2017 (6) TMI 647 - AT - Income Tax

Tribunal upholds professional fees as expenditure, remits Section 14A disallowance, classifies interest income.

The Tribunal upheld the CIT(A)'s decision to allow professional fees as expenditure. The disallowance under Section 14A was remitted back to the AO for ... TDS u/s 195 - Addition towards professional fees - payment to non-resident outside India - Held that:- From the facts of the case it is clear that the assessee had incurred expenditure of ₹ 25,89,854/- related to documentation outside India and the services were rendered by company situated outside India. Therefore, it is crystal clear that for services rendered by M/s. Mayor Brown LLB., outside India, income cannot be said to have accrued or arisen in India. Hence, we do not find it necessary to interfere with the order of the Ld.CIT(A) on this issue. Deletion of the disallowance u/s.14A - Held that:- We find that this issue is covered by our recent decision in the case of M/s. SIDD Life Sciences [2017 (4) TMI 915 - ITAT CHENNAI] we hereby remit the matter back to the file of the Ld.AO with directions to pass appropriate Order in the light of the afforested decision after examining the facts of the case. We also make it clear that if the assessee has admitted any expenses to have been incurred relating to exempt income as pointed out by the Ld.CIT(A) in his order at para No.5.2.1, then to that extent disallowance has to be sustained by virtue of Section 14A of the Act. Interest income earned from intercorporate deposits treated as business expenditure - Held that:- The assessee has parked its surplus funds in other companies and earned interest. Such income has to be necessarily assessed under the head ‘Income from other source’ as per Section 54 of the Act, as held by the Ld.AO. Hence, we hereby direct the Ld.AO to assess the interest earned from the bank and inter-corporate deposits under the head ‘Income from other source’. Issues Involved:1. Allowance of professional fees as expenditure.2. Deletion of disallowance under Section 14A of the Income Tax Act.3. Classification of interest income from inter-corporate deposits.Detailed Analysis:1. Allowance of Professional Fees as Expenditure:During the scrutiny assessment, the Assessing Officer (AO) noticed that the assessee claimed Rs. 25,89,854 as professional and consultancy charges paid to M/s. Mayor Brown LLB without deducting TDS. The assessee argued that the services were rendered outside India by a company without a permanent establishment in India, thus not attracting Section 195 of the Act. The AO, however, disallowed the expenditure under Section 40(a)(i), referencing various legal precedents. On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] directed the AO to allow the professional fees, citing decisions such as ACIT vs. M/s. M.M. Forging Ltd. and Panalfa Auto Elektrik Ltd., which held that services rendered for procurement of export orders cannot be termed as managerial services. The Tribunal upheld the CIT(A)'s decision, agreeing that the income did not accrue in India as the services were rendered outside the country.2. Deletion of Disallowance under Section 14A:The AO observed that the assessee had significant investments yielding exempt income but did not disallow any expenditure towards maintaining these investments. The AO invoked Section 14A and Rule 8D, rejecting the assessee's claims that no expenditure was directly attributable to the exempt income. On appeal, the CIT(A) directed the deletion of the disallowance, noting that routine expenditure for maintaining establishment and administration could be attributed to earning dividends. The Tribunal referred to its recent decisions, emphasizing that investments in sister concerns for strategic reasons do not attract Section 14A disallowance. Consequently, the matter was remitted back to the AO for fresh consideration, with instructions to sustain disallowance only to the extent of admitted expenses related to exempt income.3. Classification of Interest Income from Inter-Corporate Deposits:The AO categorized the interest income of Rs. 2,34,24,327 from inter-corporate deposits as 'Income from other sources' based on precedents like Tuticorin Alkaline Chemicals & Fertilizers Ltd. vs. CIT. The CIT(A), however, treated the interest as 'Business Income,' arguing that the interest was earned from companies under the management of the assessee, aligning with the object clause of the Memorandum of Association. The Tribunal disagreed with the CIT(A), holding that surplus funds parked in other companies should be assessed under 'Income from other sources' as per Section 54 of the Act, thus ruling in favor of the Revenue on this issue.Conclusion:- The Tribunal upheld the CIT(A)'s decision to allow the professional fees of Rs. 25,89,854 as expenditure.- The disallowance under Section 14A was remitted back to the AO for reconsideration with specific directions.- The interest income from inter-corporate deposits was classified as 'Income from other sources,' siding with the Revenue.The appeal by the Revenue was partly allowed for statistical purposes.