2017 (4) TMI 1469 - AT - Income Tax

Disallowance u/s 14A read with Rule 8D - HELD THAT - As rightly held in assessee's own case 2016 (6) TMI 385 - GUJARAT HIGH COURT when there was interest free funds available with the assessee, there does not arise a question of disallowing expenditure under Section 14A Nature of expenditure - payment towards control system for heat setting and stretching machine - revenue or capital expenditure - HELD THAT - After giving a thoughtful consideration to the factual matrix qua the findings of the First Appellate Authority, in our considered opinion, by incurring the impugned expenditure no new asset has come into existence. Therefore, there is no error or infirmity in the findings of the ld. CIT(A). This ground is accordingly dismissed. Addition on account of plastering, RCC work, fencing, flush system, etc - allowable revenue expenditure - HELD THAT - Bearing in mind the ratio of the decision of the Apex Court in the case of Saravana Spinning Mills P. Ltd. 2007 (8) TMI 16 - SUPREME COURT and coming back to the facts of the present case, it can be seen that by carrying out the repairs, the assessee did not bring into existence any new assets but was required to expend amount to preserve and maintain the asset already in existence. TDS u/s 194H - Addition u/s 40(a)(ia) - amount to various dealers as incentives - HELD THAT - The Hon ble Supreme Court in the case of Ahmedabad Stamp Vendors Association 2012 (9) TMI 298 - SC ORDER had held that the discount given to stamp vendors for purchasing stamps in bulk quantity was in nature of cash discount in transaction of sale, and, therefore, section 194H has no application to that transaction. - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D.
2. Disallowance of interest on investment in subsidiary companies under Section 36(1)(iii).
3. Treatment of certain expenditures as capital or revenue in nature.
4. Disallowance under Section 40(a)(ia) for non-deduction of TDS on payments.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:
The primary grievance of the assessee pertained to the disallowance of ?31,87,067 made by the Assessing Officer (A.O.) by invoking the provisions of Section 14A read with Rule 8D. The Tribunal noted that the Hon'ble Gujarat High Court in the assessee's own case for A.Y. 2006-07 held that Rule 8D is applicable from A.Y. 2008-09 and is not retrospective. Consequently, the Tribunal directed the A.O. to delete the disallowance. For A.Y. 2008-09, the Tribunal allowed a reasonable disallowance of ?20,000 for administrative expenses.

2. Disallowance of interest on investment in subsidiary companies under Section 36(1)(iii):
The Tribunal addressed the issue of disallowance of interest on investments made in subsidiary companies. The Hon'ble Gujarat High Court ruled that the investment in the subsidiary company was a legitimate business activity and not a loan in disguise. The High Court observed that the assessee had sufficient interest-free funds to make the investment, and the A.O. misdirected himself by considering the investment as a loan. Consequently, the Tribunal directed the deletion of the disallowance for A.Y. 2007-08, 2008-09, and 2009-10.

3. Treatment of certain expenditures as capital or revenue in nature:
Several expenditures were contested regarding their classification as capital or revenue in nature. For A.Y. 2008-09, the Tribunal upheld the CIT(A)'s decision that expenditures on upgrading the control system and certain building repairs were revenue in nature, as they did not result in new assets but were necessary for maintaining existing assets. The Tribunal also directed the deletion of ?3,71,819, which was initially treated as capital expenditure by the A.O.

4. Disallowance under Section 40(a)(ia) for non-deduction of TDS on payments:
The Tribunal addressed the disallowance of ?2.38 crores and ?2.78 crores for A.Y. 2008-09 and 2009-10, respectively, made by the A.O. under Section 40(a)(ia) for non-deduction of TDS on payments to dealers. The CIT(A) concluded that the payments were incentives and not commissions, thus not requiring TDS deduction. The Tribunal upheld this view, referencing the Hon'ble Gujarat High Court's decision in a similar case, which held that such incentives are not subject to TDS under Section 194H or 194C.

Conclusion:
The Tribunal's comprehensive analysis led to the following conclusions:
- The disallowance under Section 14A read with Rule 8D was restricted to ?20,000 for administrative expenses.
- The disallowance of interest on investments in subsidiary companies was deleted, affirming the legitimacy of the business activity.
- Certain expenditures were classified as revenue in nature, leading to the deletion of disallowed amounts.
- The disallowance under Section 40(a)(ia) for non-deduction of TDS on incentive payments was deleted, recognizing them as non-commission payments.

Result:
The appeals filed by the assessee were partly allowed, and the appeals filed by the revenue were dismissed. The cross-objection by the assessee was partly allowed.