2016 (9) TMI 1208 - AT - Income Tax

Addition u/s 14A - Held that - The assessee failed to produce cogent material before him to show that they have sufficient funds in their hands at the time of the alleged investments of funds or that the admitted borrowings had never been utilised for investments to earn exempt income either by preparing or producing separate account of expenditure or to substantiate how much of the composite expenditure incurred was in relation to the exempted income. In the absence of any evidence on this aspect matter cannot be decided merely on the statement made by the assessee that they had separate own fund utilised in the investment or that the borrowings with which the DPSC Ltd. shares were purchased were fully discharged by 2005-06 and 2006-07 so that no interest remained payable in the FY 2007-08 cannot be accepted. Unless on facts we are convinced that either all these things should have had happened it is not possible for us to give a finding that at relevant point of time the assessee did not utilize any borrowed funds for investment to generate the exempt income. Equally it is not possible for us to give a finding that the source of purchasing the shares in DPSC Ltd. was discharged prior to the FY 2007-08 as such no expenditure towards interest on that aspect could have been incurred by them. We therefore find in these set of facts and circumstances that the finding of the Ld. CIT(A) on this aspect is very convincing and the reasons are cogent and do not warrant any interference at all. Allowable business expenditure - Claim of deduction for securing entrance fee to the Calcutta Rowing Club on the ground that such an expenditure is in the interest of business - Held that - CIT(A) confirmed this addition not on the ground that it is a capital expenditure but the confirmation is on the question of fact. The Ld. CIT(A) expressed the opinion that the assessee has not filed any evidence whether the expenditure was the personal expenditure on directors the food expenses incurred on them and their family members and personal friends or for any business purpose. It is the expenditure in relation to business purpose alone that could be allowed as expenditure u/s. 37(1) of the Act. Unless and until the assessee removes this doubt in the mind of the lower authorities that the club membership was used solely for the purpose of business and not for the personal purpose of the directors or their family members or personal friends etc. merely because the assessee says that it has a potentiality to expand the business avenues in a routine manner such an expense cannot be allowed to be deducted. Hence we find it necessary to direct the Ld. AO to verify this fact with reference to the material to be produced by the assessee and to give a finding as to the tax liability of the assessee in respect of the expenditure incurred to secure the access to the club. We therefore set aside the finding of the lower authorities on this aspect and restore this issue for fresh adjudication of the Ld. AO. This ground of Cross Objection of assessee is allowed for statistical purposes. Addition u/s. 40(a)(ia) - non deduction of tds on audit fee - delay in deposit of tds - Held that - The deduction is not available in case the TDS is not deposited in the year of payment. Here the year of payment was 2007-08 ended by 31.03.2007 whereas the deposit of TDS was on 19.09.2008. In view of this mandate of law no such deduction is allowable and the AO has rightly disallowed such an expense and the Ld. CIT(A) has rightly confirmed the same - Decided against assessee Allowability of legal expenses - Held that - As borne on record that the assessee company incurred legal expenses to the tune of Rs. 4, 13, 764/- in respect of certain legal cases in Calcutta High Court the cases were disposed of in the FY 2007-08 but the legal experts sent its bills only in the FY 2008-09 as such such a liability could not be crystallised during the FY 2007- 08 and it is only on receipt of the bills the liability was crystallized and by that time the books of account were closed as such in the books of account for the year 2008-09 they are entered as prior period expenses. However the AO was unmindful of this fact and disallowed such expenses but rightly corrected by the Ld. CIT(A) holding that the liability for the payment to the advocates crystallized during the period relevant to the AY 2008-09 and as such a sum of Rs. 31, 55, 362/- was to be allowed as expenditure pertaining to AY 2008-09 and the bills relating to Rs. 8, 10, 657/- though issued in the AY 2009-10 but the services were rendered during the AY 2008-09 incurring liability as such the assessee had an option to create the provisions for the payment of the same or may debit exact amount on the basis of bills received immediately in the next FY. This finding of Ld. CIT(A) is well considered one and we do not see any illegality or irregularity in it - Decided against revenue Disallowance of advances written off - Held that - IT(A) discussed this in the light of the written submissions made by the assessee and recorded a finding that the assessee written off this amount being irrecoverable u/s. 36(1)(vii) of the Act and they have not received tax credit certificates relating to Sales Tax Service tax and work contract tax. The Ld. CIT(A) was convinced himself with the explanation of the assessee that it is a business loss being the payment of advance in ordinary course of business. In these circumstances the Ld. CIT(A) deleted the addition. On this score we do not find any material forthcoming from revenue to take different view when the assessee written off the amount as irrecoverable debts and amounts to business loss. We are in agreement with the Ld. CIT(A) that the same has to be allowed as deduction and the Ld. CIT(A) has rightly deleted the same.- Decided against revenue

