2015 (6) TMI 876 - AT - Income Tax

Disallowance u/s 40(a)(ia) - TDS on the commission to the director paid after the closure of the financial year but before the due date of filing of return of income - CIT(A) deleted disallowance - Held that - We concur with the view of the ld. CIT(A) that the assessee has paid the taxes at source before the statutory date of filing of the return of income which is not under dispute and in view of the decision of CIT vs Virgin Creations 2011 (11) TMI 348 - CALCUTTA HIGH COURT in view of the similar facts of the case we find no infirmity in the order of the ld. CIT(A), who has rightly deleted the addition made by AO - Decided against revenue. Disallowance being 0.5% of average investment as per Rule 8D of IT Rules - CIT(A) deleted addition - Held that - The present year is A.Yr.07-08 on which rule 8D is not applicable. Therefore in view of the decision of Kolkata Bench of ITAT in the case of DCIT vs M/s.Varanasi Commercial Ltd., 2012 (3) TMI 401 - ITAT KOLKATA for A.yr.2007-08 where the disallowance has been restricted to 1% of the exempted income. Following the same we find no infirmity in the order of ld. CIT(A) who has rightly restricted the disallowance to 1% of the exempted income - Decided against revenue.

Summary

Issues Involved:
1. Deduction of commission payment to non-executive directors under section 40(a)(ia) of IT Act, 1961.
2. Allowance of relief to the assessee under section 14A of IT Act.
3. Applicability of Rule 8D for disallowance of expenses related to earning exempt dividend income.

Issue 1: Deduction of Commission Payment to Non-Executive Directors (Section 40(a)(ia)):

The Revenue appealed against the allowance of deduction of commission payment to non-executive directors under section 40(a)(ia) of the IT Act. The AO had disallowed the commission as TDS was paid after the financial year but before the due date of filing the return. The CIT(A) allowed the claim, citing precedents and directed the AO to delete the disallowance. The Tribunal concurred with the CIT(A), emphasizing that the TDS was paid before the statutory filing date, in line with the decision in the case of CIT vs Virgin Creations. The Tribunal dismissed the Revenue's appeal on this ground.

Issue 2: Relief under Section 14A of IT Act:

The AO disallowed a percentage of average investment as per Rule 8D of IT Rules under section 14A. The CIT(A) restricted the disallowance to 1% of exempt dividend income instead of the total disallowance made by the AO. The Tribunal upheld this decision, noting that Rule 8D was not applicable for the relevant assessment year. The Tribunal agreed that some expenditure was incurred for earning exempt income, thus sustaining the disallowance at 1% of the dividend income, in line with the decision in the case of DCIT vs M/s.Varanasi Commercial Ltd. The Revenue's appeal on this ground was dismissed.

Issue 3: Applicability of Rule 8D for Disallowance of Expenses related to Earning Exempt Dividend Income:

The CIT(A) held that Rule 8D was not applicable prior to the assessment year 2008-09. The Tribunal concurred, stating that no expenditure was incurred to earn the exempt income. The Tribunal supported this view with the decision in the case of DCIT vs M/s.Varanasi Commercial Ltd. The Revenue's appeal on this ground was dismissed.

The Tribunal's orders in both appeals for the Assessment Years 2006-07 and 2007-08 were consistent, dismissing the Revenue's appeals on all grounds. The Cross Objections of the assessee were not pressed and were therefore dismissed.