2022 (10) TMI 162 - AT - Income Tax

Disallowance of business associate expenses - Appellant is engaged in share/broking business wherein it is normal business practice to have sub-brokers/business associates - HELD THAT - The findings returned by the AO/CIT(A) are without any factual basis and are on based conjecture/surmise. The Appellant has claimed deduction for business associate expenses in the preceding assessment years, however, no disallowance has been made in respect of the same. It is admitted position there has been no change in the facts and circumstances as compared to preceding assessment years. Thus, in view of the aforesaid, we hold that the Appellant is entitled to claim deduction for business associate expenses having substantiated his claim by filing relevant documents/details before the authorities below. Accordingly, we reverse the decision of CIT(A) and delete the disallowance made by Assessing Officer. Ground No. 1 raised by the Appellant is allowed. Ad-hoc disallowance of certain expenses - Appellant had claimed deduction for Computer Expenses, General Charges, Motor Car Expenses, Staff Welfare Expenses, Printing Stationery Expenses, Telephone Expenses, and Travelling Conveyance Expenses - AO made ad-hoc disallowance at the rate of 25% which was reduced to 15% by the CIT(A) - HELD THAT - We have considered the rival contentions and perused the material on record. Some ledgers relating to travelling expenses have been placed before us and the same are bulky. Even the tax auditor has expressed opinion that the possibility of some expenses being of personal nature being debited to the Profit Loss Account cannot be ruled out. We note that in the immediately preceding assessment year 2010-11, the assessing officer had, in similar facts and circumstances, adopted rate of 10% for making the disallowance. Accordingly, keeping in view the facts and circumstances of the present case we restrict the disallowance to 10% of the expenditure. - Decided partly in favour of assessee. Disallowance made u/s 14A - investment made in foreign subsidiary - HELD THAT - We find merit in the contention advanced by the Learned Authorised Representative for Appellant that investment made in foreign subsidiary should be excluded while computing disallowance under Section 14A read with Rule 8D of the Rules since the dividend income of foreign subsidiaries is taxable in India and therefore, the Assessing Officer is directed accordingly. Assessing Officer is also directed to verify and consider only the investments yielding exempt income during the relevant previous year while computing disallowance under Section 14A read of the Act with Rule 8D of the Rules as held by the special bench of the Tribunal in the case of ACIT Vs. Vireet Investment (P.) Ltd 2017 (6) TMI 1124 - ITAT DELHI . Disallowance of interest expenditure - HELD THAT - Appellant had sufficient owned/interest free funds to make deposits as well as interest bearing funds, and therefore, as per the judgment of the Hon ble Bombay High Court in the case of Reliance Utilities Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT it can be presumed that the interest free deposits were made out of owned/interest free funds and therefore, disallowance under Section 36(1)(iii) of the Act was not warranted. As regards, the findings returned by the Tribunal in the case of Deena Asit Mehta 2018 (2) TMI 1987 - ITAT MUMBAI are concerned; we note that the same were given after examining the leave license transaction from the perspective of the licensor and not from the perspective of licensee. In view of the aforesaid, we reverse the decision of CIT(A) on this issue and delete the addition made by the Assessing Officer. Ground raised by the Appellant is allowed.

Summary

Issues Involved:
1. Disallowance of business associate expenses.
2. Ad-hoc disallowance of certain expenses.
3. Disallowance under Section 14A of the Income Tax Act.
4. Disallowance of interest expenditure.
5. General grounds challenging the legality of the order.

Issue-wise Detailed Analysis:

1. Disallowance of Business Associate Expenses:
The Appellant challenged the disallowance of INR 9,77,10,205/- made by the Assessing Officer (AO) and confirmed by the CIT(A). The Appellant, a public limited company engaged in shares and stock broking, argued that the expenses were legitimate payments to sub-brokers/business associates registered with SEBI. The Appellant provided detailed documentation, including names, addresses, and registration numbers of the sub-brokers. The Tribunal noted that the AO and CIT(A) did not conduct proper verification and relied on conjectures. The Tribunal reversed the CIT(A)'s decision, allowing the deduction for business associate expenses.

2. Ad-hoc Disallowance of Certain Expenses:
The Appellant contested the ad-hoc disallowance of 15% on various business expenses, which the AO initially set at 25%. The expenses included computer, general charges, motor car, staff welfare, printing & stationery, telephone, and travel expenses. The Tribunal noted that similar disallowances were made at a 10% rate in the previous assessment year. Considering the facts, the Tribunal reduced the disallowance rate to 10%, partly allowing the ground.

3. Disallowance under Section 14A of the Income Tax Act:
The Appellant disputed the disallowance computed under Rule 8D, which the AO calculated at INR 10,95,163/- and INR 1,50,503/- under different sub-rules. The CIT(A) provided partial relief by excluding shares held as stock-in-trade from the computation. The Tribunal held that the disallowance under Section 14A cannot exceed the exempt dividend income earned (INR 6,20,419/-), citing relevant judicial precedents. Further, the Tribunal directed the AO to exclude investments in foreign subsidiaries and to consider only investments yielding exempt income. This ground was partly allowed.

4. Disallowance of Interest Expenditure:
The AO disallowed INR 95,74,500/- related to interest-free deposits given to related parties, asserting that borrowed funds were used for these deposits. The Appellant argued that the deposits were made for commercial expediency and sufficient owned/interest-free funds were available. The Tribunal agreed, noting that INR 4.5 Crores of the deposits were returned as subscription for preference shares and that the Appellant had sufficient interest-free funds for the remaining amount. Citing the precedent that interest-free deposits should be presumed to be made from interest-free funds, the Tribunal deleted the disallowance.

5. General Grounds Challenging the Legality of the Order:
Grounds 5, 6, and 7, which broadly challenged the legality and fairness of the order, were disposed of as infructuous in light of the Tribunal's decisions on the specific grounds.

Separate Judgment for Assessment Year 2013-14:
For Assessment Year 2013-14, the sole issue was the disallowance of interest expenditure under Section 36(1)(iii). The AO disallowed INR 67,91,045/-, which the CIT(A) reduced to a 9% interest rate. The Tribunal applied the same reasoning as in the 2012-13 judgment, deleting the disallowance and allowing the appeal.

Conclusion:
The appeal for Assessment Year 2012-13 was partly allowed, while the appeal for Assessment Year 2013-14 was fully allowed. The Tribunal's order was pronounced on 26.09.2022.