2017 (3) TMI 99 - AT - Income Tax

Tribunal recalculates disallowances, upholds financial charges, rent payment deletions

The tribunal set aside the CIT(A)'s order and directed the AO to recalculate the disallowances under section 14A as per Rule 8D. The disallowance of ... Disallowance of expenditure attributable to exempt income under section 14A - computation under Rule 8D of the Income Tax Rules is mandatory where section 14A applies - onus on the assessee to prove commercial expediency for interest free advances - notional interest disallowance on interest free advances where commercial expediency is not established - business expediency test for allowability of expenditure under section 37 - consistency in revenue's stance across assessment years - restoration to Assessing Officer for fresh adjudication after affording opportunity of hearingDisallowance of expenditure attributable to exempt income under section 14A - computation under Rule 8D of the Income Tax Rules is mandatory where section 14A applies - restoration to Assessing Officer for fresh adjudication after affording opportunity of hearing - Whether disallowances under section 14A must be computed as per Rule 8D and the proper course where computation was not made in accordance with Rule 8D. - HELD THAT: - The Tribunal held that once disallowance under section 14A is to be made, the disallowance has to be computed in accordance with Rule 8D of the Income Tax Rules, which covers direct and indirect expenses relatable to exempt income; after insertion of Rule 8D the Assessing Officer has no option but to calculate disallowance per Rule 8D. Because the lower authorities did not compute the disallowance correctly as per Rule 8D, the Tribunal set aside the CIT(A) order and remitted the matter to the Assessing Officer with a direction to compute disallowance under section 14A in accordance with Rule 8D after affording the assessee an opportunity of hearing. [Paras 5, 6]Rule 8D is mandatory for computation of disallowance under section 14A; matter restored to AO to compute disallowance under Rule 8D after hearing the assessee.Onus on the assessee to prove commercial expediency for interest free advances - notional interest disallowance on interest free advances where commercial expediency is not established - Whether interest free advances to a subsidiary can be left undisallowed or whether notional interest may be disallowed in absence of proof of commercial expediency. - HELD THAT: - Relying on the principle in S. A. Builders, the Tribunal reaffirmed that the assessee bears the onus to prove that interest free advances to a related concern were made for commercial expediency. A specific query was put to the assessee to place evidence of commercial expediency and none was furnished. In those circumstances the Tribunal concluded that the advances were not shown to be commercially expedient and therefore confirmed the Assessing Officer's quantification of notional interest (12%) as disallowance. [Paras 7, 8, 9]Assessee failed to prove commercial expediency of interest free advances; notional interest disallowance at 12% confirmed.Business expediency test for allowability of expenditure under section 37 - Allowability of rent paid for guest house (deletion of disallowance under section 37). - HELD THAT: - The Tribunal followed its earlier order in the case of the assessee's sister concern, which accepted the factual matrix (lease deed, usage details and commercial need for liaison work in Delhi) and held the guest house expenditure to be allowable. On the identical set of facts, the Tribunal found no reason to re adjudicate and accepted the CIT(A)'s deletion of the disallowance. [Paras 11, 12]Deletion of rent disallowance upheld; expenditure allowable.Consistency in revenue's stance across assessment years - restoration to Assessing Officer for fresh adjudication after affording opportunity of hearing - Treatment of payment as goodwill/license fee to a related party and the course where earlier year was remitted for fresh examination. - HELD THAT: - The Tribunal noted that in an earlier assessment year the AO had invoked a different provision and the Tribunal had remitted that earlier year to the AO to pass a speaking order. In the impugned year the revenue invoked a different head (section 37). The Tribunal held that revenue should maintain a consistent stand across years; given the earlier restoration it set aside the CIT(A) order for the impugned year and restored the issue to the AO to adjudicate afresh after obtaining relevant evidence and, if necessary, to take a conscious view on appropriate statutory provision to be invoked. [Paras 14, 15, 16]Order set aside and issue remitted to AO for fresh adjudication and verification; revenue directed to adopt a consistent stand and the AO to take a conscious view after obtaining evidence.Business expediency test for allowability of expenditure under section 37 - Allowability of consultancy fees paid to M/s Lexicon Finance Ltd. (disallowance under section 37). - HELD THAT: - The