2020 (12) TMI 398 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - A.R. submitted that the disallowance made by the AO consisted of interest disallowance made u/r 8D(2)(ii) as well as expenditure disallowance made u/r 8D(2)(iii) - as argued no disallowance out of interest expenditure under rule 8D(2)(ii) is called for, in A.Y. 2011-12, since the own funds available with the assessee is more than the value of investments - HELD THAT - As rightly pointed out by Ld. D.R., this submission of the Ld. A.R. requires verification of facts and hence it requires to be examined by the A.O. Accordingly, we set aside the order passed by Ld. CIT(A) on the issue of disallowance of interest expenditure under rule 8D(2)(ii) and restore the same to the file of the A.O. for examining the same in accordance with the decision rendered by jurisdictional High Court in the case of Micro Labs Ltd. (supra). The disallowance of administrative expenses made under rule 8D(2)(iii) in AY 2011-12 is confirmed. Disallowance made u/s 14A in assessment years 2010-11 2012-13 - HELD THAT - CIT(A) has followed the decision rendered by the coordinate bench in holding that the disallowance u/s 14A of the Act should not exceed the amount of exempt income.CIT(A) referred to the decision rendered by Hon ble Delhi High Court in the case of Joint Investments Pvt. Ltd. ( 2015 (3) TMI 155 - DELHI HIGH COURT ) . Disallowance of compensation paid to a person named Shri Mahesh Bhupathi and claimed as expenditure - HELD THAT - Identical issue in the assessee s own case and since there is no change in the facts relating to the impugned disallowance, we do not find any infirmity in the order passed by Ld. CIT(A) on this issue. Accordingly, we confirm the same. Addition u/s 40(a)(ia) - Scope of amendment - HELD THAT - We restore this issue to the file of A.O. for examining the applicability of second proviso to section 40(a)(ia) of the Act in AY 2010-11. See PERFECT CIRCLE INDIA PVT LTD - 2019 (1) TMI 1532 - BOMBAY HIGH COURT

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income-tax Act, 1961.
2. Disallowance of compensation paid to a third party.
3. Disallowance under Section 40(a)(ia) for non-deduction of tax at source.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A:
The common issue in the appeals filed by the assessee and the revenue pertains to the disallowance made by the Assessing Officer (A.O.) under Section 14A of the Income-tax Act, 1961. The A.O. observed that the assessee had made investments and received exempt dividend income but did not make any disallowance under Section 14A. Accordingly, the A.O. computed disallowance as per Rule 8D of the I.T. Rules.

For AY 2011-12, the assessee argued that no disallowance out of interest expenditure under Rule 8D(2)(ii) was required since the own funds available were more than the value of investments. This proposition was supported by the Karnataka High Court's decision in Micro Labs Limited. However, this required verification by the A.O., and thus the issue was restored to the A.O. for examination. The disallowance of administrative expenses under Rule 8D(2)(iii) was confirmed.

For AY 2010-11 and 2012-13, the CIT(A) directed the A.O. to restrict the disallowance to the extent of dividend income earned, supported by the Delhi High Court's decisions in Joint Investments Pvt. Ltd. and PCIT vs. Caraf Builders & Construction (P) Ltd. The revenue's challenge based on CBDT circular No.5/2014 was dismissed, and the CIT(A)'s order was confirmed.

2. Disallowance of Compensation Paid:
In AY 2010-11, the assessee claimed a compensation amount paid to a third party as an expenditure. The A.O. disallowed this claim, stating that the payment was made without deducting tax at source and had no nexus with the project executed. The CIT(A) confirmed this disallowance, referencing a similar disallowance in AY 2009-10 upheld by the Tribunal. The Tribunal found no change in facts and upheld the CIT(A)'s order.

3. Disallowance under Section 40(a)(ia):
The A.O. disallowed an interest payment made to a third party under Section 40(a)(ia) due to non-deduction of tax at source. The CIT(A) confirmed this disallowance. The assessee argued that the second proviso to Section 40(a)(ia), inserted by the Finance Act, 2012, should be applied retrospectively, as it was intended to remove hardship. The Tribunal, referencing the Bombay High Court's decision in M/s Perfect Circle India P Ltd vs. CIT, agreed that the proviso was retrospective and restored the issue to the A.O. for examination.

Conclusion:
The appeal filed by the revenue and the appeal of the assessee for AY 2012-13 were dismissed. The appeals of the assessee for AY 2010-11 and 2011-12 were partly allowed. The Tribunal's order was pronounced on December 9, 2020.