2020 (2) TMI 83 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D(2)(iii) - assessee has suo moto made the disallowance - HELD THAT - In this case undisputedly the AO has recorded general satisfaction as is apparent from the perusal of the assessment order particularly para 3.3 and thus AO has failed to record any objective satisfaction after having considered the books of accounts and also point out as to how the suo motto disallowance made by the assessee is wrong by referring to the books of accounts of the assessee. Therefore, in our opinion, the AO has failed to meet the conditions precedent for invocation of provisions u/s 14A r.w. Rule 8D. The case is squarely covered by the decision of H.T. Media Ltd. 2017 (8) TMI 962 - DELHI HIGH COURT as that AO is required to examine the books of accounts first and record his satisfaction as to how the disallowance made by the assessee, is wrong as per the mandate of section of 14A(2) of the Act r.w. Rule 8D(1)(a) of the Rules. Accordingly, we are not in agreement that the conclusion made by the ld. CIT(A) and the order of ld. CIT(A) on this issue cannot be sustained. We therefore set aside the order of CIT(A) and direct the AO to delete the disallowance made under Rule 8D(2)(iii). Disallowance under Rule 8D(2)(ii) of the Rules - CIT-A deleted the addition - HELD THAT - In this case, we find that ld. CIT(A) has recorded the findings of the fact that the assessee s interest after setting off the interest expenditure with interest income therefore no interest expenditure is called for disallowance. Besides the ld. CIT(A) has recorded a finding of fact that borrowed funds were raised for advancing loans and earning taxable interest income. Moreover we have decided that AO has not recorded any objective satisfaction before invoking provisions of section 14A r.w.r. 8D and on this count of also the addition will not survive. Accordingly we dismiss the Ground No.1 of the Revenue. Disallowance of professional fees paid to Mr. Arata Nambu - CIT-A deleted the addition - HELD THAT - As decided in own case 2019 (9) TMI 1312 - ITAT MUMBAI documentary evidence which had been relied upon by the ld. AR to support the aforesaid claim of expenses debited by the assessee in its profit and loss account for the year under consideration, had neither been dislodged by the lower authorities, nor anything proving to the contrary had been placed on our record by the ld. LD.DR in the course of the hearing of the appeal. Accordingly, finding no force in the claim of the Revenue that the CIT(A) was in error in deleting the disallowance of the consultancy charges paid by the assessee company to Mr. Arata Nambu - decided against revenue Payment of commission - CIT(A) directed the assessee to produce relevant supporting evidences before the AO and the AO to allow the claim after verifying the evidences produced by the assessee - HELD THAT - We note that this is not a case of set aside as has been contended by the Revenue as the ld. CIT(A) has recorded finding of facts that the issue in hand is identical to one as decided by CIT(A) in A.Y 2009-10 and is allowable during the year also but directed the AO to verify the evidences which the assessee may produce and allow the claim. Therefore we do not find any merit in the ground of the Revenue.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962.
2. Professional fees paid to Mr. Arata Nambu.
3. Payment of commission to Galaxy Automobiles P. Ltd.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962:

The assessee challenged the disallowance of ?4.91 crores under Section 14A read with Rule 8D(2)(iii) for administrative expenses related to earning tax-free income. The assessee had already made a suo moto disallowance of ?61.97 lacs. The Assessing Officer (AO) issued a show-cause notice and eventually calculated a disallowance of ?72.63 crores, which included ?67.72 crores for interest disallowance under Rule 8D(2)(ii) and ?4.91 crores for administrative expenses under Rule 8D(2)(iii).

The Commissioner of Income Tax (Appeals) [CIT(A)] partly allowed the appeal, deleting the interest disallowance under Rule 8D(2)(ii) but sustaining the administrative expenses disallowance. The assessee appealed against the sustained disallowance, arguing that the AO did not record objective satisfaction as required under Section 14A(2) and Rule 8D(1). The Tribunal agreed with the assessee, citing the Hon'ble Delhi High Court's decision in H.T. Media Ltd. v. PCIT, which mandates that the AO must record dissatisfaction with the assessee's claim after examining the accounts. Consequently, the Tribunal directed the AO to delete the disallowance made under Rule 8D(2)(iii).

Regarding the Revenue's appeal against the deletion of interest disallowance under Rule 8D(2)(ii), the Tribunal upheld the CIT(A)'s decision, noting that the assessee's interest income exceeded interest expenditure and that borrowed funds were used for earning taxable interest income. The Tribunal also reiterated the necessity of the AO recording objective satisfaction before invoking Section 14A and Rule 8D, leading to the dismissal of the Revenue's appeal.

2. Professional Fees Paid to Mr. Arata Nambu:

The Revenue challenged the CIT(A)'s decision to allow professional fees paid to Mr. Arata Nambu, arguing that the assessee failed to furnish relevant documents before the AO. The Tribunal noted that similar payments were made in the previous assessment year (2009-10) and were upheld by the Coordinate Bench of the Tribunal. The Tribunal found substantial evidence supporting the payments for services rendered by Mr. Arata Nambu as a business advisor. Since the documentary evidence was neither dislodged by the lower authorities nor contradicted by the Revenue, the Tribunal upheld the CIT(A)'s order, dismissing the Revenue's ground.

3. Payment of Commission to Galaxy Automobiles P. Ltd.:

The Revenue contested the CIT(A)'s decision to set aside the issue of commission payment to Galaxy Automobiles P. Ltd. for further verification. The Tribunal observed that the CIT(A) had recorded a finding of fact that the issue was identical to the previous assessment year (2009-10), where the CIT(A) allowed the deduction. The CIT(A) directed the AO to verify the evidences and allow the claim if found in order. The Tribunal found no merit in the Revenue's ground, noting that the CIT(A) did not set aside the matter for a fresh assessment but for limited verification. The Tribunal also cited the Coordinate Bench's decision in the previous year, dismissing the Revenue's ground.

Conclusion:

The Tribunal allowed the appeals filed by the assessee and dismissed the appeals and cross-objections filed by the Revenue. The Tribunal's decision was pronounced in the open court on 30.01.2020.