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2013 (5) TMI 730 - AT - Income TaxDisallowance u/s 14A r.w.r. 8D - CIT(A) deleted the disallowance - Held that - As per Godrej Boyce case (2010 (8) TMI 77 - BOMBAY HIGH COURT) Rule 8D of the Rules is applicable only prospectively with effect from assessment year 2008-09 and it is not applicable to assessment year 2007-08, i.e., the year under consideration here and CIT(A) as seen, has taken one half percent of the value of the total average assets of the assessee as the expenses attributable to earning the dividend income. This was also the basis of the determination of the apportionment of expenses for assessment year 2006-07, as arrived at by the AO. The disallowance restricted by CIT(A) from Rs. 73,96,192/-, as made by the AO, to Rs. 55,40,562/-, as such, is found to be reasonable, calling for no interference. The assessee is also not in appeal against this disallowance. The Department has not been able to show as to how the aforesaid basis taken by the CIT(A) for determining the apportionment of expenses is not reasonable. More-over, the assessee s contention that the AO had wrongly taken the average cost of total assets resulting in excess disallowance has also not been successfully refuted by the Department. Against revenue. Market development expenses - CIT(A) deleted the disallowance - Held that - None of these payments was made by the assessee to CRMI as no Agreement between the assessee and CRMI was in existence. Moreover, a similar claim of Market Development expenses had been made for the assessment year 2006-07. The same had been allowed. It has not been shown that there has been any change in the facts for the year under consideration. CIT(A) has duly taken into consideration all these facts while rightly deleting the addition made. Against revenue. Consultancy charges paid to Arman Auto Group - failure to deduct TDS - CIT(A) deleted the disallowance - Held that - AO merely rejected the explanation offered by the assessee, without recording any finding as to why it was being so done. While deleting the addition, CIT(A) has correctly observed that it had not been pointed out by the AO as to which clause of section 9 was applicable to the assessee and as to why TDS was required to be made on the payment. There has been no contravention of the assessee s stand to the effect that the services were rendered outside India and that being so, no income either accrued or was received or could be deemed to have accrued or been received in India. As such, the TDS was not deductible on the payment made and the disallowance of the expenditure was not justified. No error there-with, the CIT(A) s conclusion on this issue too - Against revenue. Difference in the rate of interest on loan to the group company - CIT(A) deleted the disallowance - Held that - The loan given was the old loan outstanding from 2003-04. The loan taken , on the other hand, was taken during the year under consideration, F.Y. 2006-07. As such, the AO did not prove any nexus between 7% interest bearing loan received and the 6% interest bearing loan given by the assessee company. It has also not been shown that for giving the loan, any loan was taken by the assessee Company. Therefore, finding no merit therein - Against revenue. Recruitment and training expenses - CIT(A) deleted the disallowance - Held that - It remains undisputed that it is the business requirement of the assessee Company to train the staff recruited for voice in UK and US accents. This is necessary for operating Call Centre and BPO Services, it is the business of the assessee Company. As such, the expenditure was an expenditure incurred wholly and exclusively for the purpose of assessee s business. That being so, the expenditure incurred cannot be said to be a capital expenditure. See Shriram Piston & Rings Ltd. 2013 (5) TMI 729 - ITAT DELHI . Against revenue. Addition on account of provision - CIT(A) deleted the disallowance - Held that - It is seen that the assessee is following the Mercantile System of Accounting, in which, the expenditure items, for which, the legal liability has been incurred, are immediately debited even before the amounts are actually disbursed, as also held in Morvi Industries Ltd. v. CIT (1971 (10) TMI 5 - SUPREME Court). The payment to Palam Court Maintenance Agency was a monthly payment after TDS, for the maintenance requirements of the assessee, including electricity. The provision in this regard was made in accordance with the Settlement Statement between the assessee and the Agency, the details whereof were duly filed. The payment was, in fact, for the services rendered by the Agency for the assessee. Undisputedly, the payment was made in the next year. The provision cannot be said to be an unascertained liability. The same goes for the AMC charges as well as the salary provision. See Triveni Engg case 2010 (11) TMI 90 - DELHI HIGH COURT Payment made to Palm Court Maintenance Ltd. - disallowance was made u/s 40 (a)(ia) - CIT(A) deleted the disallowance - Held that - The amount as stated, a Balance Sheet item. It has not been debited to the Profit and Loss Account. The payment, in fact, represented charges on account of monthly electricity, generator and building maintenance and not rent of the building, as wrongly concluded by the AO. It is available from Schedule 12 to the assessee s Balance Sheet that rent of Rs. 2.54 crores had separately been paid by the assessee. The electricity expenses and repair and maintenance expenses have also been mentioned in Schedule 12 of the Balance Sheet, under administrative and other operating expenses. Hence, once the amount paid did not represent rent, the AO obviously erred in concluding that TDS had to be made thereon @ 22.2%. The assessee, on the other hand, had correctly made TDS @2% on the payment. Against revenue.
