2017 (10) TMI 532 - AT - Income Tax

Disallowance u/s 14A - whether assessee has not earned any exempt income? - Held that - From the assessment order or even the order of the CIT(A) it is not forthcoming whether this particular factual aspect was at all examined. In case the assessee has not earned any exempt income during the relevant previous year no disallowance can be made under section 14A of the Act. We direct the AO to examine this fact and if upon such examination it is found that in the relevant previous year the assessee has not earned any exempt income, by way of dividend or otherwise, no disallowance under section 14A can be made. In any case of the matter, exclusion of investments not yielding exempt income would arise only if the provisions of Section 14A is applicable in the event of assessee earning any exempt income in the relevant previous year. In the absence of such income section 14A itself is inapplicable. Accordingly, ground raised is allowed. Disallowance under section 40(a)(ia) - non deduction of tax under section 194H on the payments made to Restricted Money Changers (RMCs) - Held that - RMCs are free to sell foreign currency bought from tourists to assessee, RBI or any other person authorised by the RBI to deal in foreign currency. It is also to be noted that both the RMCs as well as the assessee have shown foreign currency as their stock in trade. The assessee has no relationship with the persons from whom the RMCs purchase foreign currency and the assessee is no way connected to the concerned tourists. Therefore, in our view the transaction between the assessee and the RMCs is on principal to principal basis and there is no principal agent relationship existing between them. Merely because in the financial statement assessee has debited the amount as commission it cannot be treated so without looking at the real nature of the transaction. The AO must bring on record material to establish that there is a principal agent relationship existing between the assessee and the RMCs. No enquiry has been made by the AO with the RMCs to find out the real nature of transactions between them. Further, assessee s contention that in no other place in India such premium paid has been disallowed requires to be taken note of. It is also relevant to observe, even in respect of premium payment in Goa, except, the impugned assessment year in no other assessment year such disallowance under section 40(a)(ia) has been made. That being the case, we are inclined to delete the addition made by the AO. Disallowance u/s 40(a)(ia) - short deduction of tax at source - Held that - A plain reading of section 40(a)(ia) would also make it clear that disallowance under such provision can be made only if there is no deduction of tax at source or the assessee has failed to pay to the government account the TDS amount after deducting the same. In any case of the matter, as brought to our notice by the learned A.R. the payee has offered the amount paid by the assessee as income in the relevant assessment year. Therefore, in terms of the second proviso to section 40(a)(ia) no disallowance can be made. In view of the aforesaid, we delete the addition made by the AO and affirmed by the CIT(A). Grounds are allowed

Issues Involved:
1. Disallowance under section 14A of the Act.
2. Disallowance under section 40(a)(ia) of the Act for non-deduction of tax under section 194H.
3. Disallowance under section 40(a)(ia) of the Act for short deduction of tax.
4. Violation of Rule 46A of the I.T. Rules by the CIT(A).

Detailed Analysis:

1. Disallowance under Section 14A of the Act:
The assessee, a domestic company engaged in tours and travels, filed its return of income declaring ?36,99,51,002/-. The AO noticed that the assessee earned exempt income but did not disallow expenses attributable to such income. The AO disallowed ?38,37,824/- under section 14A, which included interest and indirect expenses. The CIT(A) restricted the disallowance to the extent of expenditure on investment in Tulip Star Hotels Ltd., noting that other investments were made from the assessee's own funds. The Tribunal directed the AO to examine if the assessee earned any exempt income during the relevant year; if not, no disallowance under section 14A should be made, aligning with the Delhi High Court's decision in Cheminvest Ltd. vs. CIT.

2. Disallowance under Section 40(a)(ia) of the Act for Non-Deduction of Tax under Section 194H:
The AO disallowed ?19,09,775/- for non-deduction of tax on payments to Restricted Money Changers (RMCs), treating them as commission. The CIT(A) upheld this, noting the payments were initially booked as commission. The Tribunal found the transactions between the assessee and RMCs were on a principal-to-principal basis, not principal-agent. The RMCs were not agents of the assessee but appointed by RBI, and the foreign currency was shown as stock in trade by both parties. The Tribunal deleted the addition, noting no principal-agent relationship and lack of disallowance in other years or locations.

3. Disallowance under Section 40(a)(ia) of the Act for Short Deduction of Tax:
The AO disallowed ?16,29,488/- for short deduction of tax on legal, professional, and advertising expenses. The CIT(A) upheld this, relying on a Kerala High Court decision. The Tribunal, citing the Calcutta High Court in S.K. Tekriwal's case and the Karnataka High Court, held that section 40(a)(ia) applies only to non-deduction, not short deduction of tax. The Tribunal also noted the payee had offered the amount as income, invoking the second proviso to section 40(a)(ia), and deleted the addition.

4. Violation of Rule 46A of the I.T. Rules by the CIT(A):
The Department alleged the CIT(A) violated Rule 46A by considering additional evidence without proper procedure. The Tribunal found the CIT(A) had directed the AO to examine the additional evidence and submit a report, which the AO did, confirming the genuineness of the payments. The Tribunal dismissed the Department's ground, noting full opportunity was given to the AO, and similar issues were resolved in favor of the assessee in previous years.

Conclusion:
- The assessee's appeal is allowed.
- The Department's appeal and the cross objection of the assessee are dismissed.

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