2015 (4) TMI 938 - AT - Income Tax

Tribunal allows assessee's appeal on interest and dividend disallowances, reduces Section 14A disallowance, Revenue's appeal dismissed.

The Tribunal allowed the assessee's appeal partly by deleting the disallowance of Rs. 43,42,717 for interest paid on deposits from chit subscribers, ... Chit Fund Company - Disallowance of interest paid on deposits received from chit subscribers - Interest free advances given to sister concerns - AO disallowed interest expense on the basis of diversion of income for non-business purpose - CIT(A) disallowed interest expenses on account of non business expenditure - Disallowance u/s 14A - Disallowance of dividend paid to chit subscribers on non deduction of tax at source, treating it as Interest paid - Held that:- It is manifest from the relevant clause of the Byelaws governing the scheme of chit fund that the interest at the rate of 6% was payable by the assessee company on the instalments received in advance form the subscribers. Such interest was required to be calculated monthly and kept separately by the assessee, and accordingly in compliance with clause 5(d) of the Bye-laws, the amount of instalments received in advance from the subscribers was kept by the assessee separately in the form of bank deposits. In our opinion, receipt of advance instalments from the subscribers, payment of interest thereon at 6% per annum and investment of the amount of such advance subscriptions separately in the bank deposits in compliance with the bye laws of the chit fund scheme, thus was integral part of the business of the assessee of running the chit fund, and consequently, interest received by the assessee on such bank deposits constituted its business income. The learned CIT(A), therefore, was not justified in treating such interest as income from other sources. Similarly, the learned CIT(A), in our opinion, was not justified in confirming the disallowance made by the Assessing Officer on account of interest paid by the assessee on the instalments received in advance from the customers of the chit funds, as the said interest paid by the assessee as per the scheme of the chit funds, clearly constituted expenditure incurred by it wholly and exclusively for the purpose of its business. According to us, there was a direct nexus between the interest paid by the assessee on the said instalments deposited by the members with its business of running a chit fund, and the same, therefore, was allowable as business expenditure, as rightly claimed by the assessee. We, therefore, delete the disallowance made by the Assessing Officer and confirmed by the learned CIT(A) on account of such interest and allow ground no.2 of the assessee’s appeal. Disallowance u/s 14A - It is observed that investment in the range of ₹ 25 to 30 crores was made by the assessee company in the shares during the year under consideration and in order to manage the investment of this volume, which also involved taking decisions from time to time regarding change in the portfolio, certain expenditure was required to be incurred, which cannot be as low as 1 or 2% of the exempt dividend income, as claimed by the learned counsel for the assessee. Having regard to the facts of the case including especially the quantum of investment made by the assessee in the shares, the quantum of dividend income received during the year under consideration, etc., we are of the view that it would be fair and reasonable to estimate the expenditure incurred by the assessee for earning of exempt dividend income at ₹ 2,32,375 being 5% of the exempt dividend income. We accordingly restrict the disallowance made by the Assessing Officer and confirmed by the CIT(A) under S.14A to ₹ 2,32,375 and allow partly ground No.3 of the assessee’s appeal. Disallowance of dividend paid to chit subscribers on non deduction of tax at source - As agreed by the learned representatives of both the sides, the issue involved in the appeal of the Revenue is squarely covered in favour of the assessee by the decision of the coordinate bench of this Tribunal in assessee’s own case [2012 (2) TMI 468 - ITAT HYDERABAD] for assessment year 2008-09 rendered vide order dated 24.2.2012, wherein a similar disallowance made by the Assessing Officer was held to be unsustainable, following the decision of the Madras high Court in the case of Bilahari investments (P)Ltd. [2006 (6) TMI 59 - MADRAS HIGH COURT], wherein it was held that the dividend distributed by the assessee did not part-take the character of interest and consequently, the assessee was not liable to deduct tax at source. Respectfully following these judicial pronouncements in assessee’s own case on similar issue, we uphold the impugned order of the learned CIT(A), deleting the disallowance made by the Assessing Officer under S.40a(ia) on account of dividend paid by the assessee to the chit subscribers for non-deduction of tax at source and dismiss the appeal of the Revenue. - In the result, appeal of the assessee is partly allowed and the appeal of the Revenue is dismissed. Issues Involved1. Disallowance of interest on deposits received from chit subscribers.2. Disallowance under Section 14A of the Income Tax Act for expenses incurred to earn exempt income.3. Disallowance under Section 40a(ia) of the Income Tax Act for dividend paid to chit subscribers without deduction of tax at source.Detailed AnalysisAssessee's Appeal - ITA No.1536/Hyd/2010Issue 1: Disallowance of Rs. 43,42,717 on account of interest- The assessee, a company engaged in various businesses including chit funds, had debited Rs. 43,42,717 as interest paid on deposits from chit subscribers in its Profit & Loss Account. The Assessing Officer disallowed this interest, contending that the deposits were used for non-business purposes, i.e., interest-free advances to sister concerns.- The assessee argued that it does not accept public deposits but allows chit subscribers to pay future instalments in advance, paying interest at 6% on such advances. These amounts are kept in short-term bank deposits, earning interest which is offered for tax.- The CIT(A) found that the assessee did not borrow money to give interest-free advances to sister concerns and that the funds were kept in bank deposits as required by the A.P. Chit Funds Act. However, the CIT(A) upheld the disallowance on different grounds, stating that the interest paid did not have a business nexus with the income from running the chit fund.- The Tribunal disagreed with the CIT(A), stating that the interest paid on advance instalments is an integral part of the chit fund business and should be allowed as business expenditure. The interest received on bank deposits from these funds also constitutes business income. Thus, the disallowance of Rs. 43,42,717 was deleted.Issue 2: Disallowance of Rs. 4,64,751 under Section 14A- The assessee received Rs. 46,47,516 as dividend income, which was exempt under Section 10(34). The Assessing Officer disallowed Rs. 4,64,751, estimating it as 10% of the exempt income for expenses incurred to earn this income.- The CIT(A) confirmed this disallowance.- The Tribunal, considering the volume of investment and the quantum of dividend income, found the 10% estimation excessive. It reduced the disallowance to Rs. 2,32,375, which is 5% of the exempt dividend income, as a reasonable estimate of the expenses incurred.Revenue's Appeal - ITA No.1553/Hyd/2010Issue 3: Deletion of Rs. 188.44 crores disallowance under Section 40a(ia)- The Assessing Officer disallowed Rs. 188.44 crores, treating the dividend paid to chit subscribers as interest and disallowing it for non-deduction of tax at source.- The CIT(A) deleted the disallowance.- The Tribunal noted that the issue was covered in favor of the assessee by previous decisions, including those of the Madras High Court and the Andhra Pradesh High Court, which held that the dividend did not constitute interest and thus did not require tax deduction at source. The Supreme Court also upheld this view by dismissing the Revenue's SLP.- Respectfully following these judicial pronouncements, the Tribunal upheld the CIT(A)'s order, deleting the disallowance under Section 40a(ia).Conclusion- The appeal of the assessee is partly allowed.- The appeal of the Revenue is dismissed.- The Tribunal's decision emphasizes the importance of the business nexus in determining the allowability of expenses and the classification of income.