Tribunal Partially Allows Appeal on Staff Welfare & Management Expenses Disallowance

The Tribunal partly allowed the appeal, directing the disallowance of staff welfare expenses under section 40A(9) only for the payment made directly to the Registrar of Societies. The disallowance of proportionate management expenses under section 14A was restricted to Rs. 1,45,98,406/-, with the issue remanded to the AO for further examination following Bombay High Court guidelines. The disallowance of commission expenses to non-whole time directors under section 40(a)(ia) was overturned, as the Tribunal held that such payments do not attract TDS under section 194H.

---

---

Issues Involved:
1. Disallowance of staff welfare expenses under section 40A(9) of the Income Tax Act.
2. Disallowance of proportionate management expenses under section 14A of the Income Tax Act.
3. Disallowance of commission expenses to non-whole time directors under section 40(a)(ia) of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Disallowance of Staff Welfare Expenses under Section 40A(9):
The first issue concerns the disallowance of Rs. 8,66,375/- for staff welfare expenses by invoking section 40A(9) of the Income Tax Act. The assessee, a public company engaged in various businesses, claimed expenses for staff welfare activities. The Assessing Officer (AO) disallowed part of these expenses, stating they were not deductible under section 40A(9). The CIT(A) upheld this disallowance. The Tribunal referred to a previous decision in the assessee's favor for AY 2005-06, where similar expenses were allowed under section 37(1) of the Act, except for a direct subscription to a cooperative society. The Tribunal found the expenses for the current year to be identical and directed the AO to disallow only the payment made directly to the Registrar of Societies, i.e., Rs. 25,800/-. Thus, the assessee's appeal was partly allowed.

2. Disallowance of Proportionate Management Expenses under Section 14A:
The second issue involves the disallowance of Rs. 1,45,98,406/- as proportionate management expenses under section 14A related to exempt income. The assessee had initially determined Rs. 49,08,811/- as inadmissible expenses. However, the AO invoked section 14A read with Rule 8D, making a disallowance of Rs. 15,33,88,500/-. The CIT(A) reduced this to 1% of aggregate expenses, amounting to Rs. 1,95,07,217/-, thereby restricting the disallowance to Rs. 1,45,98,406/-. The Tribunal, citing the Bombay High Court's decision in Godrej Boycee Mfg. Co. Ltd. vs. DCIT, noted that Rule 8D is not applicable for AY 2006-07. The Tribunal set aside the issue to the AO to determine the nexus of expenses with exempt income, following the Bombay High Court's guidelines. This ground was allowed for statistical purposes.

3. Disallowance of Commission Expenses to Non-Whole Time Directors under Section 40(a)(ia):
The third issue pertains to the disallowance of Rs. 25,67,671/- paid as commission to non-whole time directors without deducting TDS, invoking section 40(a)(ia). The AO considered these payments under section 194H and made the disallowance. The CIT(A) upheld this decision, stating that the commission paid to non-executive directors falls under section 194H. The Tribunal, however, referred to the jurisdictional Tribunal's decision in Jahangir Biri Factory Pvt. Ltd. vs. DCIT, where it was held that commission paid to directors does not fall under section 194H or section 194J. Following this precedent, the Tribunal allowed the assessee's claim, concluding that the commission payments to non-executive directors do not attract TDS under section 194H.

Conclusion:
The appeal was allowed in part, with the Tribunal providing relief on the disallowance of staff welfare expenses and commission expenses to non-whole time directors, while remanding the issue of proportionate management expenses back to the AO for reconsideration. The order was pronounced in open court on 18.11.2011.

---