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2018 (1) TMI 1229 - AT - Income TaxDisallowance u/s 40(a)(ia) - non deduction of tds on interest paid to NBFCs - Held that - The second proviso to section 40(a)(ia) of the Act would be effective retrospective as it was undisputedly inserted to removable the hardship faced by the assesses. Hence we set aside this issue to the record of the Assessing Officer for limited purpose to verify the fact that the interest income received by these NBFCs have been included in the return of income and offered to tax and then decide this issue in light of above observation. Disallowance u/s 40A(2)(a) - Held that - We find that when there is no actual out go from the assessee to its subsidiary but the assessee has allowed discount to the subsidiary on sale made to the subsidiary. Therefore even if the said discount was not allowed to the other parties and it is allowed to the related parties in the absence of any provisions u/s 40A(2)(a) or u/s 37 the same cannot be disallowed. It is pertinent to note that the transaction may be falling under the category of domestic transfer pricing however when the said provision is not applicable for the year under consideration and the AO has not applied the same then it cannot be disallowed. Thus when the trade disallowance is not an expenditure paid or payable as per the provisions of section 40A(2)(a) then the same cannot be disallowed for want of any prohibitory provision in the Income Tax Act. Disallowance of registrar of company fees and foreign travelling expenditure - Held that - In the absence of the specific purpose of the foreign trip of the Executive Manager the expenditure incurred on the foreign trip of the Executive Manger cannot be considered as an expenditure incurred wholly and exclusively for the business of the assessee. Thus upheld by the ld. CIT(A) in respect of the foreign trip expenses of the wife of the executive manager is justified and proper. As regards disallowance of ROC fees we find that the expenditure was incurred by the assessee for increasing the authorized share capital and therefore the authorities below have rightly considered the said expenditure as capital in nature. The assessee has failed to show that how the said expenditure is revenue in nature when the same is incurred for increase of authorized capital except the contention that it would be used for working capital. Difference in the interest on FDRs as per 26AS and the interest income recognized by the assessee in the books of accounts - Held that - We do not agree with the contention of the assessee simply on the reason that when the correct amount of income is available as per Form 26AS then the income of the assessee is required to be assessed on correct figures and facts instead of estimated figures accounted by the assessee. Further when the corresponding TDS credit is available to the assessee for the year under consideration against the income reported in 26AS then the said credit cannot be allowed against less income declared by the assessee on this account. Accordingly we do not find any error or illegality in the impugned orders of the authorities below qua this issue. Disallowance u/s 40(a)(ia) - disallowance of claim in respect of other NBFCs who have filed their return of income belatedly - Held that - CIT(A) has not disputed the fact that all the three NBFCs has filed their return of income within a time period allowed u/s 139 and particularly u/s 139(4) of the Act. The first proviso to section 201(1) specifically requires the furnishing of return of income u/s 139 without specifying any sub-section therefore the time limit provided under any of the sub-section of section 139 will be considered for the purpose of allowing the benefit as per the first proviso. Once the return of income were filed by the recipient as per the provisions of section 139 specifically under sub-section (4) then having accepted the applicability of the second proviso to section 40(a)(ia) respective effect no disallowance is called for in respect of the interest paid to the NBFCs. Accordingly we delete this issue in favour of the assessee and delete the disallowance made by the AO.
Issues Involved:
1. Disallowance under Section 40(a)(ia) of the Income Tax Act, 1961. 2. Disallowance under Section 40A(2)(a) of the Income Tax Act, 1961. 3. Disallowance of ROC fees and foreign travel expenditure. 4. Addition of interest income on FDRs. 5. Application of the second proviso to Section 40(a)(ia) retrospectively. Issue-wise Detailed Analysis: 1. Disallowance under Section 40(a)(ia) of the Income Tax Act, 1961: The assessee contested the disallowance of ?5,15,638/- for interest paid to NBFCs without TDS deduction. The assessee argued that the amount was paid during the year and not payable at year-end, citing the Allahabad High Court decision in CIT vs. Vector Shipping Services (P) Ltd. However, the Supreme Court in M/s Palam Gas Service Vs. CIT overruled this view, confirming the disallowance. The assessee also argued that the second proviso to Section 40(a)(ia) should apply retrospectively, preventing disallowance if the recipient included the interest in their income and paid taxes. The Tribunal, referencing CIT vs. Vatika Township Pvt. Ltd. and other cases, remanded the issue to the AO to verify if the interest was included in the NBFCs' returns and offered for tax. 2. Disallowance under Section 40A(2)(a) of the Income Tax Act, 1961: The AO disallowed ?8,00,969/- as a discount given to a subsidiary, arguing it was excessive and not given to other parties. The CIT(A) upheld this disallowance. The assessee contended that trade discounts are not payments and thus do not fall under Section 40A(2)(a). Citing United Exports vs. CIT, the Tribunal agreed, stating that trade discounts are not expenditures paid or payable and cannot be disallowed under Section 40A(2)(a). 3. Disallowance of ROC Fees and Foreign Travel Expenditure: The AO disallowed ?33,990/- for ROC fees as capital expenditure and 50% of ?1,88,400/- foreign travel expenses for the executive manager's wife. The CIT(A) upheld these disallowances. The Tribunal agreed with the ROC fees disallowance, considering it capital in nature. For the foreign travel expenses, the Tribunal noted the lack of specific business purpose for the trip and upheld the disallowance for the executive manager's wife's expenses. 4. Addition of Interest Income on FDRs: The AO added ?1,13,318/- as the difference between interest on FDRs per 26AS and the amount recognized by the assessee. The CIT(A) upheld this addition. The Tribunal noted that the correct income figure from 26AS should be used and upheld the addition, emphasizing the need for accurate income reporting. 5. Application of the Second Proviso to Section 40(a)(ia) Retrospectively: For the assessment years 2010-11 and 2011-12, the CIT(A) allowed the assessee's claim for interest paid to NBFCs that filed returns within the due date under Section 139(1) but disallowed for those filing late. The Tribunal clarified that the first proviso to Section 201(1) applies if the recipient files returns under any sub-section of Section 139. Thus, the Tribunal deleted the disallowance, recognizing the retrospective application of the second proviso to Section 40(a)(ia). Conclusion: The appeals for the assessment years 2010-11 and 2011-12 were allowed, and the appeal for the assessment year 2009-10 was partly allowed. The Tribunal emphasized the retrospective application of the second proviso to Section 40(a)(ia) and the need for accurate income reporting as per Form 26AS.
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