2018 (9) TMI 624 - AT - Income Tax

Tribunal upholds CIT(A) decisions on disallowances, dismisses appeals based on CBDT Circular

The Tribunal dismissed both the assessee's and the revenue's appeals. The CIT(A)'s decisions on the disallowances related to legal and professional ... Disallowance of legal and professional fees - nature of expenses - capital or revenue expenditure - Held that:- No infirmity in the order of learned CIT (A) who has held that legal and professional expenditure incurred by the assessee were incurred in relation to construction of a building is a capital expenditure, which was not used for the purpose of the business during the year under consideration. The assessee during appellate proceedings have admitted for allowance of depreciation on the above amount therefore it is apparent that the expenditure incurred by the assessee in the form of legal and professional fees paid to an architect is for the purpose of construction of building and is capital in nature. Before the lower authorities, assessee could not show that how the architect fee paid is not a capital expenditure. - decided against assessee TDS u/s 194A - Disallowance u/s 40(a)(ia) - advertisement and interest expenditure on which tax has not been deducted at source - Held that:- Mr. Lakhani borrowed the sum, from bank it was deposited with the company, and interest was paid by assessee to Mr. PD Lakhani however, on behalf of Mr. PD Lakhani the assessee paid same amount to the loan account of Mr. PD Lakhani with the bank. Merely because the same amount has been deposited by the assessee in the bank account of the lender to the assessee but borrower of the bank does not make any difference as assessee has incurred an interest expenditure of ₹ 1 575000/– on which tax was required to be deducted u/s 194A of the act. In view of this, we do not find any infirmity in the order of the learned CIT (A) in confirming the above disallowance. With respect to the advertisement expenditure assessee could not give any explanation why tax has not been deducted on the same amount therefore in absence of any explanation disallowance require to be confirmed - decided against assessee Disallowance u/s 14A - Held that:- No doubt, the assessee may have made the investment in order to gain control of the investee company. However, that does not appear to be a relevant factor in determining the issue at hand. Fact remains that such dividend income is non-taxable. In this scenario, if expenditure is incurred on earning the dividend income, that much of the expenditure, which is attributable to the dividend income, has to be disallowed and cannot be treated as business expenditure. Keeping this objective behind section 14A in mind, the said provision has to be interpreted, particularly, the word 'in relation to the income' that does not form part of total income. Considered in this hue, the principle of apportionment of expenses comes into play as that is the principle, which is engrained in section 14A - we reject the contention raised by the assessee before the lower authorities and confirm the finding of the learned CIT (Appeals) in confirming the disallowance on account of expenditure at the rate of 0.5% of average value of investment on investments u/s 14A - Decided against assessee Issues Involved:1. Deletion of disallowance of Rs. 35,59,022/- by the CIT(A).2. Confirmation of disallowance of legal and professional charges of Rs. 16.60 lakhs as capital expenditure.3. Confirmation of disallowance of Rs. 23,72,070/- under Section 40(a)(ia) of the Income Tax Act, 1961.4. Confirmation of disallowance of Rs. 3,80,023/- under Section 14A of the Income Tax Act, 1961.Detailed Analysis:1. Deletion of Disallowance of Rs. 35,59,022/- by the CIT(A):The revenue's appeal challenged the deletion of the disallowance of Rs. 35,59,022/- made by the AO, which included Rs. 8,61,700/- for unascertained provision of gratuity and Rs. 26,97,322/- for unascertained provision for earned leave. The CIT(A) deleted the disallowance, but the revenue contended that the assessee failed to substantiate the estimation/calculation of these liabilities on a scientific basis with reasonable certainty. Additionally, the assessee did not provide details of the liability during both assessment and appellate proceedings. However, the tribunal noted that the tax effect in the issue of the appeal is less than Rs. 20,00,000/-, and as per CBDT Circular No. 3 of 2018, the monetary limit for filing appeals before the Tribunal is Rs. 20,00,000/-. Consequently, the appeal of the learned assessing officer was dismissed.2. Confirmation of Disallowance of Legal and Professional Charges of Rs. 16.60 Lakhs as Capital Expenditure:The assessee's appeal contested the confirmation of the disallowance of legal and professional fees amounting to Rs. 16.60 lakhs as capital expenditure. The AO found that the amount was paid as architect fees for the construction of a building and treated it as part of the total capital cost. The CIT(A) upheld this view, noting that the expenditure was related to the construction of a building and was not used for business purposes during the year under consideration. The tribunal found no infirmity in the CIT(A)'s order and dismissed the appeal, affirming that the legal and professional fees were indeed capital expenditure.3. Confirmation of Disallowance of Rs. 23,72,070/- under Section 40(a)(ia) of the Income Tax Act, 1961:The assessee's appeal also challenged the confirmation of the disallowance of Rs. 23,72,070/- under Section 40(a)(ia) for failure to deduct tax at source on advertisement and interest expenditure. The AO disallowed the interest paid on a loan borrowed through Mr. Lakhani, as the assessee did not deduct tax at source. The CIT(A) confirmed this disallowance. The tribunal agreed with the CIT(A), noting that the assessee incurred interest expenditure on which tax was required to be deducted under Section 194A. Additionally, the assessee could not provide an explanation for not deducting tax on advertisement expenditure. Thus, the tribunal dismissed the appeal, upholding the disallowance under Section 40(a)(ia).4. Confirmation of Disallowance of Rs. 3,80,023/- under Section 14A of the Income Tax Act, 1961:The assessee's appeal contested the confirmation of the disallowance of Rs. 3,80,023/- under Section 14A. The AO made this disallowance as the assessee had made investments in shares of various companies and had not disallowed any expenditure under Section 14A. The CIT(A) upheld the disallowance, and the tribunal affirmed this decision, citing the Supreme Court's ruling that the dominant purpose test does not apply to Section 14A. The tribunal confirmed the disallowance of 0.5% of the average investment value, dismissing the appeal.Conclusion:Both the assessee's and the revenue's appeals were dismissed. The tribunal upheld the CIT(A)'s decisions on the disallowances related to legal and professional charges, interest and advertisement expenditure under Section 40(a)(ia), and expenditure under Section 14A. The revenue's appeal was dismissed based on the CBDT Circular No. 3 of 2018, which set a monetary limit for filing appeals.