2016 (9) TMI 639 - AT - Income Tax

TDS u/s 194H - Addition made on account of disallowance of Financial Services Charges - non deduction of TDS on the amount paid to the employees of the company - Held that - Both the authorities below have misdirected themselves for not appreciating the fact that the nature of payment as made by the assessee is neither a payment in the nature of salary nor related to employer-employee relationship. The payment is made in respect of the expenditure claimed to have been incurred for facilitating the loan transaction. The AO in the assessment order has considered this claim of the assessee i.e. expenditure being the reimbursement to the employees, and rejected the same on the ground that not a single bill was available with the assessee. As observed that these expenses were incurred for the services provided by the salesmen and that there was an absolute absence of even a single supporting voucher or any other documentary evidence which could prove assessee s claim that the said expenses were reimbursements to the salesmen. The AO treated such payment as the payment of commission or brokerage to the employee. In support of such finding, the AO has not placed any material on record suggesting that these payments were in the nature of brokerage or commission. In the absence of such material, in our considered view, merely on the basis of conjectures, the payments made to the employees would not partake the character of payment of brokerage or commission. Another aspect of the matter, which the AO has not appreciated that in the normal loan transaction, the bank mostly debit the amount of processing charges. The AO has also not verified from the banker whether the said expenditures were debited to the account of the loan beneficiary by the banker or not. Whether there was any agreement between the banker and the assessee company in this behalf. Even the assessee has not furnished the requisite details in support of its claim that such payments were nothing but reimbursement to the employees and such expenditure is allowable deduction. After considering the totality of the facts and circumstances of the present case, it would be in the interest of justice if the issue is restored to the file of the AO for decision afresh. Hence we set aside the impugned order and restore the matter to the file of the AO with the direction to verify from the bank whether any loan transaction was carried out as claimed by the assessee and also to verify whether the expenditure incurred in respect of documentation of the loan transaction, the expenditure related to verification of title deeds/ownership title was carried out by the banker or by the assessee company - Decided in favour of revenue for statistical purposes. Addition u/s 14A read with Rule 8D - Held that - As per section 14A of the Act, the AO has to satisfy himself in respect of the claim of expenditure. In the event the AO finds that the expenditure related to the exempt income have also been claimed by the assessee while computing its income, then the AO is empowered to make disallowance in the manner prescribed in rule 8D. In the instant case, the AO has not given any finding in respect of the disallowance of expenses. On the contrary, the assessee has pointed out that it had sufficient own funds and investment has been made out of its own funds. Therefore, the disallowance related to the interest was not justified. Thus we do not find any reason to interfere in the orders of the ld. CIT (A). In respect of administrative disallowance, as the assessee has stated that exempt income was directly credited to the bank account of the assessee, but it cannot be presumed that no administrative expenditure related to such exempt income was incurred. Therefore, in respect of administrative disallowance, we set aside the order of ld. CIT (Appeals) and restrict the disallowance to the extent of earning of exempted income of ₹ 30,000/-. Thus out of total disallowance of ₹ 5,81,868/-, the disallowance to the extent of ₹ 30,000/- qua the administrative expenses is sustained. - Decided in favour of revenue partly Disallowance of staff & labour welfare expenses - Held that - The ld. CIT (A) held that the expenses under the head salary and labour welfare are necessary for carrying on the business. He observed that there is no evidence to suggest that the expenses incurred by the assessee were either inflated or bogus. At the time of hearing of the appeal, the ld. D/R has not controverted these findings of the ld. CIT (A). We, therefore, do not find any reason to interfere in the order of the ld. CIT (A), the same is hereby upheld. - Decided against revenue

Issues Involved:
1. Deletion of disallowance of "Financial Services Charges" under Section 40(a)(ia) of the IT Act, 1961.
2. Deletion of disallowance under Section 14A read with Rule 8D of the IT Rules.
3. Deletion of disallowance out of staff and labour welfare expenses.

Detailed Analysis:

1. Deletion of Disallowance of "Financial Services Charges" under Section 40(a)(ia) of the IT Act, 1961:

The first issue pertains to the deletion of an addition made on account of disallowance of Financial Services Charges amounting to ?86,26,198/-. The assessee claimed this amount as reimbursement of expenses for facilitating bank loans for farmers purchasing tractors. The AO disallowed the claim under Section 40(a)(ia) due to non-deduction of TDS, treating the payments as commission or brokerage under Section 194H. The CIT(A) directed the AO to initiate proceedings for non-deduction of TDS, treating the payments as taxable under Section 17 of the IT Act.

Upon appeal, it was contended that the expenses were related to business and not covered under Section 194H. The Tribunal noted that the nature of the payments was neither salary nor commission/brokerage. The AO failed to provide evidence that these were commission payments. The Tribunal restored the matter to the AO for fresh verification, instructing to verify from the bank whether the expenses were debited to the loan beneficiary's account and if the assessee provided the services on behalf of the bank. If verified, the AO should allow the deduction. This ground was allowed for statistical purposes.

2. Deletion of Disallowance under Section 14A read with Rule 8D of the IT Rules:

The second issue involves the deletion of an addition of ?5,81,868/- made by the AO under Section 14A read with Rule 8D. The AO applied Rule 8D without examining the factual position, while the assessee argued that it had sufficient own funds and the dividend income was meager (?30,000/-).

The Tribunal held that the AO must satisfy himself regarding the claim of non-incurring of expenditure before making a disallowance. Since the assessee had sufficient own funds, the interest-related disallowance was unjustified. However, it acknowledged that some administrative expenses related to exempt income might have been incurred. Therefore, it restricted the administrative disallowance to ?30,000/-, sustaining this amount and partly allowing the ground.

3. Deletion of Disallowance out of Staff and Labour Welfare Expenses:

The third issue concerns the deletion of a disallowance of ?50,000/- out of staff and labour welfare expenses. The AO made the disallowance without specific instances, while the assessee argued that these were petty day-to-day expenses duly authenticated by internal vouchers.

The Tribunal upheld the CIT(A)'s finding that these expenses were necessary for business and there was no evidence of inflation or bogus claims. The ground was rejected, and the deletion of disallowance was upheld.

Conclusion:

The Tribunal partly allowed the appeals for statistical purposes, directing fresh verification on the first issue and partially sustaining the disallowance on the second issue. The third issue's deletion was upheld. The same decisions were applied to the identical grounds in the other appeals for the assessment years 2010-11 and 2011-12.

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