2021 (8) TMI 214 - AT - Income Tax

Tribunal allows Revenue's appeal, directs verification of own funds for disallowance

The Tribunal partly allowed the Revenue's appeal for statistical purposes, directing the AO to verify the availability of own funds for disallowance under ... Disallowance u/s 14A - AO not recorded satisfaction as required u/s.14A(2) - HELD THAT:- As disallowance of interest expenses under Rule 8D(2)(ii) of Income Tax Rules, 1962, is concerned, by following the decision of co-ordinate bench in assessee’s own case [2019 (5) TMI 1888 - ITAT CHENNAI] we direct the Assessing Officer to verify claim of assessee that it has sufficient own funds. In case, assessee is able to prove availability of own funds, then delete interest disallowance Rule 8D(2)(ii) of Income Tax Rules, 1962. Disallowance of other expenses under Rule 8D(2)(iii), it was the claim of learned AR for the assessee that disallowance computed by the Assessing Officer may be restricted to the extent of exempt income earned for the year under consideration. We find that issue of disallowances of expenditure u/s.14A in excess of exempt income earned for the year is no longer res integra. In the case Cheminvest Ltd. [2015 (9) TMI 238 - DELHI HIGH COURT] has considered an identical issue and held that disallowances contemplated u/s.14A cannot exceed exempt income earned for the year under consideration. A similar view has been taken by the Hon’ble High Court of Delhi in the case of Joint Investments Pvt .Ltd vs. CIT [2015 (3) TMI 155 - DELHI HIGH COURT]where it was held that disallowances contemplated u/s.14A cannot swallow entire exempt income for the year under consideration. In this case, the assessee has earned dividend income of ₹ 6,99,349/-, whereas the Assessing Officer has computed disallowance of ₹ 6,99,349/- . Therefore, we are of the considered view that disallowance computed by the Assessing Officer is disproportionate and contrary to the settled principle of law by various High Courts including the Hon’ble Delhi High Court. Hence, we direct the Assessing Officer to restrict disallowances contemplated u/s.14A read with Rule 8D(2)(iii) of the Income Tax Rules, 1962, to the extent of exempt income earned for the year. Disallowance of commission paid to Managing Director u/s.36(1)(ii) - AO disallowed commission paid to Managing Director u/s.36(1)(ii) of the Act, on the ground that the assessee has paid commission to Managing Director in lieu of profits or dividend - HELD THAT:- As decided in assessee’s own case [2019 (5) TMI 1888 - ITAT CHENNAI] we are of the considered view that Assessing Officer has erred in disallowing commission paid to Managing Director u/s.36(1)(ii) of the Act and hence, we are inclined to uphold the findings of the learned CIT(A) and reject ground taken by the Revenue. Issues Involved:1. Disallowance of expenditure related to exempt income under Section 14A of the Income Tax Act, 1961.2. Disallowance of commission paid to the Managing Director under Section 36(1)(ii) of the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Disallowance of Expenditure Related to Exempt Income under Section 14A:The Revenue challenged the deletion of Rs. 2,55,22,111/- disallowed by the Assessing Officer (AO) under Section 14A read with Rule 8D. The AO had determined this disallowance based on the dividend income of Rs. 6,99,349/- claimed exempt under Section 10(34) by the assessee and the assessee's own disallowance of Rs. 60,073/- as expenditure incurred for earning exempt income.The CIT(A) deleted the disallowance on the grounds that the AO did not record the requisite satisfaction under Section 14A(2) before invoking Rule 8D. The CIT(A) relied on the decision of the Hon’ble Delhi High Court in CIT vs. Hero Management Services Pvt. Ltd., which emphasizes the necessity of recording satisfaction.The Tribunal upheld the CIT(A)’s decision, noting that in the assessee's own case for subsequent years, the Tribunal had directed the AO to verify the availability of sufficient own funds to cover investments yielding exempt income. The Tribunal concluded that if the assessee could prove sufficient own funds, the interest disallowance under Rule 8D(2)(ii) should be deleted. For other expenses under Rule 8D(2)(iii), the Tribunal directed that the disallowance should be restricted to the extent of exempt income earned, following the Delhi High Court rulings in Cheminvest Ltd. vs. CIT and Joint Investments Pvt. Ltd. vs. CIT. Thus, the Tribunal directed the AO to restrict the disallowance to Rs. 6,99,349/-.2. Disallowance of Commission Paid to Managing Director under Section 36(1)(ii):The Revenue contested the deletion of Rs. 31,98,200/- disallowed by the AO, who treated the commission paid to the Managing Director as dividend. The AO argued that the payment was in lieu of profits or dividends. The assessee contended that the commission was paid per the terms of appointment authorized under Section 309 of the Companies Act, 1956.The CIT(A) deleted the disallowance, relying on the Delhi High Court decision in AMD Metaplast Pvt. Ltd. vs. DCIT, which upheld the payment of commission to a Managing Director as per terms of appointment. The Tribunal affirmed the CIT(A)’s decision, noting that the issue was covered in favor of the assessee by the Tribunal’s decision in the assessee’s own case for subsequent years. The Tribunal found no new evidence from the Revenue to contradict the CIT(A)’s findings. Therefore, the Tribunal upheld the CIT(A)’s deletion of the disallowance under Section 36(1)(ii).Conclusion:The Tribunal partly allowed the Revenue’s appeal for statistical purposes, directing the AO to verify the availability of own funds for disallowance under Section 14A and to restrict the disallowance to the extent of exempt income earned. The Tribunal upheld the CIT(A)’s deletion of the disallowance of the commission paid to the Managing Director under Section 36(1)(ii). The order was pronounced in the open court on 28th July 2021.