2016 (1) TMI 169 - AT - Income Tax

Disallowance u/s 14A - Held that - applicability of Rule 8D as prospective for and from AY 2008-09 and not retrospective. We further find that the assessee had already offered and identified an amount of ₹ 12,73,10,367/- and ₹ 7,51,731/- being interest on loan and de mat charges respectively for disallowance being related to exempted income. According to us, in view of the above facts and circumstances, no further disallowance can be called for in respect of exempted income. Even otherwise, the assessee company has received the dividend income from one of its group company i.e. EIH Ltd., which has the same registered office as that of the assessee and there is no specific management cost incurred for earning this dividend income. Further, the AO failed to appreciate the facts of the case that there is no satisfaction recorded by the AO with regard to correctness or otherwise of the claim of the assessee made in return having regard to the accounts of the assessee. According to us, assessee s claim is reasonable and is to be accepted. There is no scope for further disallowance of 1% of the exempted income in view of the above reasons and facts of the case - Decided in favour of assessee Disallowance on account of claim of provisions for leave encashment - Held that - We find that Ld. counsel for the assessee stated that the deduction on account of provision of leave encashment was made on the basis of the judgment of Hon ble jurisdictional High Court in the case of Exide Industries Ltd. Vs. Union of India (2007 (6) TMI 175 - CALCUTTA High Court ) but he fairly conceded that subsequently Hon ble Supreme Court has stayed this judgment of Hon ble jurisdictional High Court 2009 (5) TMI 894 - SUPREME COURT . In view of the above, Ld. counsel for the assessee fairly stated that let Hon ble Supreme Court decide the issue and by that time the matter can be remitted back to the file of AO for fresh adjudication in term of the decision of Hon ble Supreme Court. On this, Ld. CIT DR has not objected to the same. Accordingly, we set aside this issue to the file of the AO to await the decision of Hon ble Supreme Court and decide the issue accordingly. This issue of assessee s appeal is remitted back to the file of AO and allowed for statistical purposes. Addition on deemed dividend under section 2(22)(e) - Held that - We find from the findings of CIT(A) that he has admitted the additional evidence submitted before him in the shape of NBFC certificate of Oberoi Investment Pvt. Ltd. and remanded the matter back to the file of the AO. Now before us also Ld. Sr. counsel Shri R. N. Bajoria stated that the issue can be set aside to the file of AO, who will consider the certificate of NBFC of Oberoi Investment Pvt. Ltd. and also Memorandum of Association of the lender company explaining that one of the objects is to carry on money lending business. Once there is money lending business, according to ld. Counsel, the assessee is out of the mischief of the provisions of section 2(22)(e) of the Act i.e. the deemed dividend. In terms of the above, we remit the issue to the file of AO to re-decide after considering the clauses of Memorandum of Association of the lender company and also NBFC certificate of Oberoi Investment Pvt. Ltd.. Accordingly, this issue of both the appeals assessee is set aside and allowed for statistical purposes. Disallowance of depreciation in respect of premise forming part of block of assets, which was earlier used as guest house - Held that - As this asset forms part of block of assets, the depreciation cannot be disallowed. Accordingly, we allow the claim of assessee and reverse the orders of lower authorities - Decided in favour of assessee Estimation of income from house property - Held that - The AO while applying clause (a) of Section 1 to Section 23 in the assessee case failed to appreciate that in the present case actually let out the property being a farm house is on rent to EIH Limited and if a property is actually let out, then the expectation of its letting out becomes an actual reality and such property cannot be expected to let from year to year at any figure higher than the rent which is being produced actually by the property in question. Hence, even as per the deeming provision of Section 23(l)(a), in the case of let out property, only the actual rent received was required to be considered as annual value of property. The AO failed to appreciate such estimation of annual letable value as per provision of Section 23(1)(a) was called for only in case of vacant property and not where the property was actually let out since in the case of let out property, the assessee was not entitled to anything over and above the agreed rent. The said action of the AO has resulted in taxing notional income in the hands of the assessee, which never accrued and hence cannot be brought to tax. Accordingly, we are of the view that the CIT(A) has rightly deleted the addition - Decided in favour of assessee Disallowance u/s 40(a)(ia) - non-deduction of tax u/s. 195 for legal services to residence of Thailand and Australia - Held that - these expenses in foreign currency represent on account of professional services rendered by non-residents from their offices in foreign countries. The parties reside in foreign countries namely, Thailand and Australia. Admitted position is that to these payments the provisions of DTAA will apply because with both the countries India have DTAAs. Under the tax treaties professional services includes legal services and the same could only be taxed in the countries of residence of the non-residents unless the services are rendered from a fixed base in India - Decided in favour of assessee

