2012 (10) TMI 900 - AT - Income Tax

Tribunal directs reassessment under Sections 14A and 40A(2)

M/s JUPITER CAPITAL (P) LTD Versus ASSTT COMMISSIONER OF INCOME TAX

M/s JUPITER CAPITAL (P) LTD Versus ASSTT COMMISSIONER OF INCOME TAX - TMI Issues Involved:1. Disallowance under Section 14A of the Income-tax Act, 1961.2. Disallowance of payment of license fee under Section 40A(2) of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Disallowance under Section 14A:The assessee, M/s. Jupiter Capital (P) Ltd., filed a return for the assessment year 2007-08 declaring a loss of Rs. 44,00,286/-. During the assessment, the AO noticed that the assessee's income included both taxable interest income and non-taxable dividend income. The AO found that no expenses had been disallowed under Section 14A for earning the exempt income and subsequently disallowed Rs. 3,87,95,027/- under Section 14A read with Rule 8D.The assessee contested this disallowance, arguing that Section 14A was introduced by the Finance Act, 2006, effective from 1-4-2007, and hence not considered for the current year. They also argued that their primary business was trading in investments, and earning dividends was incidental. The AO, however, disagreed, stating that the income from portfolio management was primarily interest income, and the dividend income was substantial, justifying the disallowance under Section 14A.Upon appeal, the CIT(A) confirmed the addition to the extent of Rs. 3,54,24,592/-, providing relief of Rs. 33,70,435/-. The CIT(A) held that the amendments introduced by the Finance Act, 2006, were clarificatory and retrospective, thus applicable to the assessment year 2007-08. The CIT(A) also stated that the AO could disallow a definite sum if the total income included exempt income, irrespective of whether such expenses were claimed in the accounts.Both the assessee and the revenue appealed against the CIT(A)'s order. The Tribunal referred to its earlier decision for the assessment year 2006-07, where a similar issue was remitted to the AO for reconsideration in light of the Bombay High Court's guidelines in Godrej and Boyce Manufacturing Co. Ltd. Consequently, the Tribunal remitted the issue back to the AO for reconsideration, allowing the appeal for statistical purposes.2. Disallowance of Payment of License Fee under Section 40A(2):The AO disallowed Rs. 45 lakhs paid by the assessee to its holding company, VHPL, under Section 40A(2), considering it unreasonable and excessive. The payment was for a non-exclusive right to use the name 'Rajeev Chandrashekar,' who was a director in both companies. The AO found no evidence of business transactions resulting from this goodwill and concluded that the expenditure did not benefit the assessee.The assessee argued before the CIT(A) that the expenditure was genuine and necessary for business, and the AO had not provided evidence to prove it was excessive. The CIT(A) agreed, stating that, without establishing that the payment was excessive, the provisions of Section 40A(2) could not be invoked, and deleted the disallowance.The revenue appealed against this decision, arguing that the payment was excessive and did not benefit the assessee's business. The Tribunal noted that while the payment was genuine, the AO had not demonstrated how it was excessive compared to market rates or provided comparable cases. The Tribunal restored the matter to the AO to pass a speaking order with necessary materials, allowing the revenue's appeal for statistical purposes.Conclusion:Both the assessee's and the revenue's appeals were allowed for statistical purposes, with directions for the AO to reconsider the disallowance under Section 14A in light of the Bombay High Court's guidelines and to re-evaluate the disallowance under Section 40A(2) with proper evidence and comparisons.