2023 (1) TMI 359 - AT - Income Tax

Disallowance of expenditure u/s 14A r.w.r. 8D - disallowance of interest expenditure under Rule 8D(2)(ii) - HELD THAT - When the assessee has factually demonstrated that it had sufficient interest free fund available with it to take care of the investment, as per the settled legal principles, no disallowance of interest expenditure could have been made under Rule 8D(2)(ii). Accordingly, we delete the disallowance of interest expenditure made under Rule 8D(2)(ii). As regards the disallowance of administrative expenditure under Rule 8D(2)(iii), undisputedly in the year under consideration the assessee had earned exempt income. Whereas suo motu assessee has not made any disallowance under section 14A read with Rule 8D. In the course of assessment proceedings the AO had called upon the assessee to explain the reason for not making any disallowance. Though, the assessee filed its explanation, however, the Assessing Officer after recording his satisfaction regarding claim of the assessee has proceeded to make the disallowance. Therefore, he has complied with the provisions of Section 14A(2) of the Act. We uphold the disallowance made under Rule 8D(2)(iii). This ground is partly allowed. TDS u/s 195 - Disallowance u/s 40(a)(i) - assessee had paid an amount to some non-residents towards patent charges - Commissioner(Appeals) upheld the disallowance made by AO though, by treating the payment made as Fee for Technical Services (FTS) under section 9(i)(vii)(b) - HELD THAT - We find that assessee s submissions have not been considered property in the context of facts and materials brought on record relating to the payment made. Further, the departmental authorities have taken divergent views regarding the nature of payment. While the Assessing Officer has treated the payment as royalty, learned Commissioner (Appeals) has treated it as FTS. This shows lack of application of mind to the facts and materials on record to ascertain the exact nature of payment. In view of the aforesaid, we are inclined to restore the issue to the Assessing Officer for fresh adjudication after providing due opportunity of being heard to the assessee. Further, we make it clear, to establish its claim, if the assessee wants to furnish further evidences, the Assessing Officer must allow the assessee to do so. This ground is allowed for statistical purposes.

Summary

Issues: Disallowance of expenditure under section 14A of the Income Tax Act, 1961; Disallowance of payment to non-residents towards patent charges under section 40(a)(i) of the Act

Issue 1: Disallowance of expenditure under section 14A of the Income Tax Act, 1961
The appeal concerned the disallowance of expenditure under section 14A of the Income Tax Act, 1961. The Assessing Officer had disallowed an amount comprising interest disallowance and administrative expenses under Rule 8D. The assessee challenged this disallowance before the Learned Commissioner (Appeals), who restricted it to the exempt income earned by the assessee during the year. The assessee argued that it had sufficient interest-free funds available to cover the investments, hence no disallowance should be made. The Tribunal noted that the assessee had demonstrated the availability of interest-free funds and deleted the disallowance of interest expenditure. However, the disallowance of administrative expenses was upheld as the Assessing Officer had complied with the provisions of Section 14A(2) of the Act by recording proper satisfaction.

Issue 2: Disallowance of payment to non-residents towards patent charges under section 40(a)(i) of the Act
The second issue involved the disallowance of a payment made to non-residents towards patent charges under section 40(a)(i) of the Act. The Assessing Officer disallowed the payment for non-deduction of tax at source under section 195 of the Act. The assessee contended that the payment was for patent renewal fees and not royalty or Fee for Technical Services (FTS). The Tribunal observed that the nature of payment had not been properly verified, and there were divergent views between the Assessing Officer and the Learned Commissioner (Appeals). As a result, the issue was remanded back to the Assessing Officer for fresh adjudication, with the direction to consider the assessee's submissions and provide an opportunity for further evidence if needed.

In conclusion, the appeal was partly allowed, with the disallowance of interest expenditure under section 14A being deleted, and the issue of payment towards patent charges being remanded back to the Assessing Officer for reconsideration.