2017 (12) TMI 114 - AT - Income Tax

Disallowance u/s 14A - Held that - The Hon ble Delhi High Court in the case of H.T. Media Limited (2017 (8) TMI 962 - DELHI HIGH COURT) observed that there was to be a minimum compliance with the mandatory requirement u/s 14A(2) read with Rule 8D which requires A.O. to examination of the accounts of the assessee and upon arriving at a dissatisfaction as to correctness of the claim of the assessee in respect of expenditure incurred in relation to exempt income. A.O. can determine the amount of expenditure which should be disallowed in accordance with the method prescribed under rule 8D of the rules. The court explained that unless such dis-satisfaction was recorded in the manner indicated u/s 14A of the Act, the question of invoking rule 8D of rules and the formula there under does not arise. In the present case, the assessing officer has not given any finding in respect of interest expenditure incurred by the assessee. Thus, we find no reason to interfere with the order passed by the Ld. CIT(A). - Decided in favour of assessee. Addition u/s 40A - assessee is outsourcing job work relating to reeling and doubling from sister concern namely Sri Venkataraya Threads Pvt. Ltd - Held that - We find that the A.O. has not made any enquiry whether the payment made by the assessee is excess according to the norms prevailing in the similar industry. It is submitted that the assessee has to increase the price for the purpose of business expediency. We find neither A.O. nor CIT(A) gave any reasons for the disallowance. Accordingly, we find that the A.O. is not justified in invoking section 40A(2)(b) of the Act and accordingly we set aside the order passed by CIT(A) and we direct the A.O. to allow the claim of the assessee.- Decided in favour of assessee.

Issues Involved:
1. Disallowance of interest expenditure proportionate to exempted income under section 14A of the I.T. Act read with Rule 8D.
2. Justification of disallowance of reeling and doubling charges under section 40A(2)(b) of the I.T. Act.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Expenditure Proportionate to Exempted Income under Section 14A of the I.T. Act read with Rule 8D:

The primary issue was whether the CIT(A) erred in deleting the disallowance of interest expenditure proportionate to exempted income under section 14A read with Rule 8D. The assessee company had invested in equity shares and received dividend income, which was claimed as exempt under section 10(34) of the Act. The A.O. issued a show cause notice to the assessee, questioning why disallowance should not be made as per section 14A read with Rule 8D. The assessee contended that no expenditure was incurred for earning the dividend income, as the investments were made from surplus funds generated by the company several years ago. However, the A.O. was not convinced and made disallowance under section 14A read with Rule 8D, arguing it was mandatory to determine the expenditure incurred in relation to tax-free income.

Upon appeal, the CIT(A) found that no interest expenditure was incurred in relation to the investments and held that disallowance under section 14A was unjustified. The CIT(A) followed the decision of the Tribunal in the case of M/s. Andhra Sugars Limited and directed the A.O. to re-compute the disallowance.

The Tribunal upheld the CIT(A)’s decision, noting that the A.O. did not provide any finding that the investments were made from borrowed funds. The Tribunal referenced the Delhi High Court’s decision in HT Media Limited, which stated that the formula under Rule 8D(2) does not apply if there is no interest expenditure attributable to any particular income or receipt. The Tribunal concluded that the A.O. was not justified in invoking section 14A read with Rule 8D and dismissed the revenue's appeals for all assessment years from 2008-09 to 2012-13.

2. Justification of Disallowance of Reeling and Doubling Charges under Section 40A(2)(b) of the I.T. Act:

For the assessment years 2010-11 and 2011-12, the issue was whether the disallowance of reeling and doubling charges paid to a related party was justified under section 40A(2)(b). The A.O. noted that the assessee paid reeling and doubling charges to M/s. Sri Venkataraya Threads Pvt. Ltd., a company in which a director of the assessee company had substantial interest. The A.O. disallowed 10% of the payments, questioning the reasonableness of the charges.

On appeal, the assessee argued that outsourcing the work to the related party was cost-effective and beneficial. The CIT(A) upheld the A.O.'s disallowance, noting that the assessee failed to justify the reasonableness of the payments, which had been increased by 10% annually and by 20% in the year under consideration.

The Tribunal, however, found that the A.O. did not verify whether the payments were excessive according to industry norms and did not provide reasons for the disallowance. The Tribunal concluded that the A.O. was not justified in invoking section 40A(2)(b) and directed the A.O. to allow the assessee’s claim. Consequently, the appeals filed by the assessee for the assessment years 2010-11 and 2011-12 were allowed.

Conclusion:

The Tribunal dismissed the revenue's appeals for the assessment years 2008-09 to 2012-13 and allowed the assessee's appeals for the assessment years 2010-11 and 2011-12. The order was pronounced in the open court on 23rd Nov’17.

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