Summary

Issues Involved:

1. Disallowance under Section 14A of the Income-tax Act, 1961.
2. Provision for leave encashment.
3. Deemed dividend under Section 2(22)(e) of the Income-tax Act.
4. Depreciation on guest house premises.
5. Annual value of property let out.
6. Disallowance under Section 40(a)(ia) for non-deduction of tax on foreign payments.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income-tax Act, 1961:
The primary issue was the disallowance of expenses related to exempt income under Section 14A read with Rule 8D. For AY 2007-08, the Tribunal noted that Rule 8D was not applicable as it was introduced w.e.f. 24.03.2008. The Tribunal found that the assessee had already identified and disallowed relevant expenses, and no further disallowance was warranted. The Tribunal dismissed the revenue's appeal and allowed the assessee's appeal, stating that the assessee's claim was reasonable and no additional disallowance was necessary.

For AY 2008-09, the Tribunal held that the AO did not record any satisfaction about the correctness of the assessee's claim before invoking Rule 8D. The Tribunal reiterated that the primary objective of the assessee's investment was to retain controlling stakes in group companies and not to earn income. Thus, the Tribunal allowed the assessee's appeal, stating that no disallowance under Section 14A read with Rule 8D was warranted.

2. Provision for Leave Encashment:
The assessee claimed deduction based on the Calcutta High Court decision in Exide Industries Ltd. The AO disallowed it, citing the pending appeal before the Supreme Court. The Tribunal remitted the issue back to the AO to await the Supreme Court's decision and decide accordingly, allowing the assessee's appeal for statistical purposes.

3. Deemed Dividend under Section 2(22)(e) of the Income-tax Act:
The AO treated advances received by the assessee from group companies as deemed dividends. The CIT(A) deleted the disallowance for two companies but set aside the issue for one company to verify if it was engaged in money lending. The Tribunal remitted the issue back to the AO to re-examine the NBFC certificate and the Memorandum of Association of the lender company, allowing the appeals of both the assessee and the revenue for statistical purposes.

4. Depreciation on Guest House Premises:
The AO disallowed depreciation on the guest house at Naila Fort. The CIT(A) confirmed the disallowance. The Tribunal allowed the assessee's appeal, stating that under the block of assets concept, individual assets lose their identity, and depreciation cannot be disallowed on the basis of its use. The Tribunal relied on the Delhi High Court decision in CIT Vs. Oswal Agro Mills Ltd.

5. Annual Value of Property Let Out:
The AO enhanced the annual value of a property let out to a group company based on internet information. The CIT(A) deleted the addition, stating that the actual rent received should be considered. The Tribunal upheld the CIT(A)'s decision, noting that the AO's estimation was arbitrary and not based on actual income. The Tribunal dismissed the revenue's appeal.

6. Disallowance under Section 40(a)(ia) for Non-deduction of Tax on Foreign Payments:
The AO disallowed professional and consultancy fees paid to non-residents, citing non-deduction of TDS. The CIT(A) deleted the disallowance, stating that the services were rendered outside India and the non-residents did not have a permanent establishment in India. The Tribunal upheld the CIT(A)'s decision, noting that the payments were not taxable in India under the respective DTAAs. The Tribunal dismissed the revenue's appeal.

Conclusion:
The Tribunal allowed the assessee's appeals on several grounds, including the disallowance under Section 14A, depreciation on guest house premises, and the annual value of property let out. It remitted the issues related to leave encashment and deemed dividends back to the AO for reconsideration. The revenue's appeals were dismissed, upholding the CIT(A)'s decisions on these matters.