2012 (8) TMI 1021 - AT - Income Tax

Summary

Issues Involved:

1. Disallowance u/s 40(a)(ia) for non-deduction of TDS on reimbursement of expenses.
2. Disallowance u/s 40A(3) for cash payments exceeding Rs. 20,000.
3. Disallowance u/s 14A for expenses related to exempt income.

Summary:

Issue 1: Disallowance u/s 40(a)(ia) for non-deduction of TDS on reimbursement of expenses

The assessees, M/s. Suraj Bhan Agencies (P) Ltd. and M/s. Pee Cee Soap & Chemicals (P) Ltd., challenged the disallowance of Rs. 16,73,022/- and Rs. 18,34,474/- respectively, made by the Assessing Officer (AO) u/s 40(a)(ia) for non-deduction of TDS on payments made to consignee agents. The AO argued that these payments were fixed commissions disguised as reimbursement of expenses. The CIT(A) upheld the AO's decision, stating that the payments were not linked to actual expenses incurred by the agents. The Tribunal referred to the ITAT Agra Bench's decision in ITA No.434/Agr/2011, which held that section 40(a)(ia) applies only to amounts payable on the last day of the previous year. The Tribunal directed the AO to verify the facts and decide the issue in accordance with the ITAT Special Bench Visakhapatnam's decision.

Issue 2: Disallowance u/s 40A(3) for cash payments exceeding Rs. 20,000

M/s. Pee Cee Soap & Chemicals (P) Ltd. also contested the disallowance of Rs. 79,124/- made by the AO u/s 40A(3) for cash payments exceeding Rs. 20,000. The AO found that the assessee split payments to circumvent the provisions of section 40A(3). The CIT(A) confirmed the disallowance. The Tribunal, however, found merit in the assessee's argument that separate bills below Rs. 20,000 should not attract disallowance. The Tribunal directed the AO to verify the details and recalculate the disallowance accordingly.

Issue 3: Disallowance u/s 14A for expenses related to exempt income

The AO disallowed Rs. 14,79,431/- u/s 14A read with Rule 8D, which was reduced to Rs. 10,00,000/- by the CIT(A). The assessee argued that no interest-bearing funds were used for investments generating exempt income. The Tribunal referred to its earlier decision in the assessee's own case for A.Y. 2006-07, where it was held that if the assessee had sufficient interest-free funds, no disallowance u/s 14A was warranted. The Tribunal directed the AO to calculate the disallowance, if any, in accordance with this decision, considering the assessee's share capital and reserves.

Conclusion:

The Tribunal allowed both appeals for statistical purposes, directing the AO to verify facts and recalculate disallowances as per the Tribunal's directions.