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TMI Blog2013 (1) TMI 36X X X X Extracts X X X X X X X X Extracts X X X X ..... reply he, inter-alia, concluded that the payment was hit by section 2(22)(e). The AO had not given any notice in this regard to assessee. Hence issue remand back to AO Disallowance u/s 14A – Rule 8D – Whether AO can apply Rule 8D without verifying the correctness of the claim of the assessee in respect of such expenditure in relation to income which did not form part of the total income of assessee - 5% of average value of investment towards deemed expenses relating to tax free income – Held that:- The mandate of section 14A(2) clearly requires the AO to first consider the assessee’s claim and after rejecting the same should resort to Rule 8D. We, therefore, consider it in the interest of justice that the matter should be restored back to the file of AO X X X X Extracts X X X X X X X X Extracts X X X X ..... y commercial consideration. 2.3 That the Commissioner of Income Tax (Appeals) erred on facts and in law in holding that the appellant had made payment to its substantial shareholders, viz., Siegwerk Drukfarben and other two sister concern M/s Siegwerk Benelux NV and M/s Siegwerk (Asia Pacific) P. Ltd. 2.4Without prejudice that the Commissioner of Income tax (Appeals) erred on facts and in law in not appreciating that M/s Siegwerk Benelux NV and M/s Siegwerk (Asia Pacific) P. Ltd. were not the shareholders of the appellant and section 2(22)(e) of the Act could not be invoked in this case. 3. That the Commissioner of Income tax (Appeals) erred on facts and in law in upholding the disallowance of Rs.12,71,020/- invoking the provisions of section 14A of the Act." 5. Brief facts apropos ground no. 1 are that Assessing Officer noticed that assessee had debited Rs.10,09,034/- in the profit and loss account as exchange difference. The assessee replied as under: - "Reference to your point No. 11 part II on Exchange difference of Rs.10,09,034/- we have given your good self the details of realized and unrealized gain. Here we further want to emphasis that we follow this practice of r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or paid in fixed amounts, e.g. cash, receivables and payables. The word "paid" is defined u/s 43(2). This has been discussed earlier. Similarly, it is important to note that foreign currency notes, balance in bank accounts denominated in a foreign currency, and receivables/payables and loans denominated in a foreign currency as well as sundry creditors are all monetary items which have to be valued at the closing rate under AS-11. Under paragraph 5, a transaction in a foreign currency has to be recorded in the reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction. This is known as "recording of transaction on initial recognition". Paragraph 7 of AS-11 deals with reporting of the effects of changes in exchange rates subsequent to initial recognition. Paragraph 7(a), inter-alia, states that on each balance sheet date monetary items, enumerated above, denominated in a foreign currency should be reported using the closing rate. In case of revenue items falling u/s 37(1), paragraph 9 of AS-11 which deals with recognition of exchange differences, needs to be considered. Under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee company and the other two companies are sister concerns of Seigwerk Druk Farben. He, therefore, disallowed the assessee's claim for three reasons: - (i) that assessee has transferred its profit to the holding company in the name and garb of inter company management charges and, therefore, it was hit by section 2(22)(e) of the I.T. Act. (ii) that this payment is nothing but basically a payment under the guise of collusive agreement between the respective parties and, therefore, it is payment other than meant for business exigencies and disallowable u/s 37(1); (iii) that these are the payments given to the holding company and its concerns to use the brand name of the foreign based company and so it is for enduring benefit to the Indian assessee company and, therefore, capital in nature. He therefore, made a disallowance of Rs.1,43,87,679/-. 14. Before ld. CIT(A), the assessee, inter-alia, submitted as under: "To contradict such argument it is said: - i) In the instant case the appellant has not given any advance, irrespective of the fact that there are common directors holding 20% or more above shares interest. The appellant has taken the services and has made the paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee was primarily making the payment for procuring IT and HR services, etc. He submitted that the AO invoked section 2(22)(e) without giving any notice in this regard and ld. CIT(A) confirmed the AO's action on this count without properly appreciating the facts. He, therefore, submitted that assessee did not get opportunity to explain its case and, therefore, the matter may be restored back to the file of AO for examining the issue afresh. 17. Ld. DR relied on the order of ld. CIT(A). 18. We have considered the rival submissions and have perused the record of the case. 19. We find from the assessment order that primarily the AO had required the assessee to substantiate its claim that the payments were made for business purposes and were not collusive in nature because payments were made to parties falling within the categories of section 40A(2)(b). However, after considering the assessee's reply he, inter-alia, concluded that the payment was hit by section 2(22)(e). The AO had not given any notice in this regard to assessee. 20. Before ld. CIT(A), the assessee had filed detailed note about the object and purpose of payment of impugned amount. However, without considering the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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