2018 (8) TMI 1418 - AT - Income Tax

Disallowance of expenditure incurred in relation to exempt income - Held that - there is no merit in the arguments of the assessee that it has not incurred any expenditure in relation to exempt income, when the assessee has not maintained separate books of account for investment activity and its business transactions. We further observe that when common expenditure are incurred towards business as well as investment activity, then possibility of certain expenditure attributable to investment services cannot be ruled out. Therefore, keeping in view of the provisions of section 14A r.w.r. 8D(2), we are of the considered view that 5% of exempt income towards expenditure would meet the ends of justice. - Decided against the assessee. TDs liability - disallowance of expenses u/s 40(a)(ia) towards liaisoningcharges @25% of such expenses. - any payment made to a non resident for rendering services in India would come within the provisions of section 195 of the Income-tax Act, 1961. In this case, the payment has been made outside India for rendering services outside India. Therefore, the question of withholding taxes on such payment does not arise, consequently, the question of disallowance of such expenditure u/s 40(a)(ia) also does not arise. - Entire additions directed to be deleted - Decided in favor of assessee. Estimation of income on advance receipts - principle laid down in AS-11 to recognize revenue - Held that - Once the assessee is following a method of accounting which is in accordance with the method prescribed by ICAI for recognition of revenue from the kind of projects the assessee is undertaking and such method has been accepted by the department in the earlier year, there is no reason for the AO to deviate from the method followed by the assessee without any change in facts and circumstances. In this case, the AO has made addition towards income from the project on advances received without recording any reasons as to how advance received by the assessee forms part of revenue for the current year. - No additions - Decided against the revenue.

Summary

Issues Involved:
1. Disallowance of expenditure incurred in relation to exempt income under Section 14A.
2. Disallowance of expenses under Section 40(a)(ia) for failure to deduct TDS.
3. Disallowance of sponsorship expenses paid to non-residents under Section 40(a)(i).
4. Disallowance of site services and project commission under Section 40(a)(i).
5. Estimation of income on advances received from projects.

Issue-wise Detailed Analysis:

1. Disallowance of Expenditure Incurred in Relation to Exempt Income (Section 14A):
The assessee received dividend income of ?1,26,05,919, which was claimed exempt under Section 10(34). The AO determined disallowance of expenditure incurred in relation to exempt income towards interest expenses and other expenses by invoking Rule 8D(2)(ii) & 8D(2)(iii) of I.T. Rules, 1962. The assessee contended that no expenditure was incurred to earn the exempt income and accepted an ad-hoc disallowance of ?50,000. The CIT(A) provided partial relief but confirmed the addition for other expenses. The Tribunal concluded that 5% of exempt income as expenditure would be justified, directing the AO to make an addition of 5% of exempt income towards expenditure incurred in relation to earning exempt income.

2. Disallowance of Expenses under Section 40(a)(ia) for Failure to Deduct TDS:
The AO disallowed ?5,20,67,912 towards liaisoning and site services and project commission, citing failure to deduct TDS under Section 195. The assessee argued that the payments were made outside India for services rendered outside India, thus Section 195 was not applicable. The CIT(A) directed an ad-hoc disallowance of 25% for liaisoning charges. The Tribunal found that the payments were made to non-resident companies with no PE in India for services rendered outside India, thus Section 195 was not applicable. The Tribunal reversed the CIT(A)'s ad-hoc disallowance of 25% and directed the AO to delete the addition under Section 40(a)(ia).

3. Disallowance of Sponsorship Expenses Paid to Non-Residents under Section 40(a)(i):
The CIT(A) directed the AO to make an ad-hoc disallowance of 25% for sponsorship expenses paid to non-residents, which amounted to ?1,29,19,935, and deleted the balance disallowance of ?3,91,48,377. The Tribunal upheld the CIT(A)'s decision, noting that the payments were made to non-residents with no PE in India for services rendered outside India, making Section 195 inapplicable.

4. Disallowance of Site Services and Project Commission under Section 40(a)(i):
The AO disallowed site services and project commission expenses for failure to deduct TDS under Section 195. The CIT(A) provided partial relief, confirming the addition of ?63,15,200 paid to Saudi Designer Engineering Constructions for failure to deduct TDS under Section 194J. The Tribunal upheld the CIT(A)'s decision, noting that the payments were made to non-residents with no PE in India for services rendered outside India, making Section 195 inapplicable.

5. Estimation of Income on Advances Received from Projects:
The AO added ?10,84,97,194 as income accrued from advances received, arguing that the assessee did not follow the percentage completion method. The assessee contended that it followed the mercantile system of accounting and recognized revenue on a proportionate completion basis, which was accepted by the department in the past. The CIT(A) deleted the addition, and the Tribunal upheld this decision, noting that the assessee consistently followed the percentage completion method in accordance with ICAI standards, and there was no change in facts or circumstances to warrant a deviation.

Conclusion:
The Tribunal partly allowed the assessee's appeal and dismissed the revenue's appeal, directing the AO to make the specified adjustments and deletions as per the Tribunal's findings. The order was pronounced in open court on 24th August 2018.