2014 (12) TMI 55 - AT - Income Tax

Expenses towards exempted dividend disallowed u/s 14A r.w. Rule 8D Held that - The assessee has earned dividend income of ₹ 70,14,015/- from mutual funds held by it and claimed the income as exempt u/s.10(34) of the I.T. Act - the AO applying the provisions u/s.14A r.w. Rule 8D disallowed an amount which has been upheld by the CIT(A) - no borrowed fund has been utilised towards investment in mutual funds, the income of which has been claimed as exempt relying upon M/s. Ferrocare Machines Pvt. Ltd. Vs. JCIT 2014 (12) TMI 27 - ITAT PUNE - it is imperative that the AO can invoke Rule 8D only when he records satisfaction in regard to the correctness of the claim of the assessee, having regard to the accounts of the assessee - The condition precedent for the AO entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the AO must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure - it is all the more necessary that AO has to examine the accounts of assessee first and then if he is not satisfied with the correctness of the claim, only he can invoke Rule 8D - No such examination was made or satisfaction was recorded by AO - the AO has not considered the claim of the assessee at all and he has straightway embarked upon computing disallowance under Rule 8D - Disallowance u/s 14A required finding of incurring of expenditure and where it was found that for earning exempted income no expenditure had been incurred, disallowance u/s 14A could not stand. Since assessee has not directly spent any expenditure for earning the exempt income and also since AO has not recorded any satisfaction with reference to the accounts of assessee or claim that no expenditure was incurred and also keeping in mind the fact that assessee has offered most of the income under the Tonnage Tax Scheme and balance of the expenditure was for earning taxable non-tonnage tax income, invocation of Rule 8D for disallowing the expenditure u/s 14A on estimation/ presumptive basis does not arise thus, the order of the CIT(A) is set aside and the AO is directed to delete the disallowance Decided in favour of assessee. Professional fees disallowed u/s 40(a)(ia) TDS not deposited within time Held that - The assessee has paid the TDS on 07-04-2008, a fact brought on record by the AO in Commissioner of Income Tax XIII Versus Naresh Kumar, M/s Talbros (P) Ltd. 2013 (9) TMI 275 - DELHI HIGH COURT - section 40(a)(ia) to extent of 2010 amendment was procedural as same did not impose a new tax but wanted to ensure collection of TDS and amendments made had streamlined and corrected anomalies noticed in said procedure by allowing deduction in year when expenditure was incurred provided TDS was paid before due date for filing of return - section 40(a)(ia) should be interpreted liberally and equitable keeping in mind object and purpose behind same, so that assessee should not suffer unintended and deleterious consequences - amendment made in section 40(a)(ia) by Finance Act, 2010 giving relaxation applies retrospectively to earlier years the order of the CIT(A) is upheld - Decided in favour of assessee. Contract payments disallowed u/s 40(a)(ia) TDS not deposited within time on bills approved and booked Held that - The assessee has deposited the TDS on 07-04-2008, a fact brought on record by the AO - Since the assessee had deposited the TDS in the month of April 2008, therefore, no disallowance u/s.40(a)(ia) is called for thus, the order of the CIT(A) is set aside decided in favour of assessee.

Issues Involved:
1. Delay in filing the appeal.
2. Disallowance under Rule 8D read with Section 14A of the Income Tax Act.
3. Disallowance of professional fees under Section 40(a)(ia) of the Income Tax Act.
4. Disallowance of contract payments under Section 40(a)(ia) of the Income Tax Act.

Detailed Analysis:

1. Delay in Filing the Appeal:
The appeal was filed with a delay of 309 days. The assessee's counsel explained the reasons for the delay through a condonation petition. After hearing both sides and considering the contents of the condonation petition, the delay in filing the appeal was condoned.

2. Disallowance under Rule 8D read with Section 14A of the Income Tax Act:
The assessee company, engaged in trading programmable logic controllers, earned exempt dividend income of Rs. 70,41,015 and added back Rs. 3,23,660 as related expenditure in its return. The Assessing Officer (AO) applied Rule 8D, disallowing Rs. 3,23,660, which was upheld by the CIT(A).

The CIT(A) noted that the assessee's claim of negligible administrative expenses was not credible, and Rule 8D was mandatory for the relevant assessment year. The Tribunal, however, found that the AO did not record any satisfaction regarding the correctness of the assessee's accounts nor rejected the claim that no expenditure was incurred. Citing similar cases (e.g., M/s. Ferrocare Machines Pvt. Ltd.), the Tribunal concluded that without such satisfaction, Rule 8D could not be invoked. Consequently, the Tribunal set aside the CIT(A)'s order and directed the AO to delete the disallowance.

3. Disallowance of Professional Fees under Section 40(a)(ia):
The AO disallowed Rs. 2,65,270 of professional fees, arguing that TDS was not deposited within time for bills dated prior to March 2008 but approved and booked in March 2008. The CIT(A) upheld this disallowance. The Tribunal, referencing the Delhi High Court decision in CIT Vs. Rajinder Kumar, stated that TDS deposited before the due date of filing the return under Section 139(1) should not attract disallowance under Section 40(a)(ia). Since the assessee deposited TDS in April 2008, the Tribunal held that the provisions of Section 40(a)(ia) were not applicable and directed the AO to delete the disallowance.

4. Disallowance of Contract Payments under Section 40(a)(ia):
The AO disallowed Rs. 15,71,667 for various expenses, arguing that TDS was not deposited within the stipulated time for invoices dated prior to March 2008 but approved and booked in March 2008. The CIT(A) upheld this disallowance. The Tribunal, noting that TDS was deposited in April 2008, applied the same reasoning as in the professional fees issue. It concluded that no disallowance under Section 40(a)(ia) was warranted and directed the AO to delete the disallowance.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, setting aside the disallowances made under Rule 8D read with Section 14A and Section 40(a)(ia) of the Income Tax Act. The decisions were based on the lack of AO's recorded satisfaction and the timely deposit of TDS before the due date for filing returns.

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