2016 (9) TMI 637 - AT - Income Tax

Disallowance under section 14A - Held that - Disallowance of interest expenditure is concerned under Rule 8D(2)(ii), we find that, at the time of making the investment, the assessee had huge surplus/own funds available which far exceeded the investment made, therefore no disallowance of interest should be made. Accordingly, we direct the AO to delete the disallowance of interest. As regards the disallowance of indirect expenditure under Rule 8D(2)(ii) we agree with the contention of the Ld. Counsel that, so far as the investment made in subsidiary and Associate Companies are concerned, they are by way of strategic investments and, therefore, same should not form part of the working of average value of investment while computing the disallowance. Accordingly, we hold that investments which have been made mostly by way of strategic investments and stock-in-trade should not rope in for the purpose disallowance. Looking to the facts and circumstances of the case and in the interest of justice, we are of the opinion that the disallowance should be scaled down and some estimate disallowance should be made, having regard to the nature of expenditure debited and the exempt income earned at ₹ 2,95,450/-. Accordingly, we hold that 10% of the dividend income would be reasonable for allocating the indirect expenditure for the earning of exempt income. Such an estimate is purely on the facts and circumstances of the case. Thus, grounds with regard to disallowance under section 14A are treated as partly allowed. Disallowance on account of transaction charges paid to stock-exchange by invoking of the provisions of section 40(a)(ia) - Held that - The payments made to the stockexchange is not in the nature of technical services but for facilities provided by the stock-exchange and accordingly, no TDS is deductible under section 194J. Assessee was not required to deduct TDS on such payment and accordingly, no disallowance under section 40(a)(ia) is called for.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules, 1962.
2. Disallowance of transaction charges paid to stock exchanges under Section 40(a)(ia) for non-deduction of TDS under Section 194J.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:

a) The Commissioner of Income Tax (Appeals) confirmed the disallowance of ?8,88,154/- under Section 14A read with Rule 8D, rejecting the appellant's explanations. The appellant argued that the interest paid was mainly for loans taken for fixed assets and working capital, and that the CIT(A) had previously deleted such interest expenses for AY 2007-08. The Assessing Officer, relying on the Special Bench decision in Daga Capital Management P Ltd., computed the disallowance of ?7,09,975/- for interest under Rule 8D(2)(ii) and ?1,78,179/- for indirect expenditure under Rule 8D(2)(iii).

b) The appellant contended that the investments were made from surplus/interest-free funds, citing the Hon'ble Bombay High Court decisions in CIT vs Reliance Utilities and Power Ltd. and HDFC Bank Ltd. The investments were strategic, made in subsidiaries and associate companies, and should not attract disallowance. The appellant also argued that stock-in-trade should not be considered for disallowance under Rule 8D.

c) The Tribunal found that at the time of investment, the appellant had sufficient surplus/own funds, thus no disallowance of interest should be made. The disallowance of indirect expenditure for strategic investments and stock-in-trade was also deemed inappropriate. The Tribunal decided to scale down the disallowance to 10% of the dividend income, amounting to ?2,95,450/-, as a reasonable estimate for indirect expenditure.

2. Disallowance of Transaction Charges under Section 40(a)(ia):

The Commissioner of Income Tax (Appeals) upheld the disallowance of ?1,71,840/- for transaction charges paid to stock exchanges, citing non-deduction of TDS under Section 194J. The CIT(A) relied on the Bombay High Court decision in CIT vs. Kotak Securities Ltd. However, the Supreme Court reversed this decision, ruling that such payments are not for 'technical services' but for facilities provided by the stock exchange, and thus, no TDS is required under Section 194J. The Tribunal, following the Supreme Court's judgment, held that no disallowance under Section 40(a)(ia) was warranted.

Conclusion:

The appeal was partly allowed. The Tribunal directed the deletion of the disallowance of interest and scaled down the indirect expenditure disallowance to 10% of the dividend income. The disallowance of transaction charges was also overturned, following the Supreme Court's ruling. The order was pronounced on 1st August 2016.