2018 (5) TMI 952 - AT - Income Tax

Disallowance u/s 14A - Held that - It is a settled position of law that the provisions of section 14A can be applied to quantify the expenses in relation to exempt income. Since the exempt income is Nil, section 14A will not apply. The Rule 8D can be applied only when there is difficulty in finding the expenditure relating to exempt income. The provisions of section 14A and Rule 8D will not apply to the present case. We find that the investments were made purely on account of commercial necessity and as no exempt income was earned from the investment so made, the provisions of Section 14A will not be applicable in the case of assessee. Therefore, as section 14A cannot be invoked without any exempt income, accordingly, we dismiss the grounds raised by the revenue and allow the grounds raised by the assessee in C.O. Non-compete fee payment - not claimed in Return of income - whether payment is not incurred wholly and exclusively for the business of the assesse as there is no commercial expediency in this transaction? - Held that - In the plethora of cases, the courts have held that CIT(A) and ITAT have power to allow deduction for expenditure to assessee to which it was otherwise entitled even though no claim was made in the return of income. The assessee is entitled to a particular claim, which it missed in the return of income, may claim during appellate proceedings. The assessee should ensure that all necessary evidences are submitted during appellate proceedings and available on record. The case to refer in particular is CIT vs. Pruthvi Brokers & Shareholders P. Ltd. (2012 (7) TMI 158 - BOMBAY HIGH COURT). In the case under consideration, the assessee has submitted all relevant information on record relevant to claim the non-compete payment and it is not in dispute. The only issue is, it is not claimed in the return of income. Since, CIT(A) has power to allow the claim as per the above decisions of higher courts, it is within the powers of CIT(A) to allow the claim of the assessee. TDS u/s 194H - Payment of commission to Shri P. Ramaraju without deducting TDS - Held that - This is a genuine expenditure and it should be allowed. This is relating to market development and it cannot be treated as commission payment, hence, provisions of section 194H will not apply. We notice that this payment was made as appreciation of market development and the persons involved are consignment agents,m the assessee has not brought on record to show that how much consignment sales were recorded by such consignment agents and how the special discount was calculated. In the absence of such crucial information and it is fact that a lumpsum payment was made, it could be termed as sales commission or additional incentive awarded to the consignment agents. Either way, it will attract TDS. Therefore, the assessee may treat the expenditure on the basis of accounting followed by it, but, the nature of expenditure cannot change. Therefore, we sustain the disallowance made by the AO. Accordingly, ground raised by the assessee is dismissed.

Summary

Issues Involved:
1. Disallowance of interest under section 14A.
2. Depreciation on non-compete fees as intangible assets under section 32(1)(ii).
3. Payment of commission without deducting TDS under section 40(a)(ia).

Detailed Analysis:

1. Disallowance of Interest under Section 14A:
The revenue challenged the CIT(A)'s direction to the AO to re-compute the disallowance of interest and restrict it to the relatable loan funds of ?6,71,70,797/- for making disallowance under section 14A. The AO had initially disallowed ?1,24,12,329/- under section 14A, applying clause (i) of rule 8D, arguing that all funds utilized were loan funds directly linked to investments. The CIT(A) later directed the AO to recompute the disallowance, excluding certain amounts from the working capital loan and other loans. The Tribunal, however, held that since the exempt income was Nil, section 14A would not apply, referencing several cases including Madhucon Infra Ltd., ACIT Vs. M/s Mishra Dhatu Nigam Ltd., and CIT Vs. Corrtech Energy (P) Ltd. The Tribunal dismissed the revenue's appeal and allowed the assessee's grounds in the Cross Objection (C.O.).

2. Depreciation on Non-Compete Fees as Intangible Assets under Section 32(1)(ii):
The assessee did not claim non-compete fees in the return of income but treated them as an advance payment on the balance sheet. The CIT(A) allowed the claim of depreciation on non-compete fees as intangible assets under section 32(1)(ii). The CIT(A) observed that the payment was made for commercial expediency and should be treated as capital expenditure, thus eligible for depreciation. The Tribunal upheld this decision, noting that the acquisition of non-compete rights resulted in an enduring benefit and should be treated as an intangible capital asset. The Tribunal referenced the Supreme Court's decision in SA Builders Vs. CIT and other relevant case laws, concluding that the CIT(A) was within its power to allow the claim of depreciation.

3. Payment of Commission without Deducting TDS under Section 40(a)(ia):
For the AY 2009-10, the assessee's appeal included the issue of a ?10 lakh payment to Mr. P. Rama Raju, which was disallowed by the AO under section 40(a)(ia) for non-deduction of TDS. The AO considered the payment as commission liable to TDS under section 194H. The CIT(A) upheld this disallowance, reasoning that it is common practice to call commission as a discount to avoid TDS provisions. The Tribunal agreed with the CIT(A), stating that the payment, whether termed as a special discount or commission, was subject to TDS provisions. The Tribunal dismissed the assessee's grounds on this issue, sustaining the disallowance made by the AO.

Conclusion:
The Tribunal dismissed the revenue's appeal, allowed the assessee's Cross Objection regarding section 14A disallowance, and partly allowed the assessee's appeal for AY 2009-10, upholding the disallowance related to TDS on commission payments. The judgment emphasized the applicability of section 14A only in the presence of exempt income and upheld the treatment of non-compete fees as intangible assets eligible for depreciation under section 32(1)(ii).