2013 (11) TMI 810 - AT - Income Tax

Tribunal Confirms CIT(A)'s Decisions on Disallowances

ASSTT COMMISSIONER OF INCOME TAX Versus M/s ALLIED INSTRUMENT PVT LTD

ASSTT COMMISSIONER OF INCOME TAX Versus M/s ALLIED INSTRUMENT PVT LTD - TMI Issues Involved:1. Disallowance under section 40(a)(ia) for non-deduction of tax at source.2. Disallowance under section 14A read with Rule 8D for expenses related to exempt income.Detailed Analysis:Issue 1: Disallowance under section 40(a)(ia) for non-deduction of tax at sourceFacts:The Revenue challenged the deletion of disallowance under section 40(a)(ia) for payments made to M/s. Ashit Packaging Pvt. Ltd. and M/s. Liba Enterprise without deducting tax at source. The Assessing Officer (AO) treated these payments as job work under section 194C, necessitating tax deduction at source (TDS).Assessee's Argument:The assessee contended that the transactions were purchases of goods, not contracts for work, as evidenced by excise duty levied on the goods. The relationship was on a principal-to-principal basis, with suppliers having their own establishments and procuring raw materials independently.CIT(A)'s Findings:The CIT(A) agreed with the assessee, noting that the suppliers retained ownership of the goods until delivery, indicating a sale transaction. The CIT(A) cited the ITAT Delhi Bench decision in Reebok India and the Bombay High Court decision in Glenmark Pharmaceuticals Ltd., which held that TDS under section 194C is not applicable if the agreement is on a principal-to-principal basis and the manufacturer uses its own materials.Tribunal's Decision:The Tribunal upheld the CIT(A)'s decision, emphasizing that the materials were not supplied by the assessee and excise duty was charged, confirming the principal-to-principal nature of the transactions. Thus, provisions of section 194C and consequent disallowance under section 40(a)(ia) were not applicable.Issue 2: Disallowance under section 14A read with Rule 8D for expenses related to exempt incomeFacts:The AO disallowed Rs. 3,87,319 under section 14A read with Rule 8D, attributing it to expenses incurred for earning exempt dividend income of Rs. 1,448. The assessee argued that interest-bearing funds were not used for investments and the disallowance should be limited to the dividend income.CIT(A)'s Findings:The CIT(A) noted that the assessee failed to provide day-to-day cash flow statements to prove that no interest-bearing funds were used for investments. The CIT(A) directed the AO to correct the calculation of average investment but upheld the application of Rule 8D, rejecting the assessee's reliance on the ITAT Mumbai decision in Yatish Trading Co. (P.) Ltd. as it pertained to a different assessment year.Tribunal's Decision:The Tribunal agreed with the CIT(A), stating that the expenditure need not be proportionate to the income. The Tribunal referenced the Supreme Court decision in CIT vs. Rajendra Prasad Mody, which held that expenditure incurred for earning income should not be disallowed even if no income is received. The Tribunal upheld the CIT(A)'s direction to recompute the disallowance under Rule 8D, finding no infirmity in the order.Conclusion:The Tribunal dismissed both the Revenue's appeal and the assessee's cross objections, affirming the CIT(A)'s decisions on both issues. The Tribunal confirmed that the transactions with M/s. Ashit Packaging Pvt. Ltd. and M/s. Liba Enterprise were sales and not job contracts, thus not attracting TDS under section 194C. Additionally, the Tribunal upheld the disallowance under section 14A read with Rule 8D, directing a recalculation based on correct average investment figures.