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2015 (11) TMI 858 - AT - Income TaxDisallowance out of fees and legal expenses - CIT(A) deleted the addition - Held that - We find that the genuineness of the payment is not in dispute. The Assessing Officer after observing about the loss incurred by the assessee company has brought no material on record after making investigation to show that the assessee has not received the services for which payments were made by the assessee. Rather on the other hand the allowance of deduction at the rate of 50% shows that the Assessing Officer also agreed that services of the staff of the payee company were utilized by the assessee company for its business purpose. No material was brought on record to show that the consideration for services received by the assessee was so excessive as to warrant any disallowance out of the same. It is also observed that the amount of consideration paid was as per Memorandum of Understanding entered into by the assessee with the payee company. In view of the above facts and circumstances we do not find any good reason to interfere with the order of the Ld.CIT(A) - Decided against revenue. Disallowance of employees contribution to Provident Fund u/s.36(1)(via) - CIT(A) deleted the addition - Held that - This issue has been decided against the assessee in A.Y. 2007-08 by co-ordinate Bench following the judgment of Hon ble Gujarat High Court in case of CIT vs. Gujarat State Road Transport Corporation 2014 (1) TMI 502 - GUJARAT HIGH COURT to held that with respect to the sum received by the assessee firm from any of his employees to which provisions of sub-clause (x) of clause (24) of section (2) applies the assessee shall be entitled to deduction in computing the income referred to in section 28 with respect to such sum credited by the assessee to the employees account in the relevant fund or funds on or before the due date mentioned in explanation to section 36(1)(va) - Decided against assessee. Disallowance u/s.14A read with Rule 8D - Held that - firstly the AO is required to find out the nexus between the expenditure incurred and exempt income. If the expenditure is not related to the exempt income in our considered view the AO is not empowered to make disallowance u/s.14A of the Act by applying Rule 8D of the Income Tax Rules. Thus first requirement of law is that the expenditure should be related to the exempt income. In case where the assessee makes a claim that x amount is related to the exempt income or otherwise no expenditure is related to the exempt income in that event the AO has to satisfy himself about the correctness of the claim having regard to the accounts of the assessee before proceeding to apply Rule 8 D of the Income Tax Rules 1962 for computing disallowance. Hence another requirement of law is that the AO has to satisfy himself about the correctness of the claim of the assessee having regard to the accounts of the assessee. The provision of section 14A mandates the AO to examine the accounts of the assessee before proceeding to apply Rule 8D of the IT Rules. In the present case the AO has made disallowance on account of interest expenditure and administrative expenses. Since on both the counts the AO has failed to record his finding we are of the considered view that disallowance as made by the AO cannot be sustained.- Decided against revenue.
Issues Involved:
1. Deletion of addition made on account of disallowance out of fees and legal expenses. 2. Deletion of addition on account of disallowance of employees' contribution to Provident Fund. 3. Confirmation of disallowance made under Section 14A read with Rule 8D. Detailed Analysis: 1. Deletion of Addition Made on Account of Disallowance out of Fees and Legal Expenses: The Revenue contested the deletion of Rs. 12,00,000 disallowed by the Assessing Officer (AO) for fees and legal expenses. The AO argued that payments to a related concern were excessive and lacked detailed justification. The CIT(A) deleted the disallowance, noting that similar disallowance in the previous year was also deleted, and the Revenue did not dispute this fact. The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO did not provide evidence to show the payments were excessive or unjustified. 2. Deletion of Addition on Account of Disallowance of Employees' Contribution to Provident Fund: The Revenue challenged the deletion of Rs. 2,23,715 disallowed by the AO for late payment of employees' contribution to Provident Fund under Section 36(1)(va). The CIT(A) deleted this disallowance, but the Tribunal reversed this decision, citing the Gujarat High Court judgment in the case of CIT vs. Gujarat State Road Transport Corporation, which mandates that contributions must be credited to the employees' account on or before the due date. 3. Confirmation of Disallowance Made Under Section 14A Read with Rule 8D: The assessee contested the confirmation of disallowance of Rs. 7,61,908 under Section 14A read with Rule 8D. The CIT(A) had confirmed the disallowance based on the decision in Godrej & Boyce Manufacturing Co. Ltd. vs. DCIT. The assessee argued that the AO did not establish a nexus between the expenditure and the exempt income and failed to record proper satisfaction about the correctness of the claim. The Tribunal agreed with the assessee, noting that the AO must first determine the expenditure related to exempt income and record satisfaction about the claim's correctness before applying Rule 8D. The Tribunal directed the AO to delete the disallowance. Conclusion: - The Tribunal upheld the deletion of Rs. 12,00,000 disallowed for fees and legal expenses, confirming that the AO did not justify the disallowance. - The Tribunal reversed the CIT(A)'s deletion of Rs. 2,23,715 disallowed for late Provident Fund contributions, aligning with the Gujarat High Court's ruling. - The Tribunal directed the deletion of Rs. 7,61,908 disallowed under Section 14A read with Rule 8D, emphasizing the need for the AO to establish a nexus and record satisfaction about the claim's correctness. Combined Result: The appeal of the Revenue was partly allowed, while the cross-objection filed by the assessee was allowed.
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