Summary

Issues Involved:
1. Addition of Rs. 80,59,865/- under Section 14A of the Income Tax Act read with Rule 8D(2)(ii).
2. Disallowance of club membership fees of Rs. 89,000/-.
3. Disallowance of audit fee of Rs. 1,41,216/- relating to the previous year.
4. Deletion of Rs. 41,39,764/- claimed as deduction towards legal expenses relating to the earlier year.
5. Deletion of additions made by the AO towards advance written off, including Rs. 6,60,101/- recoverable from the Government Department.

Detailed Analysis:

Issue No. (i): Addition of Rs. 80,59,865/- under Section 14A read with Rule 8D(2)(ii)
The total interest paid by the assessee during the AY in question was Rs. 2,73,43,890/-, with average investments of Rs. 11,85,30,225/-. The AO computed the disallowable portion at Rs. 86,52,516/-, while the assessee offered Rs. 2,00,000/- towards expenses incurred for earning exempt income. The CIT(A) found that the assessee failed to demonstrate that the exempt income was generated solely through their own funds and no part of the borrowed funds was used. The CIT(A) referred to various judicial decisions, including Dhanuka & Sons Vs. CIT, which emphasized the need for the assessee to show the source of acquisition of shares without taking any loan. The Tribunal upheld the CIT(A)'s findings, confirming the disallowance under Section 14A.

Issue No. (ii): Disallowance of club membership fees of Rs. 89,000/-
The assessee claimed a deduction for the entrance fee to the Calcutta Rowing Club, arguing it was for business purposes. The CIT(A) found no evidence to show that the expenditure was used for business purposes rather than personal use by directors or their family members. The Tribunal directed the AO to verify the purpose of the expenditure with reference to the material to be produced by the assessee, setting aside the lower authorities' findings and restoring the issue for fresh adjudication.

Issue No. (iii): Disallowance of audit fee of Rs. 1,41,216/- relating to the previous year
The assessee booked liability for audit fees payable for the FY 2006-07 but did not deduct tax at source by 31.03.2007, leading to disallowance under Section 40(a)(ia). The TDS was deposited on 19.09.2008, and the assessee claimed the deduction in AY 2008-09. The Tribunal upheld the CIT(A)'s decision, confirming that the deduction is not allowable as the TDS was not deposited in the year of payment.

Issue No. (iv): Deletion of Rs. 41,39,764/- claimed as deduction towards legal expenses relating to the earlier year
The assessee incurred legal expenses for cases disposed of in FY 2007-08 but received bills in FY 2008-09. The CIT(A) allowed the expenses, stating the liability crystallized in AY 2008-09. The Tribunal found no illegality or irregularity in this finding and confirmed the CIT(A)'s decision, dismissing the revenue's appeal.

Issue No. (v): Deletion of additions towards advance written off, including Rs. 6,60,101/- recoverable from the Government Department
The CIT(A) found that the assessee wrote off the amount as irrecoverable under Section 36(1)(vii) and allowed it as a business loss. The Tribunal agreed with the CIT(A)'s finding, confirming the deletion of the addition and dismissing the revenue's appeal.

Conclusion:
The revenue's appeal was dismissed, and the assessee's cross-objection was partly allowed for statistical purposes. The Tribunal upheld the CIT(A)'s decisions on various issues, confirming the disallowances and deletions as justified based on the evidence and legal principles. The order was pronounced in the open court on 24.08.2016.