2014 (1) TMI 1287 - AT - Income Tax

Disallowance made u/s 40(a)(ia) of the Act TDS not deducted - Lease line, VSAT and transaction charges paid to NSE and BSE Held that - The decision in Commissioner of Income-tax - 4(3) Versus Kotak Securities Ltd. 2011 (10) TMI 24 - Bombay High Court followed - the liability to TDS u/s.194J is confirmed in respect of the transaction charges - the Revenue as well as the assessees having proceeded for nearly a decade on the basis that section 194J is not applicable to the transaction charges, here the court is making an exception for the application of section 40(a)(ia) for the first year, i.e., A.Y. 2005-06; the provision of section 40(a)(ia) having been inserted on the statute by Finance (No.2) Act, 2004, w.e.f. 01.04.2005 - The non-deduction of tax at source for lease line and VSAT charges stands since confirmed by the hon ble jurisdictional high court - As regards the transaction charges, nominality of the amount paid - deductibility or otherwise of tax at source on all the three charges under reference had been a subject matter of dispute between the assessees and the Revenue since AY 2005-06, section 40(a)(ia) would stand attracted in respect of transaction charges for the current year. Restriction of disallowance u/s 14A of the Act r.w Rule 8D of the Rules Held that - the decision in Godrej and Boyce Mfg. Co. Ltd. vs. Dy. CIT 2010 (8) TMI 77 - BOMBAY HIGH COURT followed - the disallowance u/s.14A(1) restricted only to indirect (administrative) expenses at 0.5% of the average value of investment - the assessee is having adequate funds available with it, no presumption as to the borrowings having been applied, even to the proportionate extent, in funding the tax exempt investments, would arise the restriction made by CIT(A) upheld Decided against Revenue. Disallowance of membership expenses Held that - Club membership expenses does not represent a capital expenditure as no asset or advantage or benefit of an enduring nature to the trade arises by virtue of the said expenditure - The same only gives rise to a privilege to use the facilities of the club - the club membership, as obtained by the assessee, is not transferrable as per the bye laws and the Rules of the relevant clubs, and toward which he would place material on record - The deletion in respect of the expenditure upheld - The club membership paid in the normal course of business - the club memberships does not yield any advantage of enduring nature so as to be construed as a capital expenditure, as inferred by the Revenue Decided against Revenue.

Summary

Issues:
1. Disallowance of expenses under section 40(a)(ia) for lease line, VSAT, and transaction charges.
2. Disallowance under section 14A for indirect expenses.
3. Disallowance of membership expenses as capital expenditure.

Issue 1: Disallowance of expenses under section 40(a)(ia)
The Revenue appealed against the CIT(A)'s order allowing the assessee's appeal regarding the disallowance of expenses under section 40(a)(ia) for lease line, VSAT, and transaction charges. The Tribunal considered the matter ground-wise. The dispute revolved around the non-deduction of tax at the source for these charges. The Tribunal noted the high court's decisions regarding the applicability of section 194J and the liability to TDS under section 194J for transaction charges. The Tribunal ultimately upheld the disallowance of transaction charges under section 40(a)(ia) for the current year, despite the assessee's plea based on nominal payment amounts.

Issue 2: Disallowance under section 14A for indirect expenses
The second ground of appeal by the Revenue concerned the restriction of disallowance under section 14A by the CIT(A). The Tribunal observed that Rule 8D was not mandatory for the relevant year. The CIT(A) limited the disallowance to indirect expenses at 0.5% of the average value of investment, following the high court's decision. The Tribunal found the restriction reasonable and dismissed the Revenue's appeal on this ground.

Issue 3: Disallowance of membership expenses as capital expenditure
The final ground of appeal by the Revenue related to the disallowance of membership expenses claimed by the assessee. The Revenue argued that these expenses represented capital expenditure due to yielding an enduring advantage. However, the CIT(A) relied on a different high court decision, holding that such expenses were revenue in nature. The Tribunal considered various judicial precedents and ultimately sided with the assessee, concluding that club membership expenses did not constitute capital expenditure. The Tribunal allowed the assessee's claim and dismissed the Revenue's ground on this issue.

In conclusion, the Tribunal partly allowed the Revenue's appeal, upholding the disallowance of transaction charges under section 40(a)(ia) and dismissing the appeals regarding disallowance under section 14A and membership expenses.