circular No. 786 of 2000, which was withdrawn in 2009. The CIT(A) held that since the circular was applicable during the relevant assessment year, the disallowance was unjustified. The Tribunal supported this decision, emphasizing that the withdrawal of the circular was not retrospective. The Tribunal relied on the decision in the case of DDIT (International Taxation), Mumbai Vs. Siemens Aktiengesellschaft, and other precedents to uphold the CIT(A)'s deletion of the addition under section 40(a)(i). The Tribunal found no error in the CIT(A)'s order regarding this issue.

In conclusion, the Tribunal partially allowed the assessee's appeal on the disallowance of interest expenditure u/s 14A and dismissed the revenue's appeal on the addition u/s 40(a)(i) related to foreign commission payment. The judgment was pronounced on March 11, 2015.