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2014 (11) TMI 441 - AT - Income Tax15% adhoc disallowance out of the staff salaries Held that - Margadarsi Financiers has no other office except its office located in Hyderabad - for collection of deposits and repayments from all over the undivided state of AP, it had to depend upon the branches of the assessee company and some of the staff working - Though the assessee has contended that the role of assessee s staff is only limited to guiding the investors/depositors and forwarding their applications along with cheques & drafts to Margadarsi Financiers, but the entire deposits and repayments of Margadarsi Financiers is mobilized through staff of assessee company working in the branches of all over the state of AP - some of the staff working in different branches of assessee company are engaged in providing services to Margadarsi Financiers - the entire staff cost incurred by assessee cannot be for the purpose of asessee s business alone as it is proved beyond doubt that part of the staff are also rendering services to Margadarsi Financiers - a part of the expenditure towards salary paid to staff can be apportioned towards services rendered by the staff to Margadarsi Financiers - the entire expenditure claimed towards staff cost cannot be allowed. When there is nothing on record to show that entire staff in all branches are rendering services to Margadarsi Financiers adhoc disallowance of 15% out of total salary cost is not justified - the treatment given in the accounts of Margadarsi Financiers coupled with the statements recorded from Shri PVSR Das and Shri S. Adinarayana Rao makes it clear that the amount paid by Margadarsi Financiers to the accountants and branch managers of assessee are in the nature of reimbursement of actual cost incurred - as the employees cannot be said to be exclusively doing the work of assessee company but also rendering services to Margadarsi Financiers, 15% out of the salary paid to such staff or the amount equivalent to the expenditure reimbursed by Margadarsi Financiers towards cost of branch managers and branch accountants, whichever is higher, can be considered for disallowance towards services rendered by the staff of assessee company to Margadarsi Financiers - The AO must examine the facts and details relating to the staff engaged in providing services to Margadarsi Financiers and the reimbursement made by Margadarsi Financiers in respect of such staff by verifying the books of accounts of both the assessee company and Margadarsi Financiers and thereafter work out the disallowance accordingly for both the AYs i.e. 2006-07 and 2007-08 Decided partly in favour of assessee. STCL on sale of plant and machinery disallowed Held that - Assessee in an auction conducted by EXIM Bank had purchased land and building along with plant and machinery for a total consideration of ₹ 6,79,20,930 - As can be seen from the sale certificates issued by EXIM Bank, while the land and building has been sold for a price of ₹ 6,22,20,930, plant and machinery was sold for a consideration of ₹ 57,00,000 - so far as assessee is concerned it has purchased the plant and machinery for an amount of ₹ 57,00,000 - When the assessee has sold the said plant and machinery for a consideration of ₹ 10,84,170, there is a short term capital loss to assessee - Therefore, assessee is entitled to set off this capital loss against the short term capital gains from shares, hence, the disallowance of assessee s claim is not justified Decided in favour of assessee. Invocation of section 40(a)(ia) TDS not deducted on dividend paid to chit subscribers Held that - As decided in assessee s own case for the earlier assessment year, wherein the judgment delivered in BILAHARI INVESTMENTS P. LTD. Versus COMMISSIONER OF INCOME-TAX 2006 (6) TMI 59 - MADRAS HIGH COURT followed, wherein it was held that the dividend distributed by the assessee did not partake the character of interest and consequently, the assessee was not liable to deduct tax at source thus, the order of the CIT(A) is upheld in deleting the disallowance u/s 40(a)(ia) on account of dividend paid by the assessee to the chit subscribers for non-deduction of tax at source Decided against revenue. Deletion of disallowance u/a 14A r.w. Rule 8D Held that - AO was not correct in working out the disallowance by applying the provisions of Rule 8D, which is applicable from AY 2008-09, but, it cannot be denied that assessee must have incurred some amount of expenditure for earning the exempt income in assessee s own case the Tribunal has already held that it would be fair and reasonable to estimate the expenditure incurred by the assessee for earning of exempt dividend income at 5% of the exempt dividend income thus, the AO is directed to restrict the disallowance u/s 14A to 5% of the dividend earned Decided partly in favour of Revenue. Invocation of section 40(a)(ia) Non-deduction of tax u/s 194C Held that - The expenditures were incurred towards greeting cards, stationery, visiting cards, calendars, registers, etc. - it cannot be said that assessee has made the payment towards execution of any contract work - these transactions are in the nature of purchase and sale transactions - Though it may be a fact that the calendars, registers may be containing the name and logo of assessee but that by itself will not be a criteria to conclude that the transaction is in the nature of contract work - it is very much evident that the assessee in fact has purchased calendars, registers, etc. from the concerned parties on payment of sales tax/VAT which clearly demonstrate that it is purely a transaction of purchase and sale of commodities and not works contract - CIT(A) rightly held that there is no liability on assessee to deduct tax at source u/s 194C Decided against revenue.