AO disallowed the consultancy payments for want of nexus with the income earned (interest/dividend) and absence of evidence of actual services rendered; the CIT(A) upheld the disallowance after examining the agreement and noting the consultants were appointed after investments already made and that no convincing factual material was placed to prove the services were wholly and exclusively for earning the relevant income. The Tribunal found that the assessee failed to discharge the onus of proving business expediency and necessity of the payments and therefore agreed with the CIT(A) in confirming the disallowance. [Paras 19, 20, 21, 22]Assessee failed to establish business expediency of consultancy fees; disallowance under section 37 confirmed.Final Conclusion: The Tribunal held that disallowances under section 14A must be computed in accordance with Rule 8D and remitted computation to the Assessing Officer after hearing the assessee; confirmed the notional interest disallowance on interest free advances due to failure to prove commercial expediency; upheld deletion of guest house rent disallowance following earlier Tribunal findings; remitted the goodwill/license fee issue to the AO for fresh adjudication; and confirmed the disallowance of consultancy fees for lack of proved business expediency. Issues Involved:1. Calculation of disallowance under section 14A.2. Disallowance of financial charges on interest-free advances to a subsidiary.3. Deletion of disallowance of rent paid under section 37.4. Deletion of addition on account of disallowance of goodwill license fees under the head 'Legal and Professional Charges.'5. Disallowance of consultancy fees under section 37.Issue-wise Detailed Analysis:1. Calculation of Disallowance Under Section 14A:The assessee challenged the CIT(A)'s decision on several grounds, mainly focusing on the application of Rule 8D and invoking section 14A. The tribunal noted that the AO must calculate disallowances as per Rule 8D of the Income Tax Rules, which covers all types of direct and indirect expenses incurred to earn exempted income. It was found that the disallowances were not calculated correctly as per Rule 8D. Therefore, the tribunal set aside the CIT(A)'s order and directed the AO to recalculate the disallowances under section 14A as per Rule 8D, after providing an opportunity for the assessee to be heard.2. Disallowance of Financial Charges on Interest-Free Advances to Subsidiary:The assessee had given interest-free advances to its subsidiary, M/s. Azure Media Services Pvt. Ltd., leading to a disallowance of Rs. 5,85,600/- by the AO. The CIT(A) confirmed this disallowance, citing the lack of evidence of commercial expediency. The tribunal upheld the CIT(A)'s order, emphasizing that the onus is on the assessee to prove that the interest-free advances were given on account of commercial expediency. Since no evidence was provided, the disallowance was deemed justified.3. Deletion of Disallowance of Rent Paid Under Section 37:The revenue's appeal included a ground regarding the deletion of disallowance of Rs. 3,75,000/- paid as rent for a guest house. The tribunal noted that this issue was already covered by a previous order in the case of the assessee's sister concern, ACTI Vs. Jupiter ITA No. 801/Bang/2012, where the payment of rent for the guest house was allowed. Following the same precedent, the tribunal found no justification to re-adjudicate this issue and upheld the CIT(A)'s order, rejecting the revenue's ground.4. Deletion of Addition on Account of Disallowance of Goodwill License Fees:The revenue also contested the deletion of an addition of Rs. 90,00,000/- made by the AO on account of disallowance of goodwill license fees paid to M/s. Vectra Holdings Pvt. Ltd. The CIT(A) had allowed this payment, following its earlier order for AY 2007-08. The tribunal noted that in AY 2007-08, the matter was restored to the AO for re-adjudication. Given the inconsistency in the revenue's stand across different assessment years, the tribunal set aside the CIT(A)'s order and restored the issue to the AO for fresh adjudication, ensuring a consistent approach.5. Disallowance of Consultancy Fees Under Section 37:The assessee claimed payment of Rs. 28,03,850/- towards consultancy fees to M/s. Lexicon Finance Ltd., which was disallowed by the AO and confirmed by the CIT(A). The tribunal agreed with the CIT(A) that the assessee failed to justify the expenditure as being incurred for business expediency. The consultancy services were found to have no nexus with the earning of interest and dividend income. Therefore, the tribunal upheld the CIT(A)'s order, confirming the disallowance.Conclusion:The tribunal partly allowed the appeals of both the assessee and the revenue for statistical purposes, directing the AO to re-adjudicate certain issues while upholding others. The judgment emphasized the importance of proper calculation of disallowances as per statutory rules and the necessity for the assessee to provide adequate evidence to justify business expenditures.