2017 (5) TMI 1784 - AT - Income Tax

Disallowance u/s 14A r.w.r 8D - Excess of own funds - assessee submits that the investment during the year were from the surplus available and thus, the investments were not out of borrowed funds, therefore, it is stated that no disallowance u/s 14A be made - HELD THAT - As in Avon Cycles Ld. vs. CIT 2014 (9) TMI 207 - PUNJAB HARYANA HIGH COURT it is held that where funds utilized by assessee were mixed funds and part of it was invested in earning tax free dividend income, it was held that the interest paid on borrowed fund was also relatable to interest on investment made in tax free funds. Therefore, interest expenditure relatable to investment in tax free funds was to be computed under provisions of Rule 8D (2)(ii). In CIT vs. HDFC Bank Ltd 2016 (3) TMI 755 - BOMBAY HIGH COURT it is held that the presumption laid down in CIT vs. Reliance Utilities Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT with regard to investment in tax-free securities coming out of the assessee s own funds in case they are in excess of the investments made in securities (notwithstanding the fact that the assessee concerned may also have taken some funds on interest) applies, when applying section 14A of the Act. It is reiterated again in HDFC Bank Ltd. 2016 (3) TMI 755 - BOMBAY HIGH COURT The order of the Ld. CIT(A) on the above issue is set aside and the same is restored to the file of the A.O. to make an order keeping in mind the principles delineated here-in-above after giving a reasonable opportunity of being heard to the assessee. Thus, 1st ground of appeal is allowed for statistical purposes. Addition as unproved purchases - HELD THAT - We find that the transactions with Ashirwad Broker, Lalitbhai Dalal, Madhav Broker do not figure in the order passed by the Tribunal in the assessee s own case for the A.Y. 2007-08. Therefore, the issue in instant appeal is to be decided on its own facts. The Hon'ble Supreme Court in State of Kerala vs. Shaduli Grocery Dealer 1977 (3) TMI 160 - SUPREME COURT , recognized the importance of oral evidence by holding that the opportunity to prove the correctness or completeness of the return of income necessarily carries with it the right to examine witness and that includes equally the right to cross-examine witness. Thus, the order of the Ld. CIT(A) on the above issue is set aside and the same is restored to the file of the A.O. to pass an order after examining the above three parties and allowing the assessee to cross-examine them. The assessee is directed to file the relevant details before the A.O. Thus, the 2nd ground of appeal is allowed for statistical purposes. Disallowance of commission paid to the managing director and the executive director u/s 36(1)(ii) - HELD THAT - We find that the same issue arose before the ITAT F Bench Mumbai in assessee s own case for the immediate preceding assessment year 2007-08. The Tribunal observed that (i) the Ld. CIT(A) has rightly held that the A.O. has not demonstrated that the expenditure incurred was excessive, (ii) the directors have declared the commission in their return of income and are being assessed to tax at maximum marginal rate. Therefore, the Tribunal dismissed the appeal filed by the revenue on the above issue.

Summary

Issues:
1. Disallowance u/s 14A
2. Addition of unproved purchases
3. Disallowance of commission paid to directors u/s 36(1)(ii)
4. Charging interest u/s 234C

Issue 1: Disallowance u/s 14A:
The Assessing Officer (A.O.) disallowed Rs.2,47,464 u/s 14A r.w.r. 8D of the Income Tax Rules, 1962, concerning the exemption claimed on dividend income. The Ld. CIT(A) upheld this disallowance, leading to an appeal by the assessee. The assessee argued that investments were made from surplus funds, hence no disallowance should apply. Additionally, the working under Rule 8D was challenged. The Tribunal referred to Rule 8D and relevant case laws. Citing Avon Cycles and CIT vs. HDFC Bank Ltd., it set aside the Ld. CIT(A)'s order, directing the A.O. to reconsider the matter in line with established principles.

Issue 2: Addition of unproved purchases:
The A.O. added Rs.2,06,51,426 as unproved purchases due to notices returned unserved to suppliers. The Ld. CIT(A) restricted the disallowance to Rs.29,97,477 after examining the evidences. The Tribunal emphasized the importance of oral evidence and cross-examination, directing the A.O. to reevaluate the matter, allowing the assessee to cross-examine the suppliers. The issue was to be decided based on the specific facts of the case.

Issue 3: Disallowance of commission paid to directors u/s 36(1)(ii):
The A.O. disallowed Rs.94,59,161 commission paid to two directors, citing their shareholdings and dividend entitlement. The Ld. CIT(A) upheld the disallowance, viewing the commission as a percentage of sales without direct personal efforts. The Tribunal noted similar precedents and dismissed the appeal, following the Co-ordinate Bench's decision from the previous year. It recognized the services rendered by the directors and their declaration of commission in their income tax returns.

Issue 4: Charging interest u/s 234C:
The Tribunal acknowledged the mandatory nature of charging interest u/s 234C, ordering compliance. The appeal was partly allowed based on the decisions made on the specific issues discussed.

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