2018 (8) TMI 56 - AT - Income Tax

ITAT Grants Relief on Expenses & Remands Directors' Remuneration Issue

The ITAT partly allowed appeals by both the department and the assessee. Relief was granted to the assessee concerning the disallowance of legal and ... Addition u/s 14A r.w.r 8D - Held that:- Once the assessee has submitted before the Assessing Officer that no expenditure had been incurred for earning the dividend income, the Assessing Officer was under legal obligation to demonstrate as to how he was not satisfied with the contention of the assessee and only, thereafter, he could have proceeded to make a disallowance. As is evident from the assessment order, the satisfaction of the Assessing Officer before invoking provisions of section 14A r/w Rule 8D is missing. CIT (A) has also taken a similar view while deleting the disallowance. Under the circumstances, we find no reason to interfere with the findings of the Ld. CIT (A) in this regard and accordingly, ground nos. 1 and 2 of the department’s appeal are dismissed. Ad hoc disallowance @25% of the conferences and seminars expenses - Held that:- Assessing Officer has not pointed out any specific defect in the details/accounts submitted by the assessee. It is also pertinent to note that the Assessing Officer had made inquiries from two parties viz. M/s Imperial and M/s Habitat World in respect of payments made to them by issuing notices u/s 133(6) of the Act and it is a matter of record that these two parties had confirmed the transactions with the assessee. It is well settled by now that ad hoc disallowance cannot be made unless specific defects are brought on record by the Assessing Officer. This is not the case in the present appeal before us. There is a plethora of judicial rulings wherein it has been held that ad hoc disallowance without specific pinpointing of defect is not sustainable. Directors’ remuneration - Held that:- As to how the Assessing Officer has reached this conclusion has not been elaborated. Further, the Board resolution approving the appointing of directors passed in the extraordinary general meeting is available on record. The Ld. CIT (A) also did not undertake the exercise of examining the evidences but rather addressed the issue in a casual way by holding that remuneration of ₹ 40 lakh was fair and reasonable. CIT (A) has also not elaborated as to how he has reached the conclusion that an amount of ₹ 40 lakh was fair and reasonable towards payment of directors’ remuneration. Accordingly, in view of the lack of examination with respect to this issue by both the lower authorities, we deem it appropriate to restore the issue to the file of the Assessing Officer to reexamine evidences which have been submitted in this regard after giving proper opportunity to the assessee to present its case. Accordingly, ground no. 4 of the department’s appeal and ground no. 3 of the assessee’s appeal are allowed for statistical purposes. TDS u/s 195 - Held that:- Addition made by the Assessing Officer by invoking provisions of section 40(a)(i) it is seen that the Assessing Officer in his remand report has himself accepted that in view of the provisions of Double Taxation Avoidance Agreements between India and US and India and India and UAE, the payment to Mr. Renee Mauborgne amounting to ₹ 47, 52, 000/- and of ₹ 17, 67, 150 to Mr. Shashi Tharoor did not attract the rigors of provisions for deduction of tax at source. The Ld. CIT (A) seems to have ignored this admission by the Assessing Officer in the remand report. In view of the comments of the Assessing Officer in this regard as contained in the remand report, we delete the disallowance of ₹ 47, 52, 000/- and ₹ 17, 67, 150/-. AO is directed to delete these additions. We also note that the remaining payment of ₹ 3, 06, 181/- was made to M/s KPMG Helion which was in the nature of reimbursement on which TDS had also been deducted by them. Accordingly, no further tax was required to be deducted on this reimbursement. Thus, this amount of ₹ 3, 06, 181/- is also directed to be deleted and the Assessing Officer is directed to allow consequential relief. Addition by treating the payment made for carrying out due diligence and valuation of business as capital expenditure - Held that:- The copies of invoices placed show that invoice of ₹ 3, 06, 181/- was raised for professional services rendered in connection with Project Quest and the other invoice for ₹ 7, 82, 440/- was raised for professional services rendered in connection with Project Chip. However, the nature of the services rendered is not discernible from these invoices. In view of the inability of the assessee to demonstrate as to how these invoices pertained to capital expenditure, we are unable to differ with the findings of the lower authorities in this regard and we dismiss ground no. 4 of the assessee’s appeal. Issues Involved:1. Disallowance of legal and professional charges under section 40(a)(i) of the Income Tax Act.2. Disallowance under section 14A read with Rule 8D.3. Disallowance of directors' remuneration under section 40A(2)(b).4. Disallowance of capital expenditure.5. Ad hoc disallowance of conference and seminar expenses.Detailed Analysis:1. Disallowance of Legal and Professional Charges:The Assessing Officer (AO) disallowed Rs. 68,25,331/- under section 40(a)(i) for non-deduction of tax at source on payments to non-resident Indian parties. The assessee argued that these payments were covered under the Double Taxation Avoidance Agreement (DTAA) between India and the respective countries (US and UAE), thus not requiring TDS. The AO's remand report acknowledged that payments to Mr. Renee Mauborgne and Mr. Shashi Tharoor did not attract TDS under the DTAA. The ITAT directed the deletion of these disallowances, totaling Rs. 65,19,150/-, including Rs. 3,06,181/- paid to M/s KPMG Helion as reimbursement.2. Disallowance under Section 14A read with Rule 8D:The AO made a disallowance of Rs. 5,02,462/- under section 14A read with Rule 8D, without recording satisfaction regarding the correctness of the assessee's claim that no expenses were incurred to earn exempt income. The CIT(A) deleted this disallowance, and the ITAT upheld this decision, citing the requirement of satisfaction as per the Supreme Court's ruling in Godrej & Boyce Manufacturing Co. Ltd. vs. DCIT.3. Disallowance of Directors' Remuneration:The AO disallowed Rs. 1,02,69,572/- under section 40A(2)(b) for excessive remuneration to directors. The CIT(A) reduced this disallowance to Rs. 62,69,572/-, allowing Rs. 40 lakh as reasonable remuneration. The ITAT noted that neither the AO nor the CIT(A) had thoroughly examined the evidences provided by the assessee, such as employment agreements and qualifications of the directors. The matter was remanded back to the AO for re-examination.4. Disallowance of Capital Expenditure:The AO disallowed Rs. 10,88,621/- as capital expenditure based on the tax auditor's report. The CIT(A) upheld this disallowance. The ITAT found that the assessee failed to provide cogent evidence to demonstrate that the expenditure was revenue in nature. Consequently, the ITAT upheld the disallowance.5. Ad Hoc Disallowance of Conference and Seminar Expenses:The AO made an ad hoc disallowance of Rs. 5,85,782/- (25% of total expenses) for conference and seminar expenses, alleging them to be bogus and inflated. The CIT(A) deleted this disallowance, noting that the AO did not point out specific defects in the accounts. The ITAT upheld the CIT(A)'s decision, emphasizing that ad hoc disallowances without specific defects are not sustainable, citing various judicial precedents.Conclusion:Both the appeals by the department and the assessee were partly allowed. The ITAT provided relief to the assessee on the disallowance of legal and professional charges and the ad hoc disallowance of conference expenses. However, the disallowance of capital expenditure was upheld, and the issue of directors' remuneration was remanded back to the AO for re-examination. The disallowance under section 14A was deleted due to the lack of recorded satisfaction by the AO.