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2023 (9) TMI 603 - AT - Income TaxTDS liability u/s 194A - Nature of amount paid as per the scheme - Non-Availing Compensation (NAC) - In the nature of Interest or not? - it was alleged that the scheme has been disguised as a time share scheme, and it is actually a borrowing activity. Thus, in the reasons for re-opening the assessment, it was concluded that the assessee has booked NAC in the form of repayment of unsecured loan/deposits, and interest paid, is not allowable under section 40(a)(ia) of the Act due to non deduction of TDS. HELD THAT - We find that a similar issue came up for consideration in the case of sister concern in M/s. Royal Twinkle Star Club Pvt. Ltd 2023 (5) TMI 786 - ITAT MUMBAI held that approach of the Revenue, on one hand treating the NAC paid by the assessee to its members as interest and on the other hand treating the amount received from the members as the income of the assessee is self-contradictory since only when the deposits are considered as a loan, which was one of the allegations in the reasons recorded while reopening the assessment, the interest can be charged on it. Thus, when the assessee s business was considered to be in the nature of CIS, all the consequences in relation thereto must follow. It is trite law that entries in the books of account are not decisive or determinative of the true nature of the entries. Therefore, the amount received by the assessee from its members, to the extent the same is treated as income in its books of account, is directed to be reduced while calculating the total income of the assessee, since the same is in the nature of capital receipt. We find that in the present case, the NAC paid to the members also includes the repayment of membership amount collected from the members and the same has been claimed as a deduction by the assessee. Since the said repayment has already been claimed as a deduction, therefore the said amount need not be again reduced while calculating the total income of the assessee for the year under consideration. Decided in favour of assessee. Considering 30% of NAC for the purpose of disallowance under section 40(a)(ia) of the Act instead of the entire amount - HELD THAT - CBDT, while explaining the provisions of the Finance (No.2) Act, 2014, vide Circular No.1 of 2015, dated 21/01/2015, clarified that the amendment by the Finance (No.2) Act, 2014 to the provisions of section 40(a)(ia) of the Act takes effect from 1st April 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years. We further find that in Shree Choudhary Transport Company 2020 (8) TMI 23 - SUPREME COURT held that the amendment by the Finance (No.2) Act, 2014 is with effect from 01/04/2015, and shall be applicable from the assessment year 2015-16. Since it is settled that the amendment to section 40(a)(ia) of the Act by the Finance (No.2) Act, 2014 is with effect from the assessment year 2015-16, the AO is directed to apply the said amended provision while computing disallowance under section 40(a)(ia) of the Act. As a result, ground no.1.f, raised in assessee s appeal is allowed. Disallowance u/s 14A r/w rule 8D - HELD THAT - As in the present case, the assessee has not earned any dividend income, therefore, disallowance of expenditure under section 14A read with Rule 8D is not sustainable. Scope of amendment - We find that while dealing with the issue of whether the aforesaid amendment by the Finance Act, 2022 is prospective or retrospective in operation, as in PCIT vs M/s Era infrastructure (India) Ltd, 2022 (7) TMI 1093 - DELHI HIGH COURT held that the amendment by Finance Act, 2022, in section 14A is prospective and will apply in relation to the assessment year 2022-23 and subsequent assessment years. Thus, even in view of the aforesaid amendment also, the disallowance under section 14A r/w rule 8D is not permissible in the present case.
Issues Involved:
1. Validity of reopening of assessment under sections 147/148 of the Income Tax Act, 1961. 2. Applicability of section 194A to Non-Availing Compensation (NAC). 3. Treatment of deposits received from members and NAC as interest under section 40(a)(ia). 4. Disallowance under section 14A read with Rule 8D. Summary: 1. Validity of Reopening of Assessment: The assessee challenged the reopening of assessment under sections 147/148, arguing it was done without valid reasons. The Tribunal noted that ground no.1 was not pressed during the hearing and thus dismissed it as not pressed. 2. Applicability of Section 194A to NAC: The assessee argued that the provisions of section 194A should not apply to NAC. The Tribunal referred to the case of M/s. Royal Twinkle Star Club Pvt. Ltd. and concluded that the NAC paid by the assessee to its members was treated as interest, and therefore, the deposits received from members could not be treated as revenue but as capital receipts. Consequently, the Tribunal allowed the ground regarding the non-applicability of section 194A to NAC. 3. Treatment of Deposits and NAC as Interest: The Tribunal found that treating NAC as interest and disallowing it under section 40(a)(ia) for non-deduction of TDS was contradictory to treating the deposits as income. The Tribunal directed that the amount received from members, to the extent treated as income in the books, should be reduced while calculating the total income of the assessee. This was consistent with the approach in the case of M/s. Royal Twinkle Star Club Pvt. Ltd. 4. Disallowance under Section 14A read with Rule 8D: The Tribunal observed that no exempt income was received by the assessee during the relevant year, and thus, section 14A would not apply. It referred to the decisions in Cheminvest Ltd. v. CIT and Pr.CIT v/s Kohinoor Project (P) Ltd., which held that disallowance under section 14A is not applicable if no exempt income is earned. The Tribunal also noted that the amendment to section 14A by the Finance Act, 2022, is prospective and does not apply to the assessment years under consideration. Conclusion: The appeals for the assessment years 2012-13, 2013-14, 2014-15, and 2015-16 were partly allowed, with specific grounds being allowed for statistical purposes and others being kept open for future consideration. The Tribunal directed the Assessing Officer to follow the amended provisions and judicial precedents while computing the disallowances and adjustments.
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