2020 (6) TMI 322 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - assessee has earned dividend income - assessee made suo-motu disallowance under section 14A - HELD THAT - For disallowance under Rule 8D(2)(i) and (ii), the disallowance made by AO was unwarranted. Demat charges were related to assessee s Share Broker business and were unrelated to earning of exempt income. As regards interest expenditure, the assessee has shown from the Balance Sheet as on 31/3/2012, that own funds of the assessee were much more than the investments made. It is a well settled legal proposition that were both, interest bearing and own interest free funds are available, it shall be presumed that investments are made from own funds. Disallowance made under rule 8D (2)(i) (ii) were uncalled for. In so far as disallowance under rule 8D (2)(iii) is concerned, the assessee has made suomotu disallowance of ₹ 10,000/- as against dividend income of ₹ 1,21,155/-. Apex Court in the case of PCIT v. State Bank of Patiala 2018 (11) TMI 1565 - SC ORDER has approved that disallowance under section 14A r.w. Rule 8D(2)(iii) cannot exceed the exempt income earned. We find no merit in ground No.1 of the appeal, the same is dismissed, accordingly. Disallowance of Client referral fees - HELD THAT - A perusal of the table furnished by the assessee clearly indicates that percentage of the fees paid in each year varies and there is no fixed pattern of payment of Client referral Fees. AO should have examined genuineness of the payments made rather than estimating by applying percentage of the earlier assessment year. In the facts of the case, we deem it appropriate to restore this issue back to the file of AO to verify genuineness of the payments made to the parties concerned. AO while verifying genuineness of the payments, shall grant reasonable opportunity of hearing to the assessee, in accordance with law. Order being pronounced after ninety (90) days of hearing - COVID-19 pandemic and lockdown - HELD THAT - Taking note of the extraordinary situation in the light of the COVID-19 pandemic and lockdown, the period of lockdown days need to be excluded. See case of DCIT vs. JSW Limited 2020 (5) TMI 359 - ITAT MUMBAI

Summary

Issues Involved:
1. Disallowance under section 14A of the Income Tax Act, 1961 r.w.r. 8D.
2. Disallowance of Client referral fees of ?27,93,401/-.

Issue-wise Detailed Analysis:

1. Disallowance under section 14A of the Income Tax Act, 1961 r.w.r. 8D:

The assessee, a share broker, filed its return of income for the assessment year 2012-13, declaring a total income of ?9,59,865/-. The assessee received a dividend income of ?1,21,155/- and made a suo-motu disallowance of ?10,000/- for earning exempt income. The Assessing Officer (AO) made an additional disallowance of ?9,57,180/- as direct expenditure under Rule 8D(2)(i) of the Income Tax Rules, 1962, including Demat charges. The AO also disallowed ?18,610/- under Rule 8D(2)(ii) as interest expenditure and ?26,333/- under Rule 8D(2)(iii), totaling ?10,02,123/- under section 14A r.w.r. 8D.

The assessee argued that the Demat charges were related to its share broking business and should be allowable as business expenditure. The assessee further contended that its own funds, amounting to ?33.53 crores, were much more than the investments made, and hence, no interest expenditure was incurred. The assessee referred to the Supreme Court's decision in Hero Cycles Pvt. Ltd. Vs. CIT, which upheld the presumption that own funds are utilized for making investments when both interest-bearing and own funds are available.

The Tribunal found that the disallowance under Rule 8D(2)(i) and (ii) by the AO was unwarranted as the Demat charges were related to the share broking business and the assessee's own funds were sufficient to cover the investments. However, the disallowance under Rule 8D(2)(iii) was justified to the extent of the exempt income earned, as per the Supreme Court's decision in PCIT v. State Bank of Patiala. Therefore, the first ground of appeal was dismissed.

2. Disallowance of Client referral fees of ?27,93,401/-:

The assessee paid Client referral fees of ?45,52,399/- during the assessment year, which was 13.87% of the total turnover. The AO restricted the Client referral fees to 5.36%, based on the ratio of fees paid in the preceding assessment year. The assessee argued that the percentage of Client referral fees paid varied each year and provided details of the fees paid in the preceding three assessment years, showing an average of 17.24%.

The Tribunal observed that the assessee had furnished details of the sub-brokers to whom the fees were paid, including their address, PAN, amount paid, and TDS details. These details were not considered by the AO or the CIT(A). The Tribunal noted that the CIT(A)'s observation that the assessee failed to provide factual data was contrary to the documents on record. The Tribunal held that the AO should have verified the genuineness of the payments rather than estimating the fees based on the previous year's percentage.

The Tribunal restored the issue to the AO for verification of the genuineness of the payments, granting the assessee a reasonable opportunity of hearing. The second ground of appeal was allowed for statistical purposes.

Conclusion:

The appeal of the assessee was partly allowed for statistical purposes. The Tribunal's order was pronounced beyond the period of 90 days due to the COVID-19 lockdown, which was considered an extraordinary circumstance.