2014 (10) TMI 650 - AT - Income Tax

Administrative and collection charges disallowed u/s 14A Held that - The AO was of the view that the assessee has made investment of ₹ 21,14,07,850/- and the assessee has paid interest on borrowed funds of ₹ 40,10,861 the AO as well as CIT(A) could not pinpoint any error in the computation of disallowance made by the assessee of ₹ 2,00,000/- in earning tax free dividend income - disallowance of ₹ 6,22,228/- could not have been sustained CIT(A) relying upon CIT vs. Consolidated Photo Finvest Ltd 2012 (7) TMI 312 - DELHI HIGH COURT thus, the order of the CIT(A) is to be set aside Decided in favour of assessee. Restriction of Travelling expenses Held that - The AO made a disallowance of 50% of directors' travelling expenses to the income of the assessee on the ground that the assessee had not justified the reasons for incurring of the expenses which were more than five times of expenses incurred on other employees and the assessee has not produce vouchers in support of its claim - the estimated disallowance sustained by the CIT(A) - it is seen that the fact that the travel was undertaken entirely for business purposes has not been established the order of the CIT(A) is upheld Decided against assessee. Addition u/s 40(a)(ia) Effluent treatment charges paid by assessee - Held that - CIT(A) rightly was of the view that the decision in Sing Killing Vs. ITO 2002 (3) TMI 39 - GAUHATI High Court is to be followed - TDS provisions were not applicable on services rendered by the attendant association to members - the contribution made by the assessee to its association Vapi Waste Effluent Management Company as a member cannot be classified as payment for contractual services as covered u/s. 194C of the Act revenue could not bring any material on record to show that the payments were covered under the provisions of section 194C of the Act thus, the order of the CIT(A) is upheld Decided against revenue. Overseas freight expenditure Held that - CIT(A) rightly was of the view that the decision in ITO vs. Freight Systems India Private Ltd. 2005 (10) TMI 229 - ITAT DELHI-F is to be followed - demurrage charge or handling charge or any other amounts of similar nature are treated at par with carriage freight payable to the ship owner or charter - amounts in the nature of demurrage etc. which may not end up being paid to non-residents are treated as amounts falling within special provisions of section 172 - This has been clarified by CBDT in Circular No. 723 of 1995 where such amounts have been taken outside the purview of the section 192C - where payments are made to shipping agent of non-resident owner or chartership at a port in India, provisions of section 172 will be applicable because the agent steps into the shoes of the owner - These charges are not covered under the provisions of law and no deduction of tax is called for u/s. 194C of the Act revenue could not point out any specific error in the order of the CIT(A) thus, the order of the CIT(A) is upheld Decided against revenue.

Summary

Issues Involved:
1. Disallowance of administrative and collection charges under Section 14A of the Income Tax Act.
2. Disallowance of travelling expenses of directors.
3. Addition made under Section 40(a)(ia) of the Income Tax Act for non-deduction of TDS on effluent treatment charges.
4. Addition made under Section 40(a)(ia) of the Income Tax Act for non-deduction of TDS on overseas freight expenditure.

Issue-Wise Detailed Analysis:

1. Disallowance of administrative and collection charges under Section 14A of the Income Tax Act:

The Assessing Officer observed that the assessee made an investment of Rs. 21,14,07,850 in shares and mutual funds and disallowed Rs. 2,00,000 under Section 14A of the Income Tax Act. The Assessing Officer computed a proportionate disallowance of interest expenditure at Rs. 5,84,706 and administrative expenses at Rs. 8,22,228, making a total disallowance of Rs. 14,06,934. After adjusting the self-disallowed amount of Rs. 2,00,000, the balance disallowance was Rs. 12,06,934.

The Commissioner of Income Tax (Appeals) noted that the company had specific term loans for vehicles and a Captive Power Plant, and borrowed funds were not used for non-business purposes. The Commissioner cited decisions from the Supreme Court and High Court, holding that if sufficient own funds were available, no disallowance of interest was necessary. The Commissioner deleted the disallowance of Rs. 5,84,706, stating that the assessee earned interest income from associate concerns.

The Tribunal found no infirmity in the Commissioner's order, noting that the Departmental Representative could not provide evidence to refute the Commissioner's findings. Therefore, the Tribunal confirmed the deletion of the disallowance of Rs. 5,84,706 and dismissed the Revenue's appeal.

Regarding the administrative expenses, the Tribunal noted that neither the Assessing Officer nor the Commissioner pinpointed any error in the assessee's disallowance computation of Rs. 2,00,000. The Tribunal deleted the additional disallowance of Rs. 6,22,228, supporting its view with the Delhi High Court's decision in CIT vs. Consolidated Photo & Finvest Ltd. Thus, the assessee's appeal on this ground was allowed.

2. Disallowance of travelling expenses of directors:

The Assessing Officer disallowed 50% of the directors' travelling expenses, amounting to Rs. 62,05,414, due to lack of justification and supporting vouchers. The Commissioner of Income Tax (Appeals) reduced the disallowance to 10% of the total expenses, amounting to Rs. 12,49,082, acknowledging the benefit to the company but noting the potential personal nature of some expenses.

The Tribunal upheld the Commissioner's decision, noting that the assessee could not prove that the travel was entirely for business purposes, as most visas were tourist visas. Thus, the Tribunal confirmed the disallowance of Rs. 12,49,082 and dismissed the assessee's appeal on this ground.

3. Addition made under Section 40(a)(ia) of the Income Tax Act for non-deduction of TDS on effluent treatment charges:

The Assessing Officer disallowed Rs. 1,02,43,720 for non-deduction of TDS on payments to Vapi Waste Effluent Management Company. The Commissioner of Income Tax (Appeals) deleted the disallowance, stating that the payments were contributions to a mutual association and not contractual services under Section 194C. The Commissioner cited judicial decisions supporting this view.

The Tribunal upheld the Commissioner's decision, noting that the Departmental Representative could not provide evidence to classify the payments as contractual services. Thus, the Tribunal confirmed the deletion of the disallowance and dismissed the Revenue's appeal on this ground.

4. Addition made under Section 40(a)(ia) of the Income Tax Act for non-deduction of TDS on overseas freight expenditure:

The Assessing Officer disallowed Rs. 21,11,736 for non-deduction of TDS on payments for handling charges, treating them as covered under Section 194C. The Commissioner of Income Tax (Appeals) deleted the disallowance, citing a Delhi ITAT decision and a CBDT Circular clarifying that such payments to non-resident shipping companies are outside the purview of Section 194C.

The Tribunal upheld the Commissioner's decision, noting that the Departmental Representative could not point out any specific error. Thus, the Tribunal confirmed the deletion of the disallowance and dismissed the Revenue's appeal on this ground.

Conclusion:

The Tribunal partly allowed the assessee's appeal and dismissed the Revenue's appeal, confirming the Commissioner of Income Tax (Appeals)'s decisions on the disallowances and additions made by the Assessing Officer.