2019 (1) TMI 2082 - AT - Income Tax

No exempt income and s.14A/r.8D disallowance, late TDS remittance interest, ROC filing fees: mixed appeal outcome

Where no exempt income is earned in the relevant year, s.14A cannot be invoked to disallow expenditure, and r.8D is inapplicable because it operates only ... Disallowance u/s 14A - exempt income for the relevant year is shown nil - HELD THAT:- It is settled position of law that the provisions of section 14A can be applied to quantify the expenses in relation to exempt income. Since the exempt income is Nil, section 14A will not apply. The Rule 8D can be applied only when there is difficulty in finding the expenditure relating to exempt income. The provisions of section 14A and Rule 8D will not apply to the present case. Disallowance of interest paid towards late payment of TDS - HELD THAT:-CIT(A) after considering the submissions of the assessee as well as relying on the decision of the coordinate bench in the case of M/s Taksheel Solutions Ltd. [2016 (7) TMI 840 - ITAT HYDERABAD] deleted the addition made by the AO towards interest paid on late payment of TDS held that interest on TDS is not interest paid on income tax per se. The same is in the nature of compensation and not as penal. Therefore, the ground raised by the revenue in this regard is dismissed. Disallowance u/s 35D - ROC fee expenditure - Nature of expenses - HELD THAT:- Hon’ble High Court of Rajasthan in the case of CIT Vs. Multi Metals Ltd. [1990 (10) TMI 55 - RAJASTHAN HIGH COURT] has rejected the assessee’s contention of allowability of ROC fees as revenue expenditure. Appeal of the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether disallowance under section 14A read with Rule 8D can be sustained where the exempt income for the relevant year is nil. 2. Whether interest paid for delayed remittance of tax deducted at source is an allowable deduction on the footing that it is compensatory and not penal, and not 'interest on income tax per se'. 3. Whether fees paid to the Registrar of Companies for increase of authorised share capital, claimed as one-fifth amortisation, is allowable as deduction under section 35D, and whether the disallowance of such amortised claim should be deleted. ISSUE-WISE DETAILED ANALYSIS 1. Disallowance under section 14A / Rule 8D where exempt income is nil Legal framework: The Tribunal considered section 14A and Rule 8D in the context of disallowance of expenditure 'in relation to' exempt income. Interpretation and reasoning: The Court held that section 14A operates to quantify expenditure relatable to exempt income. It further reasoned that Rule 8D is a mechanism to be applied only when there is difficulty in finding expenditure relating to exempt income. On the facts, the exempt income was nil, and therefore there was no basis to attribute or quantify any expenditure as relating to exempt income for the year. Conclusion: Section 14A and Rule 8D were held inapplicable in the absence of exempt income; deletion of the disallowance was upheld and the challenge to its deletion failed. 2. Allowability of interest paid for late payment of TDS Legal framework: The Tribunal addressed the nature of 'interest on late payment of TDS' claimed as finance cost and its deductibility under the Act. Interpretation and reasoning: The Court accepted the characterisation that such interest is levied automatically to compensate the revenue for the period of delay and is not penal. It agreed with the view that this interest is not 'interest paid on income tax per se' but is compensatory in nature. Conclusion: The deletion of the disallowance was affirmed; the interest on delayed payment of TDS was treated as allowable and the challenge to its allowance was rejected. 3. Deductibility under section 35D of ROC fees for increase of authorised share capital (amortised claim) Legal framework: The Tribunal examined section 35D in relation to the claim of amortised deduction of one-fifth of ROC fees incurred for increase of authorised share capital. Interpretation and reasoning: The Court noted that the expenditure had been disallowed on the basis that ROC fees for increasing authorised capital relates to expansion of the capital base and was therefore not allowable as claimed. The Tribunal, however, applied the ratio it accepted from the relied-upon decision to hold that while such ROC fees may not be allowable as revenue expenditure, it is allowable under section 35D(2)(c)(iv). Proceeding on that applied interpretation, the Tribunal concluded that the amortised deduction under section 35D was admissible. Conclusion: The disallowance of the amortised amount under section 35D was deleted; the order confirming disallowance was set aside and the deduction was allowed.