2013 (9) TMI 303 - AT - Income Tax

Disallowance u/s 40(a)(ia) - Payment to consignment agents - TDS not deduction from agent's commission - CIT upheld disallowance - Held that - The commission is said to be payment of commission if it is evident that it is being paid for service of a person provided in respect of sale of product of the assessee - The concerned parties have also furnished the sale Patti along with claim of the expenses on sale of consignment goods the claim of expenses given detail the expenses pertaining to the monthly selling expenses loading and unloading dealing with expenses. These expenses have been adjusted and accounted for in the account of respective parties - impugned payment is reimbursement of the expenses and are not the commission as the concerned party did not give any services in respect of the payment of expenditures made. Providing services is essentially requirement of the nature of transaction of a commission. Since this condition is not satisfied in the case under consideration therefore it is a case of reimbursement of the expenses incurred by the concerned party on behalf of the assessee - Since this is not a commission payment, therefore, there is no question of deducting tax at source under Section 194H of the Act. Since the payment is not subject to tax deducted at source, therefore, provisions of Section 40(a)(ia) of the Act is not applicable - Following decision of M/s. Pee Cee Cosma Sope Limited vs. JCIT 2013 (8) TMI 380 - ITAT AGRA. - Decided in favour of assessee. Disallowance u/s 36(1)(iii)/14A - interest expenditure - Use of interest bearing borrowed funds in the investment of shares - Held that - The deduction contemplated by the section is in relation to the expenditure which could properly be regarded as necessary for the purpose of the business or profession. Expenditure incurred on account of commercial expediency for the purpose of business would be allowable under this provision. The expenditure to be allowed must have a nexus with the business of the Assessee. If the expenditure incurred is ostensibly incurred for the business, but if in reality is not for the purpose of business then such expenditure is not allowable - assessee has right to replace his own capital with borrowed funds which were already used for the purpose of business in acquiring assets and other - for the purpose of ascertaining profit and gains, the normal principles of commercial accounting should be applied, so long as they do not conflict with any express statutory provisions - The onus is on the assessee to furnish the relevant material regarding replacement of borrowed funds by own capital and interest free funds available with the assessee - Following decision of M/s. Pee Cee Soap Chemicals (P) Ltd. Versus Addl. Commissioner of Income Tax 2013 (8) TMI 379 - ITAT AGRA - Decided in favour of assessee.

Summary

Issues Involved:

1. Disallowance under Section 40(a)(ia) of the Income Tax Act.
2. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules.

Issue-wise Analysis:

1. Disallowance under Section 40(a)(ia) of the Income Tax Act:

The primary issue in the assessee's appeal (ITA No.124/Agra/2013) was the addition of Rs.21,33,377/- made by the Assessing Officer (A.O.) under Section 40(a)(ia) of the Income Tax Act, 1961. The A.O. observed that the assessee had made payments to consignment agents over and above their commission, which he treated as part of the commission. Since the assessee did not deduct tax at source on these payments, the A.O. disallowed the expenses under Section 40(a)(ia). The CIT(A) confirmed the A.O.'s action.

The assessee argued that these payments were reimbursements of expenses incurred by the consignment agents on behalf of the assessee and not commission payments. The assessee relied on the ITAT's decision in the case of M/s. Pee Cee Cosma Sope Limited vs. JCIT, where a similar issue was decided in favor of the assessee. The ITAT in that case held that the payments were reimbursements and not commission, thus not subject to tax deduction at source under Section 194H.

Upon reviewing the facts and the ITAT's decision in the Pee Cee Cosma Sope Limited case, the Tribunal found that the payments in question were indeed reimbursements of expenses and not commission. Consequently, the provisions of Section 40(a)(ia) were not applicable. The Tribunal allowed the assessee's appeal and deleted the addition of Rs.21,33,377/-.

2. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules:

In the Revenue's appeal (ITA No.152/Agra/2013), the issue was the deletion of an addition of Rs.12,39,836/- made by the A.O. under Section 14A of the Income Tax Act, read with Rule 8D of the Income Tax Rules. The A.O. disallowed the interest expense on the grounds that the assessee had invested in shares, which yielded tax-free income, and thus, the interest expense was not allowable.

The CIT(A) deleted the addition, following the ITAT's decision in the assessee's own case for the A.Y. 2007-08, where it was held that no disallowance was required on the presumption that borrowed funds were diverted to investments in shares. The CIT(A) noted that the assessee had sufficient own funds to make the investments in shares.

The Tribunal upheld the CIT(A)'s decision, noting that the issue was covered by its earlier decision in the assessee's case for A.Y. 2006-07. The Tribunal observed that the assessee had sufficient own funds (share capital and reserves) to cover the investments in shares, and therefore, no disallowance was warranted under Section 14A. The Tribunal dismissed the Revenue's appeal.

Conclusion:

The Tribunal allowed the assessee's appeal (ITA No.124/Agra/2013) by deleting the addition of Rs.21,33,377/- made under Section 40(a)(ia) and dismissed the Revenue's appeal (ITA No.152/Agra/2013) by upholding the deletion of Rs.12,39,836/- made under Section 14A.