2019 (11) TMI 1188 - AT - Income Tax

Disallowance on account of commission paid to its two directors - HELD THAT - In this year also both the Directors admitted the payment of commission received and offered the same in their income tax returns and had paid at a maximum marginal rate. This clearly establishes the fact that there has been no tax avoidance motive behind the payment of commission to the directors by the assessee company. The CIT(A) has taken proper cognizance of these fact. There is no need to interfere with the finding of the CIT(A). Thus Ground No.1 of the Revenue s appeal is dismissed. Disallowance u/s 14A r.w.r. 8D - HELD THAT - Fixed maturity plans offered by mutual funds definitely require much less professional expertise as compared for making investments in equity related schemes and therefore, less expenditure is involved in managing such schemes. Moreover before upholding partial disallowance u/s 14A, Ld. CIT(A) should have considered the submissions of assessee that a part of investments were not for earning dividends but were strategic investments. In view of the above, we are of the opinion that the issue of disallowance be readjudicated by the AO and the AO should decide the disallowance on the basis of his objective findings after giving a reasonable opportunity to the assessee of being heard. In view of the above, the appeal of the assessee allowed for statistical purposes TDS u/s 195 - Disallowance u/s 40(a)(ia) for non-deduction of TDS - HELD THAT - From the perusal of the order of the CIT(A), it can be seen that the companies did not have any PE in India and it is not the case of the Assessing Officer that these companies have PE in India. Further, such services are not in the nature of Management, technical and consultancy, therefore, the same cannot be treated as FTS. Thus, there was no obligation on the assessee to deduct TDS thereon u/s 195. CIT(A) rightly held that no disallowance u/s 40(a)(i) can be made. CIT(A) has given a detailed finding and this issue is also decided in favour of the assessee in previous years, therefore, Ground No.3 is dismissed.

Summary

Issues Involved:
1. Disallowance of commission paid to two directors under Section 36(1)(ii).
2. Disallowance under Section 14A read with Rule 8D.
3. Disallowance under Section 40(a)(ia) for non-deduction of TDS.

Issue-wise Detailed Analysis:

1. Disallowance of commission paid to two directors under Section 36(1)(ii):
The Revenue challenged the deletion of the disallowance of ?3,35,72,184/- made on account of commission paid to two directors. The Assessing Officer (AO) had disallowed the commission, asserting it was an attempt to distribute profits as commission instead of dividends, invoking Section 36(1)(ii). The CIT(A) rejected this, noting that the company had also paid substantial dividends, disproving the AO's claim. The Tribunal upheld the CIT(A)'s decision, referencing past judgments in the assessee's favor for similar issues in previous assessment years. The Tribunal concluded that the commission was part of a structured remuneration plan, duly approved by the Board, and there was no tax avoidance motive, thus dismissing the Revenue's appeal on this ground.

2. Disallowance under Section 14A read with Rule 8D:
The Revenue contested the deletion of ?72,69,505/- disallowed under Section 14A for expenses incurred in earning exempt income. The CIT(A) found that investments in group companies and certain bonds were for business purposes and taxable, respectively, and should not attract disallowance under Section 14A. The Tribunal noted that the AO had not examined the correctness of the assessee's claim and had invoked Rule 8D without proper justification. The Tribunal directed the AO to re-examine the disallowance, considering the nature of investments and expenses, and provide the assessee an opportunity to present their case, thus remanding the matter back to the AO for fresh consideration.

3. Disallowance under Section 40(a)(ia) for non-deduction of TDS:
The Revenue disputed the deletion of ?84,22,535/- disallowed for non-deduction of TDS on payments to foreign parties. The CIT(A) found that the payments were for services rendered outside India by entities without a Permanent Establishment (PE) in India, and thus not subject to TDS under Section 195. The Tribunal upheld this finding, noting that the services did not qualify as "fees for technical services" (FTS) under the relevant DTAAs and that similar issues had been decided in favor of the assessee in previous years. Therefore, the Tribunal dismissed the Revenue's appeal on this ground, affirming that no TDS was required, and no disallowance under Section 40(a)(ia) was warranted.

Conclusion:
The Tribunal dismissed the Revenue's appeal on the first and third grounds, upholding the CIT(A)'s decisions. On the second ground, the Tribunal remanded the matter back to the AO for re-examination, allowing the appeal partly for statistical purposes. The judgment emphasized adherence to past precedents and proper examination of facts before invoking disallowance provisions.