2015 (11) TMI 425 - AT - Income Tax

Employees' Provident Fund contributions disallowed but investment disallowance reversed by Tribunal

The Tribunal confirmed the disallowance of employees' contribution to Provident Fund under Section 36(1)(va) but directed the AO to delete the ... Disallowance out of fees and legal expenses - CIT(A) deleted the addition - Held that:- As in earlier year similar disallowance was made and predecessor of the CIT(A) in A.Y. 2007-08 had deleted the disallowance. This fact has not been disputed by the Revenue. No material was brought on record to show that the consideration for services received by the assessee was so excessive as to warrant any disallowance out of the same. It is also observed that the amount of consideration paid was as per Memorandum of Understanding entered into by the assessee with the payee company. In view of the above facts and circumstances, we do not find any good reason to interfere with the order of the Ld.CIT(A) - Decided against revenue. Disallowance of employees contribution to Provident Fund u/s.36(1) - CIT(A) deleted the addition - Held that:- This issue has been decided against the assessee in A.Y. 2007-08 following the judgment of CIT Vs. Gujarat State Road Transport Corporation (2014 (1) TMI 502 - GUJARAT HIGH COURT -) as held that with respect to the sum received by the assessee firm from any of his employees to which provisions of sub-clause (x) of clause (24) of section (2) applies, the assessee shall be entitled to deduction in computing the income referred to in section 28 with respect to such sum credited by the assessee to the employees’ account in the relevant fund or funds on or before the “due date” mentioned in explanation to section 36(1)(va). - Decided against assessee. Disallowance u/s.14A read with Rule 8D - Held that:- First requirement of law is that the expenditure should be related to the exempt income. In case, where the assessee makes a claim that ‘x’ amount is related to the exempt income or otherwise no expenditure is related to the exempt income, in that event, the AO has to satisfy himself about the correctness of the claim having regard to the accounts of the assessee before proceeding to apply Rule 8 D of the Income Tax Rules, 1962 for computing disallowance. Hence, another requirement of law is that the AO has to satisfy himself about the correctness of the claim of the assessee having regard to the accounts of the assessee. The provision of section 14A mandates the AO to examine the accounts of the assessee before proceeding to apply Rule 8D of the IT Rules. In the present case, the AO has made disallowance on account of interest expenditure and administrative expenses. Since on both the counts, the AO has failed to record his finding, we are of the considered view that disallowance as made by the AO cannot be sustained. - Decided against revenue. Issues Involved:1. Deletion of addition of Rs. 12 lakhs on account of disallowance out of fees and legal expenses.2. Deletion of addition of Rs. 2,23,705 on account of disallowance of employees' contribution to Provident Fund under Section 36(1)(va).3. Confirmation of disallowance under Section 14A read with Rule 8D of Rs. 7,61,908.4. General grounds raised by the Revenue.Issue-Wise Detailed Analysis:1. Deletion of Addition of Rs. 12 Lakhs on Account of Disallowance Out of Fees and Legal Expenses:The Assessing Officer (AO) disallowed Rs. 12 lakhs paid by the assessee to a related concern, Dharnidhar Chemicals Pvt. Ltd. (DCPL), on the grounds that the payments were recently introduced, the agreement was loosely worded, and no detailed nature, purpose, or justification for the amount was provided. The AO also observed that no supporting evidence was placed on record regarding the services rendered by the employees of DCPL. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the disallowance, stating that similar disallowance in the previous year was deleted and that the AO did not dispute the work carried out by the employees. The Tribunal upheld the CIT(A)'s decision, noting that the AO allowed 50% of the payment, indicating acknowledgment of the services rendered, and no material was brought on record to show that the consideration for services was excessive. The Tribunal confirmed the CIT(A)'s order, rejecting the Revenue's appeal on this ground.2. Deletion of Addition of Rs. 2,23,705 on Account of Disallowance of Employees' Contribution to Provident Fund under Section 36(1)(va):The AO disallowed Rs. 2,23,705 for employees' contribution to the Provident Fund, which was not deposited within the due date under Section 36(1)(va). The CIT(A) deleted the addition. However, the Tribunal, following the judgment of the Hon'ble Gujarat High Court in the case of CIT vs. Gujarat State Road Transport Corporation, set aside the CIT(A)'s order and confirmed the AO's disallowance. The Tribunal allowed the Revenue's appeal on this ground.3. Confirmation of Disallowance under Section 14A read with Rule 8D of Rs. 7,61,908:The AO made a disallowance of Rs. 8,61,908 under Section 14A read with Rule 8D, which the CIT(A) partly confirmed by deleting Rs. 1,00,000 related to administrative expenses. The assessee contended that the AO did not establish a nexus between the expenditure disallowed and the investments made, and did not record proper satisfaction about the correctness of the claim. The Tribunal noted that for any disallowance under Section 14A, the AO must first determine the expenditure related to exempt income and record satisfaction regarding the correctness of the assessee's claim. Since the AO failed to establish the nexus and record satisfaction, the Tribunal directed the AO to delete the disallowance. The Tribunal allowed the assessee's cross-objection on this ground.4. General Grounds Raised by the Revenue:Grounds 3 and 4 raised by the Revenue were general in nature and did not require separate adjudication.Conclusion:The Tribunal partly allowed the Revenue's appeal by confirming the disallowance of employees' contribution to Provident Fund under Section 36(1)(va) and rejected the other grounds. The Tribunal allowed the assessee's cross-objection by directing the AO to delete the disallowance under Section 14A read with Rule 8D. The combined result was that the Revenue's appeal was partly allowed, and the assessee's cross-objection was allowed.