Issues Involved:
1. Adhoc disallowance out of the staff salaries. 2. Disallowance of short-term capital loss on the sale of plant and machinery. 3. Deletion of addition made by AO by invoking section 40(a)(ia) on account of non-deduction of tax at source on dividend paid to chit subscribers. 4. Disallowance made by AO u/s 14A read with Rule 8D. 5. Deletion of addition of Rs. 2,32,28,557 made by AO by invoking the provisions of section 40(a)(ia) on account of non-deduction of tax in terms of section 194C of the Act. Issue-wise Detailed Analysis: 1. Adhoc Disallowance Out of the Staff Salaries: The first issue pertains to the 15% adhoc disallowance out of the staff salaries. The assessee, a limited company engaged in various businesses, had debited a significant amount towards staff costs. The AO observed that the staff also assisted in activities related to Margadarsi Financiers, a sister concern. Despite the assessee's argument that the time spent by the staff on these activities was negligible, the AO disallowed 15% of the staff cost, amounting to Rs. 4,16,06,586. The CIT(A) upheld this disallowance, stating that the arguments of the appellant were unsubstantiated and the disallowance was just and reasonable. The Tribunal, however, directed the AO to re-examine the facts and quantify the disallowance based on the actual reimbursement made by Margadarsi Financiers. 2. Disallowance of Short-term Capital Loss on Sale of Plant and Machinery: The second issue involves the disallowance of short-term capital loss on the sale of plant and machinery. The assessee purchased a factory with plant and machinery and later sold the machinery as scrap, claiming a short-term capital loss. The AO disallowed this claim, arguing that the machinery was of scrap value at the time of purchase. The CIT(A) sustained this disallowance. The Tribunal, however, allowed the assessee's claim, stating that the assessee had indeed purchased the plant and machinery for Rs. 57,00,000 and sold it for Rs. 10,84,170, thereby incurring a short-term capital loss. 3. Deletion of Addition Made by AO by Invoking Section 40(a)(ia) on Account of Non-deduction of Tax at Source on Dividend Paid to Chit Subscribers: The third issue is about the deletion of the addition made by the AO by invoking section 40(a)(ia) for non-deduction of tax at source on dividend paid to chit subscribers. The AO disallowed the expenditure claimed by the assessee, but the CIT(A) deleted this addition, stating that the dividend paid to subscribers is not in the nature of interest. The Tribunal upheld the CIT(A)'s decision, following the precedent set by the Hon'ble Andhra Pradesh High Court and the Hon'ble Supreme Court, which held that the dividend distributed by the assessee did not partake the character of interest. 4. Disallowance Made by AO u/s 14A Read with Rule 8D: The fourth issue pertains to the disallowance made by the AO u/s 14A read with Rule 8D. The AO disallowed Rs. 17,97,177, attributing it to the exempt income earned by the assessee. The CIT(A) deleted this addition, terming it as an adhoc disallowance without proper examination. The Tribunal, however, directed that a reasonable disallowance of 5% of the exempt dividend income be made, following the precedent set in the assessee's own case for the previous assessment year. 5. Deletion of Addition of Rs. 2,32,28,557 Made by AO by Invoking the Provisions of Section 40(a)(ia) on Account of Non-deduction of Tax in Terms of Section 194C of the Act: The fifth issue involves the deletion of the addition made by the AO for non-deduction of tax on certain expenditures. The AO treated these expenditures as works contracts subject to TDS under section 194C and disallowed the amount. The CIT(A) deleted the addition, stating that these were straightforward purchases and not works contracts. The Tribunal upheld the CIT(A)'s decision, noting that the transactions were indeed purchases and not works contracts, and thus not subject to TDS under section 194C. Conclusion: The assessee's appeals were partly allowed, and the revenue's appeals were also partly allowed. The Tribunal directed the AO to re-examine certain disallowances and upheld the CIT(A)'s decisions on other issues, providing a balanced resolution to the disputes.
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