Issues Involved:
1. Deletion of disallowance u/s 14A read with Rule 8D. 2. Deletion of disallowance on account of market development expenses. 3. Deletion of disallowance on account of consultancy charges for failure to deduct TDS. 4. Deletion of disallowance on account of difference in rate of interest on loan to group company. 5. Deletion of disallowance on account of recruitment and training expenses. 6. Deletion of disallowance on account of provision. 7. Deletion of disallowance on account of payment made to Palm Court Maintenance Ltd. Issue-wise Detailed Analysis: 1. Deletion of Disallowance u/s 14A read with Rule 8D: The AO disallowed Rs. 73,96,192/- under section 14A read with Rule 8D, which was contested by the assessee stating that Rule 8D is applicable only from AY 2008-09, as per the "Godrej & Boyce v. DCIT" case. The CIT(A) granted relief of Rs. 55,40,562/- by considering only 0.5% of the average value of total assets as expenses attributable to earning dividend income, which was accepted by the assessee in the previous year. The Tribunal upheld the CIT(A)'s decision, noting that the AO did not correctly apply Rule 8D and did not refute the assessee's contention regarding the average cost of total assets. 2. Deletion of Disallowance on Account of Market Development Expenses: The AO treated the market development expenses as capital expenditure, allowing only 25% as depreciation. The CIT(A) deleted the addition, noting that the expenses were revenue in nature and related to the business activities of the assessee, such as trade fair expenses, franchisee expenses, and service charges. The Tribunal upheld the CIT(A)'s decision, stating that the expenses were necessary for the business and had been allowed in the previous year without any change in facts. 3. Deletion of Disallowance on Account of Consultancy Charges for Failure to Deduct TDS: The AO disallowed Rs. 6,88,950/- paid to Arman Auto Group for consultancy services, citing failure to deduct TDS. The CIT(A) deleted the disallowance, noting that the services were rendered outside India and no income accrued or was received in India, thus no TDS was deductible. The Tribunal upheld the CIT(A)'s decision, stating that the AO did not provide any reason for rejecting the assessee's explanation. 4. Deletion of Disallowance on Account of Difference in Rate of Interest on Loan to Group Company: The AO added Rs. 93,40,408/- due to a 1% difference in interest rates on loans given and taken by the assessee. The CIT(A) deleted the addition, noting that there was no nexus between the loans and the AO did not provide any observation on the assessee's submission. The Tribunal upheld the CIT(A)'s decision, noting the loans were from different financial years and no nexus was proven. 5. Deletion of Disallowance on Account of Recruitment and Training Expenses: The AO disallowed Rs. 77,15,000/- as capital expenditure, stating that the training provided was of an enduring nature. The CIT(A) deleted the disallowance, noting that the training was necessary for the business operations and similar expenses were allowed in the previous year. The Tribunal upheld the CIT(A)'s decision, stating that the expenses were incurred wholly and exclusively for business purposes. 6. Deletion of Disallowance on Account of Provision: The AO disallowed Rs. 2,51,96,577/- on account of provisions for salary, electricity, and AMC charges. The CIT(A) deleted the disallowance, noting that the provisions were for ascertained liabilities and were necessary under the mercantile system of accounting. The Tribunal upheld the CIT(A)'s decision, noting that the provisions were for liabilities incurred during the year and were paid in the next year. 7. Deletion of Disallowance on Account of Payment Made to Palm Court Maintenance Ltd.: The AO disallowed Rs. 1,79,33,349/- paid to Palm Court Maintenance Ltd., treating it as rent and applying a higher TDS rate. The CIT(A) deleted the disallowance, noting that the payment was for maintenance services and not rent, and the amount was not debited to the Profit and Loss Account. The Tribunal upheld the CIT(A)'s decision, noting that the payment was correctly subjected to TDS at 2%. Conclusion: Both appeals filed by the Department for the assessment year 2007-08 were dismissed, upholding the CIT(A)'s decisions on all grounds. The Tribunal found no merit in the Department's contentions and affirmed the relief granted to the assessee.
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