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2010 (12) TMI 582 - AT - Income TaxDisallowing u/s.14A - the decision of the jurisdictional High Court in the case of Godrej and Boyce Mfg. Ltd. vs. DCIT (2010) 328 ITR 81 (Bom.), Rule 8D, being held to be prospective, could not be invoked in the relevant assessment year and, therefore, the matter needs to be restored back to the file of AO for deciding the issue de novo - direct accordingly. In the result, this ground is allowed for statistical purposes. Disallowance u/s.40(a)(ia) - Labour charges for manufacturing the asset - Revenue or capital expenditure - The Tribunal, after considering the submissions of both the parties, inter alia, concluded that the payment made for purchase of software could not be treated either as royalty or even for technical services. Therefore, the payment for SAP software could not be charged to tax in India as interest or royalty or fee for technical services. The Tribunal concluded that the payment made for acquisition of an asset, whether it is a revenue expenditure or capital, the provisions of sec. 40(a)(i) of the Act will not be applicable in respect of the respondent assessee for asstt. year 2000-01. However, in the present case, the applicability of sec. 40(a)(ia) has not been ruled out and, therefore, to the extent the assessee had made claim of depreciation in the P and L a/c., the same is to be disallowed - direct accordingly. In the result, this ground is dismissed. Disallowance on account of chit funds - deciding this issue, the AO will take into consideration the decision of Hon ble Supreme Court reported in 124 ITR 1 - In the result, this ground is allowed for statistical purpose.
Issues Involved:
1. Disallowance under Section 14A. 2. Disallowance under Section 40(a)(ia). 3. Disallowance of loss on chit funds. 4. Disallowance of legal and professional charges. Issue-wise Detailed Analysis: 1. Disallowance under Section 14A: The first issue pertains to the disallowance of Rs.78,084/- under Section 14A related to exempt income. The assessee argued that no expenses were incurred in earning the dividend income of Rs.4,500/-. The Assessing Officer (AO) computed the disallowance based on the interest attributable to earning the dividend income, following Section 14A read with Rule 8D. The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed this disallowance based on the Special Bench decision in Daga Capital Management P. Ltd. However, both parties agreed that the jurisdictional High Court's decision in Godrej and Boyce Mfg. Ltd. vs. DCIT rendered Rule 8D prospective, necessitating a de novo decision by the AO. Consequently, the matter was restored to the AO for fresh consideration, and this ground was allowed for statistical purposes. 2. Disallowance under Section 40(a)(ia): The second issue involves the disallowance of Rs.1,00,000/- under Section 40(a)(ia) for non-deduction of Tax Deducted at Source (TDS) on labor charges paid to Vipul Engg. Works for manufacturing an Ammonia Steel Container. The assessee contended that these charges were capitalized and not claimed as revenue expenditure, thus disallowance under Section 40(a)(ia) was not sustainable. The CIT(A) upheld the disallowance, noting the failure to deduct TDS under Section 194C. The Tribunal examined the facts and concluded that the term "amounts payable" in Section 40(a)(ia) necessitated TDS deduction for allowability. However, since the amount was capitalized, only the depreciation claimed was disallowed. The Tribunal distinguished the present case from the SMS Demag P. Ltd. decision, where Section 40(a)(i) was ruled out, and upheld the disallowance to the extent of the depreciation claimed. 3. Disallowance of Loss on Chit Funds: The third issue concerns the disallowance of Rs.1,10,010/- on account of chit fund losses. The assessee claimed this loss as a business expense, arguing that the chit subscription was akin to a deposit, with dividends treated as income and foregone amounts as losses. The AO disallowed the claim, referencing CBDT Instruction No.1175 and noting the lack of explanation on the utilization of funds for business purposes. The CIT(A) confirmed this disallowance, emphasizing the absence of evidence linking the funds to business use. The Tribunal referred to the ITAT decision in Rajees vs. ITO, which allowed chit fund losses if funds were used for business purposes. Consequently, the issue was restored to the AO for fresh examination to determine if the funds were utilized for business purposes, allowing the ground for statistical purposes. 4. Disallowance of Legal and Professional Charges: The fourth issue involves the disallowance of Rs.1,92,660/- in legal and professional charges. The AO disallowed these expenses, noting the failure to deduct TDS on professional expenses and considering them capital in nature. The CIT(A) confirmed the disallowance, associating the expenses with vehicle registration work, thus capital in nature. The Tribunal, noting that detailed submissions were not considered, restored the issue to the AO for a fresh decision, directing consideration of the Supreme Court decision in 124 ITR 1. This ground was allowed for statistical purposes. Conclusion: The appeal was partly allowed, with the first, third, and fourth grounds restored to the AO for fresh consideration, and the second ground dismissed with a partial disallowance of depreciation claimed.
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