2016 (7) TMI 613 - AT - Income Tax

Disallowance made u/s 14A - Held that - No disallowance u/s 14 A of the Act need to be made by invoking the provisions of Rule 8D(2) of the Rules as the investments admittedly are business expediency investments and strategic investments. Since the investments were held to be business expediency investments, there is no case for making any disallowance by adopting Rule 8D(2)(iii) of the Rules also - Decided against revenue Disallowance on account of depreciation - Held that - We find that the action of the ld AO in trying to disturb the opening Written Down Value (WDV) attributable to the cost of land and thereby trying the disallow the depreciation component thereon is not appreciated , as, if at all, the ld AO has got any grievance on the impugned issue, then he should have reopened the assessment for the Asst Year 2007-08 ( i.e. the year in which land on which windmill was installed was purchased) and disallowed the depreciation thereon in that year. He cannot unilaterally disallow the depreciation based on the opening written down value. Assessee is entitled to entire amount claimed as depreciation on windmill. - Decided against revenue Disallowance made on account of advertisement expenses - assessee produced the copy of the bill of M/s Adsun Advertising Agency and CIT(A) deleted the addition - DR argued that the bill of M/s Adsun Advertising Agency was never subjected to verification by the ld AO and accordingly prayed for setting aside of this issue to the file of the ld AO - Held that - In the facts and circumstances, we deem it fit and appropriate, to set aside this issue to the file of the ld AO , to decide the same in the light of evidences submitted by the assessee in this regard. - Decided in favour of revenue for statistical purposes. TDS u/s 194C - non deduction of tds on advertisement material expenses - Held that - We find from the details and the bills submitted the assessee had only made payments for purchase of materials and had admittedly not supplied the materials to the job worker and hence the same would not fall under the definition of work as per section 194C of the Act.Hence there is no violation of section 194C warranting any disallowance u/s 40(a)(ia) of the Act. - Decided in favour of assessee Addition being notional interest @ 13.5% on trade advance - Held that - As already held while dealing with the issue of disallowance u/s 14A that the assessee is having sufficient own funds at its disposal which would easily cover the advance given to the wife Smt Kala Devi Jain in the sum of ₹ 7,00,000/- also. Hence there is no question of charging any notional interest thereon on the said advance presumed to have been given out of own funds. Hence the addition made is directed to be deleted. - Decided in favour of assessee Disallowance towards staff welfare expenses - Held that - The assessee has made gifts of ₹ 5,100/- each to two of its employees on the occasion of the marriage in their families in order to maintain harmonious relation with the staff members. We hold that there is no personal element involved therein and has been incurred in the ordinary course of his business. We hold that the said expenditure is only in the nature of staff welfare and is squarely allowable as a deduction. Accordingly, we have no hesitation in directing the ld AO to delete this addition - Decided in favour of assessee

Summary

Issues Involved:
1. Deletion of disallowance made under Section 14A of the Income Tax Act.
2. Deletion of disallowance on account of depreciation.
3. Deletion of disallowance on account of advertisement expenses.
4. Deletion of disallowance under Section 40(a)(ia) for violation of Section 194C.
5. Sustaining addition of notional interest on trade advance.
6. Upholding disallowance towards staff welfare expenses.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance under Section 14A:
The primary issue was whether the CIT(A) was justified in deleting the disallowance of ?1,19,10,124/- made under Section 14A of the Income Tax Act. The assessee, an individual and Managing Director of M/s. TT Ltd., claimed that no expenditure was incurred for earning exempt income (dividend). The AO made the disallowance by invoking Rule 8D(2)(ii) and Rule 8D(2)(iii). The CIT(A) deleted the disallowance, noting that the investments in TT Ltd. were strategic and made out of own funds, not borrowed funds. The Tribunal upheld the CIT(A)'s decision, citing that the investments were for business expediency and not with the intention to earn dividend income. The Tribunal relied on the decisions of the Hon'ble Calcutta High Court in CIT vs Rajeeva Lochan Kanoria and the Hon'ble Karnataka High Court in CCI Ltd vs JCIT.

2. Deletion of Disallowance on Account of Depreciation:
The AO disallowed ?4,54,080/- of depreciation claimed on the land portion included in the cost of a windmill, arguing that no depreciation is allowable on land. The CIT(A) deleted the disallowance, accepting that the expenses were integral to the windmill plant. The Tribunal upheld this deletion, referencing the Chennai Tribunal's decision in Asian Handlooms vs DCIT and the Ahmedabad Tribunal's decision in ACIT vs Parry Engineering & Electronics Pvt. Ltd., which considered land and foundation as part of the windmill plant eligible for depreciation.

3. Deletion of Disallowance on Account of Advertisement Expenses:
The AO disallowed ?7,93,379/- paid to M/s Adsun Advertising Agency due to lack of bill verification. The CIT(A) deleted the disallowance, noting that payments were made by account payee cheques and the bill was later produced. The Tribunal set aside this issue to the AO for verification of the evidence submitted by the assessee.

4. Deletion of Disallowance under Section 40(a)(ia) for Violation of Section 194C:
The AO disallowed ?11,18,698/- for failure to deduct TDS on payments for advertisement materials, treating them as payments for a contract of printing. The CIT(A) held that the transactions were outright purchases and not contracts, thus Section 194C was not applicable. The Tribunal upheld the CIT(A)'s decision, noting that the assessee had not supplied materials to the job worker, and the transactions were pure purchases.

5. Sustaining Addition of Notional Interest on Trade Advance:
The AO added ?39,375/- as notional interest on a trade advance of ?7,00,000/- given to the assessee's wife. The CIT(A) upheld this addition. The Tribunal deleted the addition, stating that the advance was made out of own funds, and no notional interest should be charged.

6. Upholding Disallowance towards Staff Welfare Expenses:
The AO disallowed ?10,200/- towards staff welfare expenses, which were gifts given to employees on marriage occasions. The Tribunal deleted this disallowance, considering the expenses as incurred in the ordinary course of business and allowable as staff welfare expenses.

Conclusion:
The Tribunal allowed the appeal of the revenue partly for statistical purposes and allowed the cross objection of the assessee, providing a detailed analysis and justification for each issue involved in the judgment.