2014 (6) TMI 353 - AT - Income Tax

Disallowance u/s 14A r.w. rule 8D of the Act - Administrative and managerial expenses towards investment activity for earning exempt income Held that - Making disallowance at 2% of the exempt income of Rs. 15,76,758/- will meet both ends of justice of the facts Decided partly in favour of assessee. Disallowance made u/s 40(a)(ia) of the Act - Market support service expenses Fee for Technical Services (FTS)/Royalty Held that - There was no nexus of the expenditure to the clientele of the company who received the payment, qua the services rendered by the employees/contract workers of the company as the case may be thus, the matter is remitted back to the AO and the AO is directed to examine not only the nature of employment of the persons whose names appear on the tax invoices and the nature of services rendered by them to the so called company Decided in favour of Assessee. Disallowance made u/s 37 of the Act - Mutual fund scheme expenses Whether the expenses in excess of 6% can be booked to the accounts of the assessee Held that - Section 52 provides and enables the AMC like the present assessee to bear the expenditure in excess of the said 6% limitation - the relief granted by CIT(A) does not call for any interference Decided against Revenue. Disallowance of foreign travel expenses Held that - As decided in assessee s own case for the previous assessment year, it has rightly been held by the CIT(A) that the disallowance made by the AO on account of foreign traveling expenses and expenses incidental to foreign travel are set aside where no specific adverse material is not in possession of the AO Decided against Revenue. Disallowance of nontechnical expenses Held that - Following Amway India Enterprises Versus Union of India And Another 2003 (5) TMI 55 - KERALA High Court - there is no specific discussion appearing in the orders of the lower authorities - the orders of the lower authorities cannot be described as speaking order on each of such grounds - the AO is directed to allow the claim of the assessee after due verification of the genuineness and business nexus and also in accordance with the provisions of section 37 of the Act Decided partly in favour of Assessee.

Summary

Issues Involved:
1. Disallowance under section 14A.
2. Disallowance of Market Support Services under section 40(a)(ia).
3. Disallowance of Mutual Fund Scheme expenses.
4. Disallowance of Foreign Travel Expenses.
5. Disallowance of Information Technology Expenses.
6. Disallowance of Office License Fees.
7. Disallowance of Allocated Regional Overheads.

Detailed Analysis:

1. Disallowance under section 14A:
For AY 2006-07, the assessee's appeal against the disallowance of Rs. 210,000 under section 14A was partly allowed. The Tribunal referenced the Bombay High Court's judgment in Godrej Agrovet Ltd., which established that for AYs prior to the insertion of Rule 8D, a 2% disallowance of exempt income was reasonable. Consequently, the disallowance was adjusted to 2% of the exempt income, amounting to Rs. 31,535. For AY 2007-08, the Tribunal directed the AO to follow the same principle, thus partly allowing the assessee's appeal.

2. Disallowance of Market Support Services under section 40(a)(ia):
For AY 2006-07, the Tribunal remanded the issue to the AO for a fresh decision, directing the AO to examine the nature of employment and services rendered, granting the assessee a reasonable opportunity to present evidence. The same approach was applied for AY 2007-08, as the issue was identical to the previous year.

3. Disallowance of Mutual Fund Scheme expenses:
For AY 2006-07, the Tribunal upheld the CIT(A)'s decision, allowing the expenses of Rs. 2,20,17,000 as business expenditure under section 37, referencing SEBI regulations. For AY 2007-08, the Tribunal remanded the issue to the AO for fresh adjudication, following the principle of consistency.

4. Disallowance of Foreign Travel Expenses:
For AY 2006-07, the Tribunal dismissed the Revenue's appeal, referencing a prior Tribunal decision in the assessee's favor. For AY 2007-08, the Tribunal again dismissed the Revenue's appeal, maintaining consistency with earlier decisions.

5. Disallowance of Information Technology Expenses:
For AY 2006-07, the Tribunal remanded the issue to the AO for fresh decision, referencing the Special Bench decision in Amway India Enterprise. The AO was directed to examine the nature of the expenses and their business connectivity. For AY 2007-08, the Tribunal followed the same approach, remanding the issue to the AO for fresh adjudication.

6. Disallowance of Office License Fees:
For AY 2007-08, the Tribunal admitted additional evidence (TDS Certificates) and remanded the issue to the AO for fresh adjudication, granting the assessee an opportunity to present evidence.

7. Disallowance of Allocated Regional Overheads:
For AY 2007-08, the assessee did not press this ground, and thus, it was dismissed.

Conclusion:
The Tribunal's decisions were largely consistent across the appeals for both assessment years, focusing on principles of natural justice, consistency, and adherence to legal precedents. The appeals were partly allowed for statistical purposes, with several issues remanded to the AO for fresh adjudication.