2016 (8) TMI 726 - AT - Income Tax

Deemed dividend under section 2(22)(e)- Held that - Bare perusal of the findings returned by the AO goes to prove that he has merely followed the assessment order of the earlier year AY 2008-09 and has not applied his mind whereas CIT (A) has examined the issue threadbare. It is proved on record inter alia that the payment made by the assessee to three group concerns is not a dividend nor the payment made by the company was by way of advance of loan rather the payment was made by the assessee to M/s. Siegwerk Benelux N.V., M/s. Siegwerk (Asia Pacific) Pvt. Ltd. & M/s. Siegwerk Druckfarben for work done. So, we find that no case is made out to interfere into the findings returned by the CIT (A), hence ground no.1 is determined against the revenue. Addition claimed being royalty in profit & loss account - assessee has not filed any detail or documents to substantiate its claim of royalty payment nor assessee has proved if TDS has made on such payment or not - Held that - AO has merely made the addition on account of payment of royalty to the tune of ₹ 70,18,413/- on the grounds inter alia that assessee has failed to furnish the expenses to substantiate its claim of royalty payment; that the nature of payment is that the assessee has failed to explain if payment is capital or revenue in nature; that the genuineness of the actual payment has not been proved; that it is not proved that tax at source has been deducted or not, but CIT (A) has not preferred to call the remand report qua the said documents nor entertained the said documents on the basis of some request for additional evidence. However, it is admitted fact that the royalty payment made by the assessee company qua the AY 2008-09 and AY 2010-11 has already been allowed as revenue expenditure by the revenue authorities. In these circumstances, we find it expedient to restore the matter to the AO to decide afresh. AO to allow the royalty payment to the tune of ₹ 70,18,413/- after due verifications of the documents relied upon by the assessee. So, the ground no.2 is determined in favour of the revenue. Addition u/s 14A - Held that - Assessee s own case in its favour by restoring the matter back to the file of the AO for de novo consideration in the light of observations made therein, AO passed fresh order dated 31.01.2014 (copy available on the file) and accepted the contention of the assessee that expenditure of ₹ 1,32,520/- was made for earning of exempt income, the file is required to be restored back to AO to determine the issue afresh in the light of his earlier year order as well as in view of the mandate of section 14A(2) by considering the assessee s claim by providing opportunity of being heard and if the assessee s claim is rejected then he should resort to Rule 8D. - Decided in favour of the revenue.

Issues Involved:
1. Deletion of addition on account of inter-company charges as deemed dividend under section 2(22)(e) of the Income-tax Act, 1961.
2. Deletion of addition on account of royalty payment.
3. Admission of additional evidence by the CIT(A) under Rule 46A of the Income-tax Rules, 1962.
4. Deletion of disallowance under section 14A of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

GROUND NO.1: Deletion of Addition on Account of Inter-Company Charges as Deemed Dividend
The Assessing Officer (AO) had made an addition of ?6,21,95,582/- debited by the assessee in the profit & loss account as management consultancy expenses, drawing on the assessment order of the previous year (AY 2008-09). The CIT(A), however, overturned this by examining the documents submitted by the assessee, which demonstrated that the payments were made to group companies for services rendered. The CIT(A) observed that the payments were not loans or advances but were for services provided, thus not falling under the definition of dividend as per Section 2(22)(e) of the Income-tax Act. The Tribunal upheld the CIT(A)'s decision, noting that the AO had not applied his mind independently and had merely followed the previous year's order. The Tribunal found that the payments were genuinely for services rendered and not dividends, thus determining the ground against the revenue.

GROUND NO.2: Deletion of Addition on Account of Royalty Payment
The AO disallowed ?70,18,413/- claimed as royalty payment, citing the assessee's failure to substantiate the claim with documents and to clarify whether the payment was capital or revenue in nature. The CIT(A) examined the issue in detail, verifying documents and certificates, and concluded that the royalty payment was genuine and revenue in nature. However, the Tribunal noted that the AO had not called for a remand report on the documents submitted by the assessee. Given that similar royalty payments were allowed in previous and subsequent assessment years, the Tribunal restored the matter to the AO for fresh verification of the documents and determination of the royalty payment's validity. This ground was determined in favor of the revenue for further examination.

GROUND NO.3: Admission of Additional Evidence by the CIT(A)
This ground was not pressed during the arguments and was thus determined against the revenue.

GROUND NO.4: Deletion of Disallowance under Section 14A
The AO had disallowed ?8,67,240/- under Section 14A read with Rule 8D, related to expenditure incurred for earning exempt income. The CIT(A) deleted the disallowance, stating that the AO had not provided reasons for rejecting the assessee's claim that no expenditure was allocable towards earning exempt income. The Tribunal noted that a similar issue had been remanded to the AO in the assessee's own case for AY 2008-09, where the AO subsequently accepted the assessee's claim. Consequently, the Tribunal restored the matter to the AO for fresh consideration, directing the AO to assess the claim in light of the previous order and Section 14A(2). This ground was also determined in favor of the revenue for de novo examination.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes, restoring certain matters to the AO for fresh consideration and verification. The order was pronounced in open court on 31st May 2016.

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