2017 (1) TMI 1155 - AT - Income Tax

Disallowing the expenditure representing commission paid - disallowance u/s 40(a)(i) - liability to be taxed in India - fees paid to a non-resident - retrospectivity - Held that - Notably, the payments in question fall during the previous year i.e. 01/01/2009 to 31/03/2010 corresponding to the assessment year before us, whereas the amendment in question came into effect on 08/05/2010 when the Finance Act, 2010 was given assent by the President of India. Though such a retrospective amendment may result in an incidence of tax liability in the hands of recipient of income but it would not result in creating an obligation on the payer of such income to deduct tax at source on the date of payment as it would be impracticable; obviously on the date of payment of income, the said amendment was not on the statute and, therefore, a subsequent amendment cannot create an obligation, which is impossible of performance. Thus, in such a scenario, even if it is held that the income paid to non-resident agent was taxable in India and thus, liable for deduction of tax in India, yet assessee cannot be faulted for non-deduction as on the relevant date there was no such obligation in law. Therefore, under the circumstances, the provisions of section 40(a)(i) could not have been invoked to disallow the impugned payment. - Decided in favour of assessee. Disallowance under section 14A - Held that - Having regard to the judgment of the Hon ble Bombay High Court in the case of CIT v. Reliance Utilities & Power Ltd.(2009 (1) TMI 4 - BOMBAY HIGH COURT ), it is to be presumed that the investments are out of interest free funds and that such proposition is applicable even in the context of section 14A of the Act, as held by the Hon ble Bombay High Court in the cases of CIT vs. HDFC Bank Ltd.(2014 (8) TMI 119 - BOMBAY HIGH COURT ) and HDFC Bank Ltd. vs. DCIT, (2016 (3) TMI 755 - BOMBAY HIGH COURT ). No disallowance out of interest expenditure is merited in terms of section 14A of the Act. Accordingly, we set-aside the order of the CIT(A) and direct the Assessing Officer to delete the disallowance Disallowance of overhead expenses applying the formula contained in Rule 8D(2)(iii) - Held that - Following the ratio of the Hon ble Delhi High Court in the case of Joint Investments Pvt. Ltd (2015 (3) TMI 155 - DELHI HIGH COURT ) which prescribes that the disallowance can only be to the extent of the tax exempt income, we direct the Assessing Officer to restrict the disallowance of expenditure to the extent of the exempt income and delete the balance.

Summary

Issues Involved:

1. Deletion of commission addition under section 37 and alternate section 40(a)(i).
2. Applicability of retrospective amendment by Finance Act 2010 to section 40(a)(i).
3. Disallowance under section 14A by applying Rule 8D of the Income Tax Rules, 1961.

Issue-wise Detailed Analysis:

1. Deletion of Commission Addition under Section 37 and Alternate Section 40(a)(i):

The primary issue revolves around the deletion of an addition of ?87,76,168/- representing commission paid to a non-resident agent, Mr. Bharat Goyal. The Assessing Officer (AO) disallowed this expenditure on two grounds: invoking section 37(1) of the Income Tax Act, 1961, and non-deduction of TDS under section 40(a)(i). The CIT(A) deleted the disallowance based on the Tribunal's decision for assessment years 2008-09 and 2009-10, which held that similar payments were accepted as allowable business expenditure by the Revenue. The Tribunal observed that the commission was paid for business purposes, and there was no contrary material to suggest otherwise. Hence, the CIT(A)'s decision to delete the disallowance under section 37 was upheld.

2. Applicability of Retrospective Amendment by Finance Act 2010 to Section 40(a)(i):

The Revenue argued that the retrospective amendment by the Finance Act 2010, which included fees for technical services rendered by non-residents in their total income, necessitated TDS deduction. However, the Tribunal noted that the amendment, effective from 01/06/1976, was assented on 08/05/2010, and could not create an obligation for the payer to deduct tax at source retrospectively. The Tribunal concluded that the amendment did not apply to the assessee's case as the payments were made before the amendment came into effect. Therefore, the provisions of section 40(a)(i) could not be invoked, and the CIT(A)'s deletion of the disallowance was affirmed.

3. Disallowance under Section 14A by Applying Rule 8D of the Income Tax Rules, 1961:

The Cross Objection by the assessee concerned the disallowance of ?4,08,461/- under section 14A by applying Rule 8D. The disallowance included ?3,12,577/- for interest expenditure and ?95,884/- for overhead expenses. The assessee argued that it had sufficient interest-free funds to cover the investments and no fresh investments were made during the year. The Tribunal, referencing the judgments in Reliance Utilities & Power Ltd. and HDFC Bank Ltd., held that the investments were presumed to be out of interest-free funds. Consequently, the disallowance of interest expenditure was deleted.

Regarding the overhead expenses, the Tribunal cited the Delhi High Court's judgment in Joint Investments Pvt. Ltd., which limited the disallowance to the extent of the exempt income. Therefore, the disallowance was restricted to ?2,840/-, the amount of exempt income earned, and the balance was deleted.

Conclusion:

The appeal of the Revenue was dismissed, and the Cross Objection of the assessee was partly allowed. The Tribunal upheld the CIT(A)'s deletion of the disallowance of ?87,76,168/- under sections 37 and 40(a)(i) and directed the deletion of the disallowance of ?3,12,577/- out of interest expenditure. The disallowance of overhead expenses was restricted to the exempt income of ?2,840/-. The order was pronounced in the open court on 18/01/2017.