2012 (9) TMI 1149 - AT - Income Tax

Summary

Issues involved:
1. Invocation of sec. 14A of the Income Tax Act, 1961 for disallowance of interest expenditure.
2. Disallowance under sec. 40(a)(ia) of the Act for non-deduction of TDS on export commission to foreign agents.

Issue 1: Invocation of sec. 14A for disallowance of interest expenditure:
The assessee, a manufacturer of Friction materials, filed a return of income for the assessment year 2008-09. The Assessing Officer observed investments and secured loans in the company's financials. Despite no dividend income, interest expenditure was disallowed under sec. 14A read with Rule 8D. The CIT(A) upheld this decision. The Tribunal found that the Assessing Officer did not consider evidence presented by the assessee regarding borrowings not used for investments. The matter was remitted back to the Assessing Officer for a fresh decision.

Issue 2: Disallowance under sec. 40(a)(ia) for non-deduction of TDS:
The assessee paid &8377; 32.93 lakhs as export commission to foreign agents without deducting TDS. The Assessing Officer disallowed this amount under sec. 40(a)(ia) citing non-compliance with sec. 195 provisions. The CIT(A) affirmed this decision. The Tribunal noted that the Assessing Officer failed to establish a business connection requiring TDS deduction. Citing a Delhi High Court decision, it was held that no TDS was necessary in the absence of a business connection. Referring to a Madras Tribunal decision, it was concluded that concurrence from the Assessing Officer under sec. 195(2) was not required when no chargeable income was present. Consequently, the disallowance under sec. 40(a)(ia) was set aside.

Conclusion:
The Tribunal partially allowed the appeal for statistical purposes, remitting the first issue back to the Assessing Officer for reconsideration and ruling in favor of the assessee on the second issue based on the lack of a business connection and the non-necessity of TDS deduction in the given circumstances.