2017 (4) TMI 823 - AT - Income Tax

Disallowance u/s 14A - Held that - The issue in dispute is squarely covered in favour of the assessee by the decision of the Hon ble High Court rendered in the case of Correctech Energy 2014 (3) TMI 856 - GUJARAT HIGH COURT as observed that if no tax free income was earned by the assessee, then no expenses can be construed as incurred by the assessee, because plain reading of section 14A provides that if an assessee incurred expenditure in relation to earning of tax free income then such expenditure would not be allowed. The assessee did not earn tax free income, then where is the question of allocating expenditure. CIT(A) is not justified in confirming the disallowance. - Decided in favour of assessee Nature of expenditure - revenue v/s capital expenditure - Non-deduction of TDS - Held that - With the assistance of the ld.representatives, we have gone through the record. He disallowed claim of the assessee on account of non-deduction of TDS. Thus, the ld.CIT(A) has changed the colour of the dispute. The ld.CIT(A) thereafter did not confront the assessee as to why this expenditure should not be treated as capital expenditure. Similarly, the ld.CIT(A) himself has also not tallied with items purchased by the assessee whether these electrical fittings were meant for repairing work or they are related to some new products/items. Considering this aspect, we vacate the findings of the ld.CIT(A). The expenditure cannot be disallowed to the assessee, because it was not required to deduct TDS on the purchases. In case the AO has granted deprecation, then, he will withdraw depreciation and allow the expenditure as revenue expenditure. Thus, this ground of appeal is allowed in favour of assessee TDS u/s 194C - disallowance under section 40(a)(ia) - argument raised by the assessee that payment did not exceed ₹ 50,000/- and therefore, liability for TDS deduction does not arise - Held that - .CIT(A) has considered this aspect and observed that the assessee was required to deduct TDS under section 194C where the limit is ₹ 20,000/-. Before us, the ld.counsel for the assessee failed to controvert this finding of the CIT(A). Similar argument was raised with regard to the payment made to Hemal Shah and Associates. The ld.CIT observed that limit was of ₹ 20,000/- which has been exceeded by the assessee. In view of this finding of CIT(A), we do not see any reason to interfere in it. - Decided against assessee

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Addition of interest income.
3. Treatment of payment to Harsha Electricals.
4. Disallowance under Section 40(a)(ia) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act, 1961:
The assessee challenged the confirmation of disallowance amounting to ?18,40,543/- under Section 14A. The facts reveal that the assessee had made investments amounting to ?6.50 crores as of 31.03.2009. The AO disallowed the expenditure under Section 14A read with Rule 8D. The assessee argued that since no exempt income was earned, no disallowance should be made under Section 14A. This contention was supported by the decision of the Hon’ble High Court in the case of Correctech Energy, which held that if no tax-free income is earned, no expenses can be construed as incurred in relation to such income. The Tribunal, following this precedent, allowed the appeal and deleted the disallowance.

2. Addition of Interest Income:
The AO added ?6,08,116/- as interest income based on information from AIR, while the assessee had shown ?3,07,914/-. The assessee contended that part of this interest was accounted for in the subsequent year (2010-11). The CIT(A) confirmed the addition, stating that the assessee follows the mercantile system of accounting, and the interest should be taxed in the year it accrued. The Tribunal considered the argument that income should not be taxed twice and directed that if the interest was offered in the subsequent year, appropriate action should be taken by the AO to avoid double taxation.

3. Treatment of Payment to Harsha Electricals:
The AO disallowed ?7,19,385/- under Section 40(a)(ia), including ?6,25,000/- paid to Harsha Electricals, due to non-deduction of TDS. The CIT(A) observed that the payment was for the purchase of electrical items and not subject to TDS but treated it as a capital expenditure, allowing depreciation instead. The Tribunal found that the CIT(A) changed the nature of the dispute without confronting the assessee and vacated the CIT(A)'s findings. It directed that the expenditure should be allowed as revenue expenditure if no TDS was required, and depreciation should be withdrawn if already granted.

4. Disallowance under Section 40(a)(ia) of the Income Tax Act, 1961:
The AO disallowed payments to Hemal Shah Associate and Surya Offset due to non-deduction of TDS. The assessee argued that the payments did not exceed ?50,000/-, thus not attracting TDS liability. The CIT(A) noted that the limit under Section 194C was ?20,000/-, which was exceeded. The Tribunal upheld the CIT(A)’s findings, confirming the disallowance under Section 40(a)(ia) for these payments.

Conclusion:
The Tribunal allowed the appeal partly, deleting the disallowance under Section 14A and directing appropriate action to avoid double taxation of interest income. It also vacated the CIT(A)’s findings on the capital expenditure treatment of payment to Harsha Electricals, allowing it as revenue expenditure. However, it confirmed the disallowance under Section 40(a)(ia) for payments exceeding the TDS threshold.