2016 (3) TMI 314 - AT - Income Tax

Disallowance u/s 14A - Held that - Section 14A of the Act stipulate for disallowance of said expenditure which are incurred in relation to earning of exempt income while Rule 8D of Income Tax Rules, 1962 is a machinery provision which provides for method of computing disallowance u/s 14A of the Act . We have observed that there was a closing balance of ₹ 10.13 crores in the mutual fund as on 31-3-2010 while the average investment held by the assessee company in Mutual Fund during the previous year was ₹ 6.33 crores. The assessee company also submitted that no borrowed funds have been utilized for earning the investment. In our considered view, the authorities below have rightly applied the Rule 8D of Income Tax Rules, 1962 in the instant case as the relevant assessment year is 2010-11 while Rule 8D of Income Tax Rules , 1962 is applicable from the assessment year 2008-09 , keeping in view the peculiar facts and circumstances of the case which we have discussed hereinabove in this order. - Decided against assessee Disallowance of claim of service charges u/s 40A(2)(a) and 37(1) - Held that - As submitted by the assessee company, Shri Ubhayakar was providing services to both the companies. The assessee company was debiting 90% of salary of Sh Ubhayakar till 30-04-2008 to M/s Pidilite Industries Ltd. i.e. prior to transfer of employees w.e.f. 01-05-2008 in pursuance of demerger of the manufacturing unit of the assessee company w.e.f 01-04-2007 which was approved by Hon ble High Court w.e.f 18.01.2008. Shri Ubhayakar was transferred to M/s Pidilite Industries Ltd. w.e.f 01-05-2008 and M/s Pidilite Industries Ltd. started debiting 10% of the salary on which due services taxes have also been paid to the Government. From the facts and circumstances of the case emanating from the record, this practice was continuing earlier also and was accepted by the Revenue in the preceding assessment years also . The assessee company has placed on record the debit notes so raised for earlier year s also which is placed in paper book page 20-26, which are accepted by the Revenue for earlier years. The principles of consistency has to be followed as laid down by Hon ble Supreme Court in the case of Radhasoami Satsang (1991 (11) TMI 2 - SUPREME Court ) although we are aware that principles of res-judicata are not strictly applicable to income tax proceedings. In view of our above discussions and reasoning, the addition made by the AO and as confirmed by the CIT(A) by disallowing expenditure towards salary of Sh Ubhayakar being 10% of the total salary being debited to the assessee company, is hereby deleted and we allow the appeal of the assessee company. - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D.
2. Disallowance under Section 40A(2) and Section 37(1).

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:

The first issue pertains to the disallowance of Rs. 3,06,852 under Section 14A read with Rule 8D. The assessee company had claimed dividend income of Rs. 18,86,490 as exempt under Section 10(35) and had suo-motu disallowed Rs. 10,000 under Section 14A. However, the Assessing Officer (AO) observed that this disallowance was not in accordance with Rule 8D and computed the disallowance as Rs. 3,16,852, restricting the disallowance to Rs. 3,06,852 after considering the assessee's voluntary disallowance.

The assessee argued that no expenditure was incurred for earning the exempt income as the investments were in the form of a "dividend reinvestments plan" managed by fund managers, and only minimal transactions were conducted. The CIT(A) upheld the AO's decision, referencing the Delhi High Court's decision in Maxopp Investment Ltd. v. CIT, which held that expenses related to exempt income must be disallowed regardless of the dominant objective of the expenditure.

The Tribunal observed that Rule 8D is applicable from the assessment year 2008-09 and that the AO was correct in applying it. The Tribunal noted that the assessee had significant investments and that managing these investments involves costs. Therefore, the Tribunal upheld the CIT(A)'s decision, confirming the disallowance of Rs. 3,06,852 under Section 14A read with Rule 8D.

2. Disallowance under Section 40A(2) and Section 37(1):

The second issue involves the disallowance of Rs. 6,86,351 paid as service charges to an associate entity, M/s Pidilite Industries Ltd. The AO disallowed this amount under Sections 40A(2) and 37(1), observing that the assessee failed to provide necessary evidence that the services of Mr. A.D. Ubhayakar, an employee of Pidilite Industries, were required and availed for marketing purposes. The AO noted that the entire Board of Directors of both companies was common, and the debit notes raised did not specify the services rendered.

The CIT(A) upheld the AO's decision, questioning the necessity and reasonableness of the service charges, given the close relationship between the companies and the lack of specific evidence of services rendered.

The Tribunal, however, found that the practice of sharing Mr. Ubhayakar's salary had been accepted by the Revenue in previous years and that service tax had been paid on the debited amount. The Tribunal emphasized the principle of consistency, as laid down by the Supreme Court in Radhasoami Satsang, and concluded that the disallowance was not justified. Therefore, the Tribunal deleted the disallowance of Rs. 6,86,351, allowing the assessee's appeal on this ground.

Conclusion:

The Tribunal partly allowed the appeal, confirming the disallowance under Section 14A read with Rule 8D but deleting the disallowance under Sections 40A(2) and 37(1). The order was pronounced in the open court on 29th January 2016.