2020 (2) TMI 83 - AT - Income Tax

Tribunal rules in favor of assessee, emphasizes need for objective satisfaction before disallowing expenses

Tata Capital Ltd. Versus ACIT-2 (3), Mumbai And DCIT-2 (3), Mumbai Versus Tata Capital Ltd. And (Vice-Versa) And DCIT-2 (3) (1), Mumbai Versus Tata Capital Ltd.

Tata Capital Ltd. Versus ACIT-2 (3), Mumbai And DCIT-2 (3), Mumbai Versus Tata Capital Ltd. And (Vice-Versa) And DCIT-2 (3) (1), Mumbai Versus Tata ... Issues Involved:1. Disallowance under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962.2. Professional fees paid to Mr. Arata Nambu.3. Payment of commission to Galaxy Automobiles P. Ltd.Issue-wise Detailed Analysis:1. Disallowance under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962:The assessee challenged the disallowance of Rs. 4.91 crores under Section 14A read with Rule 8D(2)(iii) for administrative expenses related to earning tax-free income. The assessee had already made a suo moto disallowance of Rs. 61.97 lacs. The Assessing Officer (AO) issued a show-cause notice and eventually calculated a disallowance of Rs. 72.63 crores, which included Rs. 67.72 crores for interest disallowance under Rule 8D(2)(ii) and Rs. 4.91 crores for administrative expenses under Rule 8D(2)(iii).The Commissioner of Income Tax (Appeals) [CIT(A)] partly allowed the appeal, deleting the interest disallowance under Rule 8D(2)(ii) but sustaining the administrative expenses disallowance. The assessee appealed against the sustained disallowance, arguing that the AO did not record objective satisfaction as required under Section 14A(2) and Rule 8D(1). The Tribunal agreed with the assessee, citing the Hon'ble Delhi High Court's decision in H.T. Media Ltd. v. PCIT, which mandates that the AO must record dissatisfaction with the assessee's claim after examining the accounts. Consequently, the Tribunal directed the AO to delete the disallowance made under Rule 8D(2)(iii).Regarding the Revenue's appeal against the deletion of interest disallowance under Rule 8D(2)(ii), the Tribunal upheld the CIT(A)'s decision, noting that the assessee's interest income exceeded interest expenditure and that borrowed funds were used for earning taxable interest income. The Tribunal also reiterated the necessity of the AO recording objective satisfaction before invoking Section 14A and Rule 8D, leading to the dismissal of the Revenue's appeal.2. Professional Fees Paid to Mr. Arata Nambu:The Revenue challenged the CIT(A)'s decision to allow professional fees paid to Mr. Arata Nambu, arguing that the assessee failed to furnish relevant documents before the AO. The Tribunal noted that similar payments were made in the previous assessment year (2009-10) and were upheld by the Coordinate Bench of the Tribunal. The Tribunal found substantial evidence supporting the payments for services rendered by Mr. Arata Nambu as a business advisor. Since the documentary evidence was neither dislodged by the lower authorities nor contradicted by the Revenue, the Tribunal upheld the CIT(A)'s order, dismissing the Revenue's ground.3. Payment of Commission to Galaxy Automobiles P. Ltd.:The Revenue contested the CIT(A)'s decision to set aside the issue of commission payment to Galaxy Automobiles P. Ltd. for further verification. The Tribunal observed that the CIT(A) had recorded a finding of fact that the issue was identical to the previous assessment year (2009-10), where the CIT(A) allowed the deduction. The CIT(A) directed the AO to verify the evidences and allow the claim if found in order. The Tribunal found no merit in the Revenue's ground, noting that the CIT(A) did not set aside the matter for a fresh assessment but for limited verification. The Tribunal also cited the Coordinate Bench's decision in the previous year, dismissing the Revenue's ground.Conclusion:The Tribunal allowed the appeals filed by the assessee and dismissed the appeals and cross-objections filed by the Revenue. The Tribunal's decision was pronounced in the open court on 30.01.2020.