2017 (4) TMI 567 - AT - Income Tax

Disallowance on account of club expenses and the expenditure to advertisement - Held that - No distinguishable material has been produced before us to which it can be assumed that the finding of the CIT(A) is wrong against law and facts. The assessee is an advocate and claiming the club expenses in view of his profession. The advocate is being restricted for advertising in view of the regulation of BAR Council of India and such type of expenditure has been hit by Explanation to Section 37(1) of the Act. No plausible explanation has been given before us to justify the claim of the assessee. In view of the said circumstances, we are of the view that the CIT(A) has passed the order judiciously and correctly on these issues which nowhere require interference at this appellate stage. Therefore, these issues are decided in favour of the revenue against the assessee. Disallowance of Portfolio Management fee - Held that - It is not in dispute that in connection with the present matter of controversy there are two views which have been taken by the Hon ble Income Tax Appellate Tribunal. One is in favour of the assessee and the other is against the assessee. In view of the above mentioned case i.e. Serum International Ltd. Vs. Addl CIT and vice versa (2015 (6) TMI 794 - ITAT PUNE) the view which is in favour of the assessee is liable to be taken wherein held PMS fees paid by the assessee is an allowable deduction from the capital gains. The finding of the said case is based upon the finding of Hon ble Supreme Court of India in case CIT Vs. Vegetable Products (1973 (1) TMI 1 - SUPREME Court) . In view of the said circumstances we set aside the finding of the CIT(A) on this issue and Assessing Officer is directed to allow the appropriate relief of the assessee in terms of the above said decisions in accordance with law. Accordingly, these issues are decided in favour of the assessee against the revenue. Application of section 14A(2) read with Rule 8D - Held that - In case titled as Godrej & Boyce Mfg. Co. 2010 (8) TMI 77 - BOMBAY HIGH COURT Bombay High Court, it is specifically held that Rule 8D is not retrospective and it applied for the period w.e.f.2008-09 and disallowance has to be worked out on reasonable basis u/s.14A of the Act. However, at the time of argument, the learned representative of the assessee took the plea that he received the Long Term Capital Gain directly through broker and did not expend anything nor received Long Term Capital Gain from Kotak PMS, therefore when no expenditure was incurred by the assessee, therefore the same is not liable to be added. Since the matter is being ordered to be set aside and remanded to the Assessing Officer, therefore, we are of the view that this issue is required to be re-examined by the Assessing Officer after giving an opportunity of being heard to the assessee in accordance with law Penalty u/s 271(1)(c) - Held that - There is lot of ambiguity to levy the penalty as initiated by the Assessing Officer in his order. Two different views have been taken by both the authority. Moreover, while deciding the appeal on merit in the instant case, the claim of the assessee was allowed and in the said circumstances when the quantum has been deleted then no penalty is sustainable in the eyes of law. Therefore, in the said circumstances the finding of the CIT(A) is not sustainable in the eyes of law. Therefore, we delete the penalty. Accordingly, the appeal of the assessee is hereby allowed.

Summary

Issues Involved:
1. Disallowance of club expenses.
2. Disallowance of Portfolio Management fees.
3. Application of Section 14A(2) read with Rule 8D.
4. Levy of penalty under Section 271(1)(c).

Issue-wise Detailed Analysis:

Issue 1 & 2: Disallowance of Club Expenses
The assessee challenged the disallowance of ?14,851/- on account of club expenses. The CIT(A) disallowed the amount, stating that the expenditure amounts to advertisement and is prohibited by law. The assessee argued that the expenses were incurred for professional purposes, to entertain clients. However, the CIT(A) noted that as an advocate, the appellant is bound by the Bar Council of India's regulations, which prohibit advertising. The CIT(A) concluded that club memberships do not augment the business of an advocate and such expenditure is hit by Explanation to Section 37(1) of the Act. The Tribunal upheld the CIT(A)'s decision, finding no distinguishable material to assume the CIT(A)'s findings were erroneous.

Issue 3 to 5: Disallowance of Portfolio Management Fees
The assessee claimed ?25,86,320/- as Portfolio Management fees. The Assessing Officer disallowed this amount under Section 40(a)(ia) of the Act for non-deduction of TDS. The CIT(A) upheld the disallowance but noted that the fees do not fall within Section 40 of the Act. The Tribunal considered conflicting decisions from various ITAT benches. The Tribunal cited the principle that when two views are possible, the view favorable to the assessee should be adopted, referencing the Supreme Court decision in CIT vs. Vegetable Products. The Tribunal directed the Assessing Officer to allow the Portfolio Management fees as a deduction, setting aside the CIT(A)'s findings.

Issue 6 to 9: Application of Section 14A(2) read with Rule 8D
The assessee received ?53,74,195/- as dividend income, which was claimed as exempt under Section 10(34) of the Act. The assessee disallowed ?4,56,234/- as expenditure incurred to earn the exempt income. The Assessing Officer, however, assessed the expenditure at ?18,96,224/- under Section 14A. The CIT(A) applied Rule 8D retrospectively. The Tribunal noted that Rule 8D is not retrospective and applies from AY 2008-09 onwards, as held in Godrej & Boyce Mfg. Co. 328 ITR 81 (Bombay High Court). The Tribunal remanded the issue back to the Assessing Officer for re-examination in light of this precedent, directing the Assessing Officer to give the assessee an opportunity to be heard.

Penalty under Section 271(1)(c):
The assessee challenged the penalty of ?7,75,896/- levied under Section 271(1)(c) for allegedly furnishing inaccurate particulars. The Tribunal noted that the penalty was based on the disallowance of Portfolio Management fees, which was a debatable issue with two possible views. Citing CIT vs. Reliance Petro Products Pvt. Ltd. 322 ITR 158 (SC), the Tribunal held that a wrong claim does not amount to concealment or furnishing inaccurate particulars. The Tribunal also referenced decisions from the Mumbai Tribunal, which had deleted penalties in similar circumstances. Given the ambiguity and the fact that the quantum addition was deleted, the Tribunal found the penalty unsustainable and deleted it.

Conclusion:
Both appeals filed by the assessee were allowed, with the Tribunal setting aside the disallowance of Portfolio Management fees and remanding the Section 14A issue for re-examination. The penalty under Section 271(1)(c) was also deleted.