2019 (7) TMI 1590 - AT - Income Tax

Addition u/s 14A r.w.r. 8D - no investment has been made during the year under investment and only dividend has been earned on the reinvestment of dividend earned in the earlier years - HELD THAT - There is not an iota of evidence on record to work out if the assessee has incurred any direct or indirect expenses in earning the dividend. When dividend has been undisputedly earned on the basis of earlier investment made in the earlier years in which the assessee has given standing instructions to reinvest the dividend earned, no expenses directly or indirectly can be attributed to have been incurred by the assessee. No doubt, at the time of making initial investment, assessee must have incurred expenses but when it is undisputed fact that no investment has been made during the year under investment and only dividend has been earned on the reinvestment of dividend earned in the earlier years and there was no intervention of human labour and mind, section 14A is not attracted - AO without bringing on record any evidence as to how and under what circumstances the expenses have been incurred in the given circumstances applied Rule 8D mechanically which is not sustainable in the eyes of law. The ld. CIT (A) has also erred in confirming the addition made u/s 14A - So, disallowance made u/s 14A is ordered to be deleted. - Decided in favour of assessee TDS u/s 195 - assessee has made foreign remittance to AMR Research Inc. without deducting the tax- HELD THAT - Undisputedly, assessee has not deducted the tax at source by relying upon the decision rendered by the Tribunal in case of M/s. Wipro Ltd. vs. ITO 2004 (12) TMI 304 - ITAT BANGALORE-B - It is also not in dispute that the aforesaid case of M/s. Wipro Ltd. decided by the Tribunal has been overruled by Hon ble Karnataka High Court 2010 (8) TMI 1053 - KARNATAKA HIGH COURT wherein it is held that any payment made by the assessee to a non-resident in order to obtain licence to use the database maintained by it is to be treated as royalty. When the case of Wipro Ltd. is undisputedly applicable to the facts and circumstances of the case as contended by the ld. AR for the assessee, there cannot be a second view that the assessee was required to deduct the tax at source while making the payment to AMR Research Inc. So, AO has rightly disallowed the amount u/s 40(a)(ia) of the Act and is required to be added to the income of the assessee. - Decided against assessee.

Summary

Issues:
1. Disallowance under section 14A of the Income Tax Act, 1961.
2. Disallowance under section 40(a)(ia) of the Income Tax Act, 1961.
3. Penalty proceedings under section 271(1)(c) of the Income Tax Act, 1961.

Issue 1: Disallowance under section 14A of the Income Tax Act, 1961:
The assessee, engaged in outsourcing services, claimed dividend income of ?1,97,979. The Assessing Officer (AO) disallowed ?20,857 under section 14A of the Act, alleging expenses incurred in earning dividend income. The Tribunal found no evidence of direct or indirect expenses incurred by the assessee in earning the dividend. As the dividend was reinvested from earlier investments without new investments in the assessment year, the Tribunal held that section 14A was not applicable. The Tribunal concluded that the AO applied Rule 8D mechanically without evidence, leading to the deletion of the disallowance under section 14A.

Issue 2: Disallowance under section 40(a)(ia) of the Income Tax Act, 1961:
The AO disallowed ?5,78,078 under section 40(a)(ia) as the assessee failed to deduct tax under section 195 on payments to AMR Research Inc. The assessee argued that based on a Tribunal decision, tax deduction was not required. However, the Tribunal noted that the Tribunal decision was overruled by the Karnataka High Court, establishing the need for tax deduction. As the payment to AMR Research Inc. fell under royalty, the AO's disallowance was upheld, and the amount was required to be added to the assessee's income.

Issue 3: Penalty proceedings under section 271(1)(c) of the Income Tax Act, 1961:
The Tribunal did not provide a detailed analysis of the penalty proceedings under section 271(1)(c) in the judgment. It was mentioned that the issue was premature and did not require specific findings.

In conclusion, the Tribunal partially allowed the appeal by ruling in favor of the assessee on the disallowance under section 14A but against the assessee on the disallowance under section 40(a)(ia). The judgment did not provide detailed analysis on the penalty proceedings under section 271(1)(c).