2014 (2) TMI 671 - AT - Income Tax

Disallowance u/s 14A of the Act r.w. Rule 8D of the Rules Exemption claimed u/s 10(34) of the Act - Dividend income earned Held that - The decision in GODREJ AND BOYCE MFG. CO. LTD. Versus DEPUTY COMMISSIONER OF INCOME-TAX AND ANOTHER 2010 (8) TMI 77 - BOMBAY HIGH COURT - Rule 8D cannot be invoked for assessment year 2006-07 - Rule 8D cannot be invoked for this assessment year and only a reasonable amount can be considered for disallowance for earning exempt income. As seen from the reserves and profits assessee has more funds than investments, so disallowance of interest without establishing nexus does not arise. Considering that assessee has earned dividend income of Rs.12.06 crores, 1% of the amount can be considered as reasonable thus, 1% of the dividend earned can be considered as reasonable amount for disallowance under section 14A on the given facts Decided partly in favour of Assessee. Disallowance of deduction u/s 40(a)(ib) of the Act - STT paid on behalf of assessee Held that - The decision in IL & FS Investsmart Ltd. Versus Addl. CIT & DCIT 2014 (2) TMI 254 - ITAT MUMBAI followed there was some force in the contention of the Counsel for the assessee so far as the treatment of brokerage inclusive of STT is concerned thus, the matter is remitted back to the AO for fresh adjudication. Disallowance of bad debts Held that - The decision in CIT Vs. Shreyas S. Morakhia 2012 (3) TMI 103 - BOMBAY HIGH COURT followed - , in the business of share broking, the amount payable by the clients are also considered as amount taken into account the AO is directed to allow the amount as bad debts - Decided in favour of Assessee. Entrance fee paid to club Held that - The decision in CIT vs. Samtel Color Ltd 2009 (1) TMI 26 - DELHI HIGH COURT followed - admission fee paid towards corporate membership was an expenditure incurred wholly and exclusively for the purpose of business and not towards capital account as it facilitated the smooth and efficient running of a business and did not add to the profit earning apparatus of a business enterprise - thus, the AO is directed to allow the amount as expenditure u/s 37(1) - Decided in favour of Assessee. Amount paid to stock exchange Disallowance of Penalty - Held that - The decision in IL & FS Investsmart Ltd. Versus Addl. CIT & DCIT 2014 (2) TMI 254 - ITAT MUMBAI followed - The penalty was on account of irregularities committed by the assessee s clients - the capital market regulations of the stock exchanges were in the nature of indoor management governing relations between the member and the stock exchange and not an offence punishable by the statute - the CIT(A) has rightly deleted the addition the order of the CIT(A) upheld Decided against Revenue. Calculation of Interest u/s 234B of the Act Held that - The levy of interest u/s. 234B is mandatory as Decided in CIT vs Anjum M H Ghaswala 2001 (10) TMI 4 - SUPREME Court and is to be calculated on the assessed income - levy of interest u/s 234B is compensatory in nature and is chargeable not-withstanding the fact that default is bonafide - No discretion can be exercised in matter of levy of interest u/s 234B thus, exclusion of the amount as considered by the CIT(A) is not according to the provisions of law the order of the CIT(A) modified and AO is directed to levy interest u/s. 234B, if applicable Decided partly in favour of Revenue.

Summary

Issues involved:
Cross appeals by assessee and revenue against orders of CIT(A) for assessment year 2006-07.

Analysis:
1. The assessee raised six grounds on four issues in its appeal, including disallowance under Section 14A r.w. Rule 8D. The AO disallowed entrance fee, STT paid, bad debts, and penalty. CIT(A) deleted the penalty and provided relief on interest under section 234B, confirming other disallowances. The revenue appealed against deletion of penalty and interest, while the assessee appealed against disallowances.

2. Regarding disallowance under Section 14A r.w. Rule 8D, the AO computed disallowance at Rs.33,51,001/- for dividend income. The Tribunal held that Rule 8D cannot be invoked for the assessment year 2006-07. Considering the funds and investments, a reasonable 1% of the dividend earned was deemed as a reasonable disallowance under Section 14A.

3. Disallowance of STT paid on behalf of clients was contested by the assessee. The matter was restored to the AO for fresh examination based on previous orders and the nature of brokerage inclusive of STT.

4. The issue of disallowance of bad debts was addressed, and the Tribunal directed the AO to allow the amount as bad debt based on relevant case law and the nature of the business.

5. The grounds related to entrance fee paid to a club were discussed. The Tribunal allowed the amount as expenditure under Section 37(1) based on precedents and the purpose of the expense for the business.

6. In the revenue appeal, issues included disallowance of an amount paid to the stock exchange and calculating interest under section 234B on the disallowed amount under Section 14A. The Tribunal upheld the deletion of penalty based on previous decisions and directed the levy of interest under section 234B on the assessed income, rejecting the CIT(A)'s decision.

7. The appeals were partly allowed, addressing various disallowances and issues raised by both the assessee and the revenue.

This comprehensive analysis covers the key issues and decisions made by the Tribunal in the legal judgment.