2020 (10) TMI 930 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - recording satisfaction - assessee s objection that there is absence of satisfaction recorded by the Assessing Officer - HELD THAT - We note that the AO has categorically stated that Hence, having regard to the accounts of the assessee-company, I am satisfied that the claim of the assessee in respect of expenditure in relation to income which does not form part of the total income under the Income Tax Act, 1961 is not correct. Plea that the AO has not recorded any satisfaction regarding assessee s claim fails and in this view of the matter the case laws referred by assessee for the proposition that the disallowance in this regard on the touchstone of Rule 8D would fails in the absence of necessary satisfaction by the AO are not applicable, in as much as satisfaction of the AO is very much evident in the assessment order. Accordingly, this limb of claim of assessee s argument is not correct. We note that the exempt income earned is only ₹ 3,99,270/- and the disallowance for administrative expenses incurred in this regard is ₹ 2,36,733/-. This at glance is not in accordance with principles of proportionality. Hence, we remit this issue to the file of the AO with the direction to assessee to submit its details of direct and indirect expenses which has been incurred in incurring exempt income. Addition being the interest income reflected in the AIR information not credited in the profit and loss account - HELD THAT - Contention of assessee is that the said income did not belong to the assessee and it was mistake on the part of IL FS Securities Ltd. to show the above sum as income of the assessee was not made before the AO nor the assessee had asked the Assessing Officer to issue/make any inquiry from the concerned entity. Hence matter is remitted to the file of the Assessing Officer. AO is directed to examine the assessee s plea that the said income reflected in AIR information is wrong in as much as some does not belong to the assessee. Disallowance u/s 36(l)(ii) - Payment of bonus to its directors shareholders - HELD THAT - AO in this case if he wants to invoke provisions of section 36(1)(ii) on the touchstone of M/S. DALAL BROACHA STOCK BROKING PVT. LTD. 2011 (6) TMI 251 - ITAT, MUMBAI . AO will have to give clear cut finding as to what was tax avoidance or tax evasion involved in this case. For this purpose the AO will need to examine the amount of dividend which the assessee-company would have declared under the provisions of relevant payment of dividend as per the Company s Act. He shall also compute tax sought to be avoided by the assessee company by the so called scheme of the company. In this regard the decision in the case of Excel Industries Ltd. 2013 (10) TMI 324 - SUPREME COURT is also relevant here as expounded that if the tax effect is revenue neutral, the proposition need not be disturbed. Here Assessing Officer shall examine the assessee s submission that both the share holder directors or owners of the company have filed their individual return and have been taxed at the highest bracket in the context of this Hon'ble Supreme Court decision. So the tax impact and the emerging tax neutrality if any, needs to be evaluated on the touchstone of this decision also. The claim in this regard was duly submitted, as noted by learned CIT(A) himself in his order. Accordingly, we set aside the issue of allowability of payment of bonus to the director shareholders in accordance with our direction and the decisions quoted above

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D(2)(iii)
2. Non-reconciliation of Annual Information Return (AIR)
3. Disallowance of bonus to directors under Section 36(1)(ii)

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D(2)(iii):
The Assessing Officer (AO) initially disallowed ?15,19,159 under Section 14A read with Rule 8D. The CIT(A) provided relief by deleting the interest expenditure disallowance of ?12,82,425 under Rule 8D(2)(ii) but upheld the disallowance of ?2,36,733 under Rule 8D(2)(iii), which was computed at 0.5% of the average value of investments. The CIT(A) reasoned that some expenses related to employee benefits and office establishment were attributable to earning exempt dividend income. The ITAT found that the AO had recorded satisfaction regarding the assessee's claim of not incurring any direct expenses for earning exempt income. However, the ITAT noted that the disallowance amount seemed disproportionate compared to the exempt income earned. Therefore, the ITAT remitted the issue back to the AO to re-examine the direct and indirect expenses incurred in earning exempt income and to record satisfaction accordingly.

2. Non-reconciliation of Annual Information Return (AIR):
The AO added ?44,589 as interest income based on AIR information, which was not reflected in the assessee's profit and loss account. The CIT(A) upheld this addition, stating that the assessee did not provide sufficient evidence to show that the interest income from IL&FS Securities Services Ltd. and Bombay Stock Exchange Ltd. did not accrue to the assessee. The ITAT noted that the assessee contended the income did not belong to them and was a mistake by IL&FS Securities Ltd. However, this contention was not made before the AO. The ITAT remitted the matter to the AO for re-examination, directing the AO to verify the assessee's claim that the income reflected in the AIR information was incorrect.

3. Disallowance of bonus to directors under Section 36(1)(ii):
The AO disallowed ?5,00,000 paid as bonus to directors, invoking Section 36(1)(ii), arguing that the payment was in lieu of dividends. The CIT(A) upheld this disallowance, referring to the ITAT Special Bench decision in the case of Dalai & Broacha Stock Broking Pvt. Ltd. and the Bombay High Court decision in Loyal Motor Service Co. Ltd. The ITAT noted that the Special Bench decision was based on a finding of tax avoidance. The ITAT directed the AO to re-examine whether the bonus payment was indeed a tax avoidance scheme. The AO was instructed to determine the amount of dividend that would have been declared under the Companies Act and to compute any tax avoidance involved. The AO was also directed to consider the Supreme Court decision in Excel Industries Ltd., which expounds that if the tax effect is revenue-neutral, the proposition need not be disturbed. The ITAT remitted the issue back to the AO for a detailed examination and to provide the assessee an opportunity to be heard.

Conclusion:
The appeal by the assessee was partly allowed for statistical purposes, with the ITAT remitting the issues back to the AO for re-examination and proper satisfaction recording, ensuring that the assessee is given adequate opportunity to present their case.