2016 (8) TMI 1569 - AT - Income Tax

Exemption u/s 14A r.w.r. 8D - interest paid by the assessee on the borrowed funds - HELD THAT - If there is any direct nexus with the borrowed funds then the interest paid by the assessee on the borrowed funds has to be disallowed in view of Rule 8D(2)(i) of the Act. If the expenditure/interest is not relatable to the income which was exempted from taxation, then disallowance has to be computed under sub-clause(2)(ii) of Rule 8D. It is also necessary to examine the details of the investment made from the first day of the financial year and the last day of the financial year as found in the Balance Sheet for the purpose of computing the aggregate expenditure under third limb of Rule 8D(2). These exercises were not done either by the Assessing Officer or the CIT(A). The investment made in Shriram Transport Finance Company Ltd and Shriram City Union Finance Ltd. was claimed to be investment in the subsidiary companies. It is not known how Shriram Transport Finance Company Ltd and Shriram City Union Finance Ltd. are sister concerns of the assessee-company. Merely because some of the Directors are common in both the companies, that cannot be a reason to hold that the companies in which the assessee invested are subsidiary/holding companies. Tribunal is of the considered opinion that the shareholding pattern of the assessee-company and the companies in which investments were made has to be examined to decide whether the investment was made by the assessee in the subsidiary/holding companies. These facts were not apparently examined by the lower authorities. Moreover, the availability of liquid funds with the assessee on the date of the investment also needs to be examined. Since these factual aspects are not examined by any of the lower authorities, this Tribunal is of the considered opinion that the matter needs to be reexamined. Accordingly, the orders of the lower authorities are set aside and the entire disallowance made by the Assessing Officer u/s 14A r.w. Rule 8D is remitted back to the file of the Assessing Officer. TDS u/s 194C - Addition u/s 40(a)(ia) - Proof of recipient/deductee disclosing the receipt in the return of income and paid taxes thereon - HELD THAT - Under the scheme of the Income-tax Act, 1961, the assessee has to deduct tax only at the time of payment or giving credit, therefore, the amount which was already paid or given credit and remains payable is also subjected to disallowance u/s 40(a)(ia) of the Act. Therefore, we are unable to uphold the order of the CIT(A) on this issue. Accordingly, the order of the CIT(A) is set aside and that of the Assessing Officer is restored. Now the ld. Counsel submits that the recipient/deductee admitted the income and paid the taxes. This fact is not verified by any of the lower authorities. This Tribunal is of the considered opinion that if the recipient/deductee disclosed the receipt in the return of income and paid taxes, there is no need for further disallowance. However, the matter needs to be verified by the Assessing Officer. Accordingly, the orders of the lower authorities are set aside and the issue of disallowance u/s 40(a)(ia) of the Act is remitted back to the file of the Assessing Officer. The Assessing Officer shall verify whether the deductee/recipient of the amounts disclosed the same in their return of income and paid the taxes. The Assessing Officer thereafter decide the same in accordance with law after giving a reasonable opportunity to the assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D.
2. Addition to book profit under Section 115JB.
3. Disallowance under Section 40(a)(ia) for non-deduction of TDS.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:
The assessee received ?17,10,42,083 as dividend income and disallowed ?8,000 as expenditure for earning the exempted income. The Assessing Officer (AO) found this disallowance insufficient and computed it under Section 14A read with Rule 8D, relying on the Delhi High Court's judgment in Maxopp Investment Ltd vs CIT. The assessee argued that the investments were made to acquire controlling interest in subsidiary companies, thus Section 14A should not apply. The Departmental Representative (DR) countered that the AO had not verified whether the investments were solely in subsidiary companies nor if the assessee acquired controlling interest. The Tribunal noted the lack of examination of the shareholding pattern and the availability of liquid funds on the investment date. Consequently, the Tribunal set aside the lower authorities' orders and remitted the matter back to the AO for fresh examination and decision in accordance with law.

2. Addition to book profit under Section 115JB:
The Revenue appealed against the disallowance of ?34,28,05,564 under Section 14A being added to the book profit for minimum alternate tax (MAT) computation under Section 115JB. The Tribunal observed that since the disallowance under Section 14A was to be reconsidered, the addition to the book profit also needed reassessment. The Tribunal remitted the issue back to the AO for fresh examination and decision based on the material provided by the assessee.

3. Disallowance under Section 40(a)(ia) for non-deduction of TDS:
The Revenue appealed against the CIT(A)'s decision to delete the addition of ?33 crores under Section 40(a)(ia) for non-deduction of TDS. The AO had disallowed the payment made for acquiring rights to services/information, considering it a contractual service requiring TDS under Section 194C. The CIT(A) relied on the Tribunal's earlier decision in the assessee's own case and the Vishakapatnam Special Bench's decision in Merilyn Shipping and Transports vs Addl. CIT, which held that disallowance under Section 40(a)(ia) applies only to amounts payable as of the financial year's end. The DR argued that this interpretation was incorrect, citing Gujarat and Calcutta High Courts' judgments that disallowance applies to both paid and payable amounts. The Tribunal agreed with the DR, preferring the Gujarat and Calcutta High Courts' reasoning over the Allahabad High Court's judgment in Vector Shipping Services Pvt. Ltd. The Tribunal found that the assessee's failure to deduct TDS warranted disallowance under Section 40(a)(ia). However, if the recipient had disclosed the income and paid taxes, no disallowance was needed. The Tribunal remitted the issue back to the AO to verify the recipient's tax compliance and decide accordingly.

Conclusion:
The Tribunal allowed the appeals for statistical purposes, remitting the issues back to the AO for fresh examination and decision in accordance with law, after giving the assessee a reasonable opportunity to present their case. The order was pronounced in the open court on 5th August 2016, at Chennai.