2024 (12) TMI 1165 - AT - Income Tax

Disallowance u/s. 14A - Addition being 1% of the average of the investment - HELD THAT - Since the disallowance made by the AO of Rs. 1,56,10,238/- is right as per the provisions of Rule 8D(2) related to disallowance u/s. 14A of the Act, we decline to interfere with the order of the CIT(A) on this issue. In the result, the appeal of assessee on this ground is dismissed. Disallowance u/s. 36(1)(va) - Delayed employees' contributions to provident funds - HELD THAT - This issue has been settled by the order of the Hon ble Apex Court in the case of Checkmate Services Pvt. Ltd. 2022 (10) TMI 617 - SUPREME COURT observed that there is a marked distinction between the nature and character of the two amounts viz., the employers' contribution and employees' contribution required to be deposited by the employer. The first one is the employer's liability is to be paid out of its income whereas the second is deemed an income, by definition, since it is the deduction from employees' income and held in trust by the employer. As the issue of payment of employees contribution towards the PF has been settled by the judgment of Hon'ble Supreme Court, the appeal of the assessee on this ground is liable to be dismissed. Disallowance u/s. 40(a)(i) - TDS u/s 195 - commission paid to non-resident agents as no TDS was effected on the commission payment - HELD THAT - The amounts have been paid to non-resident agents who are not tax payable entities in India for the services rendered abroad. The commission agents who have been paid commission do not have any permanent establishment in India. Hence, no disallowance u/s. 40(a)(i) of the Act, is attracted as the entities were not situated in India. Decided in favour of assessee. Disallowance u/s. 36(1)(iii) on account of Capital Work In Progress (CWIP) - as submitted the assessee has sufficient own funds which can be utilized as capital work in progress and for capital advances - HELD THAT - From the detailed examination of the borrowings of the assessee and payment of interest since no loan amount has been raised and utilized for the purpose of Capital Work in Progress (CWIP), since the assessee s own funds far exceed the value of the CWIP by 14 times, no addition is called for in this account. The notional interest calculated by the Assessing Officer on the closing balance of CWIP cannot stand test of legal scrutiny.

Summary

Issues Involved:

1. Disallowance under Section 14A of the Income Tax Act.
2. Disallowance under Section 36(1)(va) of the Act.
3. Disallowance under Section 40(a)(i) of the Act.
4. Disallowance under Section 36(1)(iii) of the Act.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:

The Assessee challenged the disallowance of Rs. 1,56,10,238/- made under Section 14A read with Rule 8D. The Assessing Officer (AO) invoked Rule 8D without recording dissatisfaction with the Assessee's claim that no expenditure was incurred to earn exempt income. The Assessee argued that investments were made from interest-free funds for strategic purposes, not for earning dividends. However, the CIT(A) upheld the disallowance, referencing the Supreme Court ruling in Maxopp Investments Ltd., which clarified that the dominant purpose of investment is irrelevant if the income is exempt. The Tribunal concurred with the CIT(A), noting that the AO correctly applied Rule 8D(2)(ii) and that the Assessee failed to demonstrate sufficient interest-free funds at the time of investment. Consequently, the appeal on this ground was dismissed.

2. Disallowance under Section 36(1)(va) of the Act:

The Assessee contested the disallowance of Rs. 88,94,666/- relating to employees' contributions to provident funds, arguing that contributions made within the grace period should be allowed. The CIT(A) confirmed the disallowance, relying on the Supreme Court's decision in Checkmate Services Pvt. Ltd., which distinguishes between employer's and employees' contributions, emphasizing timely deposit as a condition for deduction. The Tribunal upheld this view, noting that employees' contributions are deemed income and must be deposited by the due date to qualify for deduction. Thus, the appeal on this ground was dismissed.

3. Disallowance under Section 40(a)(i) of the Act:

The AO disallowed Rs. 57,74,000/- paid as commission to non-resident agents under Section 40(a)(i) due to non-deduction of TDS. The Assessee argued that the agents, having no permanent establishment in India, were not liable to tax in India, and thus no TDS was required. The Tribunal, referencing its previous decision in the Assessee's case, agreed that the commission income did not accrue in India and that Section 195 was not applicable. Therefore, the appeal on this ground was allowed.

4. Disallowance under Section 36(1)(iii) of the Act:

The AO disallowed Rs. 35,18,785/- as interest on borrowed funds, alleging they were used for Capital Work In Progress (CWIP). The Assessee contended that sufficient interest-free funds were available to cover CWIP, and the borrowed funds were used for business purposes. The Tribunal found that the Assessee's own funds exceeded CWIP by 14 times, indicating no borrowed funds were used for CWIP. The Tribunal concluded that the notional interest calculated by the AO lacked legal basis, thus allowing the appeal on this ground.

Conclusion:

The appeal was partly allowed, with the Tribunal upholding the disallowances under Sections 14A and 36(1)(va) while allowing relief under Sections 40(a)(i) and 36(1)(iii).