2017 (3) TMI 99 - AT - Income Tax

Calculation of disallowance under section 14A - Held that - We are of the view that once it is held that disallowances are to be made under section 14A of the Act, the disallowances are to be calculated as per Rule 8D of the Income Tax Rule. Rule 8D takes care of all types of direct and indirect expenses incurred to earn an exempted income. After the insertion of Rule 8D, the AO has no other option but to calculate the disallowances under section 14A as per Rule 8D of the Income Tax Rules. Having carefully examined the order of the lower authorities, we find that disallowances are not calculated correctly as per Rule 8D. Therefore, we set aside the order of the CIT(A) and restore the matter to the file of the AO with the direction to calculate the disallowances under section 14A of the Act as per Rule 8D, after affording an opportunity of being heard to the assessee. Disallowances of financial charges - assessee has given the interest free advances to its subsidiary - Held that - We find that as per judgment of the Apex Court in the case of S. A. Builders 2006 (12) TMI 82 - SUPREME COURT the onus is upon the assessee to prove that the interest free advances to its sister concern was given on account of commercial expediency. If the assessee is not able to establish these facts, the expenditure on disallowance of interest payment on the borrowed funds can be made. During the course of hearing, a specific query was raised to place some evidence that the interest free advances were given on account of business expediency, but nothing has been placed before us. Under these circumstances, we are constrained to hold that the interest free advances were not given to subsidiary on account of business expediency. Therefore, the AO has rightly made 12% as disallowance out of interest free advances. Disallowance of rent paid under section 37 - Held that - This ground is covered by the order of the Tribunal in the case of assessee s sister concern wherein held that the expenditure incurred as rent on maintenance of guest house at Delhi is allowable. Disallowance of claim of goodwill, license fee under the head legal and professional charges paid to its Director - Held that - Undisputedly, during the AY 2007-08, the AO has made disallowance of the payment of ₹ 45 lakhs on account of goodwill, license fee after invoking the provisions under section 40A(2) and the Tribunal has restored the matter back to the AO with the direction to examine all aspects and pass a speaking order, whereas in the impugned AY, the disallowance was made under section 37 of the Act. The revenue has taken a contrary stand while making the disallowance in the different AY whereas the nature of payment is same. Under these circumstances, we are of the view that the revenue cannot take a different stand for making the disallowance in different AY. They should take one constant stand in all the years.Therefore, we are of the view that in the present year, the matter should go back to the AO for adjudicating the issue afresh Disallowance u/s 37 - Held that - We find that if any payments are made by the assessee, the onus is upon him to establish that the payments made on the expenditure incurred was on account of business expediency. The assessee failed to establish these facts. In the instant case also, the learned AR of the assessee could not establish that the expenditure was incurred on account of business expediency. Therefore, we find ourselves in agreement with the order of the CIT(A), who has rightly confirmed the disallowances made by the AO.

Issues Involved:
1. Calculation of disallowance under section 14A.
2. Disallowance of financial charges on interest-free advances to a subsidiary.
3. Deletion of disallowance of rent paid under section 37.
4. Deletion of addition on account of disallowance of goodwill license fees under the head "Legal and Professional Charges."
5. Disallowance of consultancy fees under section 37.

Issue-wise Detailed Analysis:

1. Calculation of Disallowance Under Section 14A:
The assessee challenged the CIT(A)'s decision on several grounds, mainly focusing on the application of Rule 8D and invoking section 14A. The tribunal noted that the AO must calculate disallowances as per Rule 8D of the Income Tax Rules, which covers all types of direct and indirect expenses incurred to earn exempted income. It was found that the disallowances were not calculated correctly as per Rule 8D. Therefore, the tribunal set aside the CIT(A)'s order and directed the AO to recalculate the disallowances under section 14A as per Rule 8D, after providing an opportunity for the assessee to be heard.

2. Disallowance of Financial Charges on Interest-Free Advances to Subsidiary:
The assessee had given interest-free advances to its subsidiary, M/s. Azure Media Services Pvt. Ltd., leading to a disallowance of ?5,85,600/- by the AO. The CIT(A) confirmed this disallowance, citing the lack of evidence of commercial expediency. The tribunal upheld the CIT(A)'s order, emphasizing that the onus is on the assessee to prove that the interest-free advances were given on account of commercial expediency. Since no evidence was provided, the disallowance was deemed justified.

3. Deletion of Disallowance of Rent Paid Under Section 37:
The revenue's appeal included a ground regarding the deletion of disallowance of ?3,75,000/- paid as rent for a guest house. The tribunal noted that this issue was already covered by a previous order in the case of the assessee's sister concern, ACTI Vs. Jupiter ITA No. 801/Bang/2012, where the payment of rent for the guest house was allowed. Following the same precedent, the tribunal found no justification to re-adjudicate this issue and upheld the CIT(A)'s order, rejecting the revenue's ground.

4. Deletion of Addition on Account of Disallowance of Goodwill License Fees:
The revenue also contested the deletion of an addition of ?90,00,000/- made by the AO on account of disallowance of goodwill license fees paid to M/s. Vectra Holdings Pvt. Ltd. The CIT(A) had allowed this payment, following its earlier order for AY 2007-08. The tribunal noted that in AY 2007-08, the matter was restored to the AO for re-adjudication. Given the inconsistency in the revenue's stand across different assessment years, the tribunal set aside the CIT(A)'s order and restored the issue to the AO for fresh adjudication, ensuring a consistent approach.

5. Disallowance of Consultancy Fees Under Section 37:
The assessee claimed payment of ?28,03,850/- towards consultancy fees to M/s. Lexicon Finance Ltd., which was disallowed by the AO and confirmed by the CIT(A). The tribunal agreed with the CIT(A) that the assessee failed to justify the expenditure as being incurred for business expediency. The consultancy services were found to have no nexus with the earning of interest and dividend income. Therefore, the tribunal upheld the CIT(A)'s order, confirming the disallowance.

Conclusion:
The tribunal partly allowed the appeals of both the assessee and the revenue for statistical purposes, directing the AO to re-adjudicate certain issues while upholding others. The judgment emphasized the importance of proper calculation of disallowances as per statutory rules and the necessity for the assessee to provide adequate evidence to justify business expenditures.

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