2016 (9) TMI 639 - AT - Income Tax

Tribunal partially allows appeals on IT Act & Rule 8D, restricts disallowance & upholds deletion.

The Tribunal partly allowed the appeals for statistical purposes, directing fresh verification on the deletion of 'Financial Services Charges' under ... Disallowance under section 40(a)(ia) for non-deduction of tax at source - tax deduction at source liability under section 194H - income taxable under section 17 - disallowance under section 14A read with Rule 8D - administrative expenses attributable to exempt income - allowability of staff and labour welfare expenses as business expenditureDisallowance under section 40(a)(ia) for non-deduction of tax at source - tax deduction at source liability under section 194H - income taxable under section 17 - Whether payments shown as 'Financial Services Charges' are liable to disallowance under section 40(a)(ia) for failure to deduct tax, or otherwise exigible to tax under section 17, and the appropriate adjudicatory step. - HELD THAT: - The Tribunal examined the nature of the payments claimed as financial services charges - payments incurred to facilitate bank loans for purchasers (processing/documentation/verification) and paid through company employees. The AO treated them as commission/brokerage and invoked section 40(a)(ia) read with section 194H without independent evidence that the payments were brokerage/commission, and without verifying banking records or any tie-up/agreement with the banker or whether processing charges were debited to the borrower by the bank. The CIT(A) did not affirm the AO's disallowance but directed initiation of proceedings treating the payments as taxable under section 17. The Tribunal found both authorities had not adequately verified facts or placed material to establish the payments as commission or as salary; nor had the AO ascertained from the banker whether the bank had debited such processing charges to the borrowers. In the interest of justice the Tribunal set aside the orders and restored the matter to the AO for fresh verification of whether the services were performed on behalf of the bank, whether banks debited such charges to borrowers, whether the assessee recovered such amounts from beneficiaries, and to decide allowance/disallowance accordingly. [Paras 3]Matter remanded to the AO for fresh verification and adjudication as to the true nature of the payments and consequent tax/TDS consequences; ground of revenue's appeal allowed for statistical purposes.Disallowance under section 14A read with Rule 8D - administrative expenses attributable to exempt income - Validity and extent of disallowance made under section 14A and Rule 8D in respect of exempt (dividend) income. - HELD THAT: - The Tribunal applied the statutory test that the AO must satisfy himself regarding the incurrence of expenditure in relation to exempt income before invoking section 14A and Rule 8D. The AO had mechanically applied Rule 8D without recording requisite findings; the assessee contended investments were made out of own funds and that dividend income was small and directly credited to bank account. The Tribunal found no basis to sustain the full disallowance made by the AO. However, with regard to administrative expenses, the Tribunal observed that it cannot be presumed that no administrative expenditure was incurred in earning the exempt income. Accordingly the Tribunal restricted the administrative disallowance to the extent of the exempt income actually earned (dividend credited) and sustained disallowance only to that limited extent. [Paras 4]CIT(A)'s deletion of the full disallowance upheld in part; administrative disallowance sustained only to the extent of the exempt dividend income (limited disallowance maintained), remainder of AO's disallowance deleted.Allowability of staff and labour welfare expenses as business expenditure - Whether disallowance of staff and labour welfare expenses (petty office refreshments etc.) was justified. - HELD THAT: - The Tribunal noted that the CIT(A) found such salary and labour welfare expenses necessary for carrying on business, there was no evidence that these expenses were inflated or bogus, and the departmental representative did not controvert these findings at the hearing. The vouchers were internal and authenticated and auditors had not found objection. On these facts the Tribunal found no reason to interfere with the appellate authority's conclusion. [Paras 5]Deletion of disallowance by CIT(A) upheld; revenue's ground rejected.Final Conclusion: For assessment years 2009-10, 10-11 and 11-12 the Tribunal remanded the controversy over the nature and tax/TDS consequences of 'Financial Services Charges' to the AO for fresh verification and decision; restricted the section 14A/Rule 8D disallowance to the extent of the exempt dividend income and deleted the balance; and upheld the deletion of disallowance of staff and labour welfare expenses. Appeals are disposed of partly allowing the revenue's contentions for statistical purposes. Issues Involved:1. Deletion of disallowance of 'Financial Services Charges' under Section 40(a)(ia) of the IT Act, 1961.2. Deletion of disallowance under Section 14A read with Rule 8D of the IT Rules.3. Deletion of disallowance out of staff and labour welfare expenses.Detailed Analysis:1. Deletion of Disallowance of 'Financial Services Charges' under Section 40(a)(ia) of the IT Act, 1961:The first issue pertains to the deletion of an addition made on account of disallowance of Financial Services Charges amounting to Rs. 86,26,198/-. The assessee claimed this amount as reimbursement of expenses for facilitating bank loans for farmers purchasing tractors. The AO disallowed the claim under Section 40(a)(ia) due to non-deduction of TDS, treating the payments as commission or brokerage under Section 194H. The CIT(A) directed the AO to initiate proceedings for non-deduction of TDS, treating the payments as taxable under Section 17 of the IT Act.Upon appeal, it was contended that the expenses were related to business and not covered under Section 194H. The Tribunal noted that the nature of the payments was neither salary nor commission/brokerage. The AO failed to provide evidence that these were commission payments. The Tribunal restored the matter to the AO for fresh verification, instructing to verify from the bank whether the expenses were debited to the loan beneficiary's account and if the assessee provided the services on behalf of the bank. If verified, the AO should allow the deduction. This ground was allowed for statistical purposes.2. Deletion of Disallowance under Section 14A read with Rule 8D of the IT Rules:The second issue involves the deletion of an addition of Rs. 5,81,868/- made by the AO under Section 14A read with Rule 8D. The AO applied Rule 8D without examining the factual position, while the assessee argued that it had sufficient own funds and the dividend income was meager (Rs. 30,000/-).The Tribunal held that the AO must satisfy himself regarding the claim of non-incurring of expenditure before making a disallowance. Since the assessee had sufficient own funds, the interest-related disallowance was unjustified. However, it acknowledged that some administrative expenses related to exempt income might have been incurred. Therefore, it restricted the administrative disallowance to Rs. 30,000/-, sustaining this amount and partly allowing the ground.3. Deletion of Disallowance out of Staff and Labour Welfare Expenses:The third issue concerns the deletion of a disallowance of Rs. 50,000/- out of staff and labour welfare expenses. The AO made the disallowance without specific instances, while the assessee argued that these were petty day-to-day expenses duly authenticated by internal vouchers.The Tribunal upheld the CIT(A)'s finding that these expenses were necessary for business and there was no evidence of inflation or bogus claims. The ground was rejected, and the deletion of disallowance was upheld.Conclusion:The Tribunal partly allowed the appeals for statistical purposes, directing fresh verification on the first issue and partially sustaining the disallowance on the second issue. The third issue's deletion was upheld. The same decisions were applied to the identical grounds in the other appeals for the assessment years 2010-11 and 2011-12.