2018 (11) TMI 1819 - AT - Income Tax

TDS u/ 194C - Addition u/s 40(a)(ia) - transactions relate to sale of material which cannot be termed as contract for work and labour - HELD THAT - Section 194C is not applicable in assessee s case. Ld. CIT(A) also noted that since assessee had paid VAT on sale of goods to its customers Section 194C of the Act is not applicable. Therefore provisions of section 40(a)(ia) applied by the A.O. is not justified. Entire addition have been deleted. In the aforesaid transactions Section 194C is not applicable therefore there is no need to deduct the TDS. The issue is covered in favour of the assessee by the decision of the Tribunal. We therefore do not find any merit in the departmental appeal on this ground. Ground No.1 is accordingly dismissed. Addition under section 14A - Assessee submitted that there is no borrowed funds utilised by the assessee for purchase of investment in shares. Hence disallowance of interest under sub-rule 2(ii) of Rule 8D is not applicable in assessee s case - HELD THAT - The Hon ble Punjab and Haryana High Court in the case of Abhishek Industries Ltd. 2015 (2) TMI 672 - PUNJAB AND HARYANA HIGH COURT held that onus is upon A.O. to record satisfaction that interest bearing funds have been used for investment to earn tax free income . Since no borrowed funds have been used by assessee to make investment therefore Ld. CIT(A) correctly deleted the addition. Ground No.2 of appeal of Revenue is dismissed.

Summary

Issues:
1. Challenge against the deletion of disallowance under section 40(a)(ia) of the I.T. Act, 1961.
2. Challenge against the deletion of addition under section 14A of the I.T. Act, 1961.

Issue 1: Disallowance under section 40(a)(ia) of the I.T. Act, 1961:

The Revenue challenged the deletion of disallowance made under section 40(a)(ia) of the I.T. Act, amounting to &8377; 2,33,50,158. The assessee argued that the transactions with M/s Zen Chinese Food were purchases and sales, not contracts for work and labor, thus not falling under Section 194C. The Ld. CIT(A) agreed, citing Explanation-III to Section 194C and previous tribunal decisions. The Counsel for the Assessee highlighted earlier tribunal rulings supporting the non-applicability of Section 194C, which was upheld. The Tribunal, considering past decisions, dismissed the appeal, stating that Section 194C did not apply, hence no TDS deduction was necessary.

Issue 2: Addition under section 14A of the I.T. Act, 1961:

The Revenue contested the deletion of an addition of &8377; 68,288 under section 14A. The Ld. CIT(A) found no borrowed funds were used for share investments, thus disallowance under Rule 8D was inapplicable. The Tribunal upheld this decision, citing a High Court ruling that disallowance under section 14A requires evidence of expenditure for earning dividend income. As no evidence of borrowed funds for investments was provided, the addition was correctly deleted. The onus was on the A.O. to prove the use of interest-bearing funds for investments. Consequently, the Tribunal dismissed the Revenue's appeal on this ground.

In conclusion, the Tribunal dismissed the Revenue's appeal, upholding the decisions of the Ld. CIT(A) regarding the disallowance under section 40(a)(ia) and the addition under section 14A of the I.T. Act, 1961.