2019 (4) TMI 193 - AT - Income Tax

Disallowance made u/s 14A - excess of own funds - HELD THAT - Own funds available with the assessee is in excess of the value of investment and hence the decision rendered in the case of Karnataka State Industrial & Infrastructure Development Corporation Limited 2015 (11) TMI 1631 - KARNATAKA HIGH COURT shall apply to the facts of the present case. The disallowance out of interest expenditure is no called for. DR submitted that the assessee has used the mixed funds. However from the submission made by the assessee we noticed that the assessee has made the impugned investment out of the sale proceeds of land sold to M/s.ITC Limited. Hence we noticed that the assessee is able to show the nexus between the funds utilized and the investment made. Disallowance made out of administrative expenses under Rule 8D(2)(iii) the assessee has placed reliance on the decision rendered in the case of Syntex Industries Limited 2018 (3) TMI 1448 - SUPREME COURT in order to contend that no disallowance out of administrative expense should be made. It show that the assessee had made minor investments out of surplus funds while in the instant case the assessee has not shown that it had surplus funds and further investments made by it could be regarded as minor in nature. Hence in our view the assessee cannot take support of the above said decision. The assessee has made investment in Mutual Funds units which does not involve use of much of administrative capabilities. Provisions of Rule 8D(2)(iii) should not be applied to the facts of the present case. Since the assessee has received exempt income some disallowance is called for to meet the requirements of sec.14A of the Act. Accordingly we direct the A.O. to make lump sum disallowance of Rs. 25, 000/- towards administrative expenses and in our view the same would meet the requirements of sec.14A of the Act. TDS u/s 194J - Disallowance of purchase cost of software u/s 40(a)(ia) - TDS liability fastened upon the assessee retrospectively - whether payment made towards purchase of software is in the nature of Royalty attracting TDS provisions? - HELD THAT - The assessee cannot be fastened with the liability to deduct tax at source retrospectively and accordingly we set aside the order passed by the CIT(A) on this issue and direct the A.O. to delete the impugned addition. Disallowance of interest levied on late remittance of TDS - HELD THAT - Hon ble Madras High Court in the case of CIT vs. Chennai Properties & Investments Ltd 1998 (4) TMI 89 - MADRAS HIGH COURT wherein it was held that the interest paid would take the colour from the nature of Principal amount required to be paid but not paid in time. Accordingly it was held that the interest paid on belated payment of TDS cannot be considered as compensatory in nature and accordingly held that the same is not allowable as deduction. Non-granting of TDS credit - HELD THAT - Assessee should not be denied the benefit of credit of TDS as provided in Rule 37BA(3)(ii) of I.T Rules. Accordingly we restore this issue to the file of the AO for examining the claim of the assessee. We also direct the assessee to move appropriate petition before the AO in this regard which shall be considered in a liberal manner by the AO. Appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. Disallowance made u/s 14A of the Act.
2. Disallowance of purchase cost of software u/s 40(a)(ia) of the Act.
3. Disallowance of interest levied on late remittance of TDS.
4. Non-granting of TDS credit.

Detailed Analysis:

1. Disallowance made u/s 14A of the Act:
The assessee challenged the disallowance of Rs. 26.35 lakhs made by the Assessing Officer (AO) under section 14A of the Income Tax Act, 1961, which was confirmed by the CIT(A). The AO noticed that the assessee received Rs. 14.79 lakhs as dividend income, claimed as exempt, without disallowing any expenditure. The AO applied Rule 8D of the Income-tax Rules to compute the disallowance. The assessee argued that the investment was made from its own funds, not from borrowed funds, and cited decisions from the Karnataka High Court and the Supreme Court to support that no disallowance should be made out of interest expenditure. The Departmental Representative contended that the assessee had mixed funds, and the Supreme Court's decision in Max Investments was cited.

Upon review, it was noted that the assessee had sufficient own funds, and the investment was made from the sale proceeds of land sold to M/s.ITC Limited, establishing a clear nexus between the funds utilized and the investment. The Tribunal concluded that no disallowance out of interest expenditure was warranted. However, regarding administrative expenses under Rule 8D(2)(iii), it was determined that since the investment in Mutual Funds did not require significant administrative capabilities, a lump sum disallowance of Rs. 25,000/- was appropriate to meet the requirements of section 14A.

2. Disallowance of purchase cost of software u/s 40(a)(ia) of the Act:
The assessee purchased AutoCAD software for Rs. 1,10,775 and claimed it as revenue expenditure. The AO treated it as capital in nature and disallowed depreciation under section 40(a)(ia) due to non-deduction of tax at source under section 194J. The CIT(A) upheld this, treating the payment as royalty based on the Karnataka High Court's decision in Samsung Electronics. The assessee argued that the transaction occurred before the court's decision, and they were under a bona fide belief that no TDS was required, supported by the Tribunal's decision in Allegis Services India Pvt. Ltd.

The Tribunal agreed with the assessee, noting that the TDS liability could not be applied retrospectively. The Tribunal cited the co-ordinate bench's decision in Allegis Services India Pvt. Ltd., which held that the liability to deduct TDS could not be fastened retrospectively. Consequently, the Tribunal directed the AO to delete the disallowance.

3. Disallowance of interest levied on late remittance of TDS:
The assessee contested the disallowance of interest on late TDS remittance. The assessee cited the Kolkata Tribunal's decision in M/s Narayani Ispat P Ltd., which allowed such interest as a deduction. However, the Departmental Representative referred to the Madras High Court's decision in CIT vs. Chennai Properties & Investments Ltd., which held that interest on late TDS payment is not compensatory and thus not allowable as a deduction.

The Tribunal upheld the CIT(A)'s decision, following the Madras High Court's ruling, and decided against the assessee on this issue.

4. Non-granting of TDS credit:
The AO disallowed TDS credit of Rs. 4,70,214/- for receipts not offered during the year under consideration, based on section 199 of the Act. The CIT(A) confirmed this. The Tribunal reviewed Rule 37BA read with section 199, which mandates TDS credit in the year the income is assessable. The Tribunal noted that the assessee should get credit in the same proportion as the income is assessable across years.

The Tribunal restored the issue to the AO to examine the claim and directed the assessee to file an appropriate petition, which the AO should consider liberally. The CIT(A)'s order was modified accordingly.

Conclusion:
The assessee's appeal was partly allowed, with specific directions for each issue. The Tribunal provided relief on the disallowance under section 14A and the software purchase disallowance under section 40(a)(ia), upheld the disallowance of interest on late TDS remittance, and restored the TDS credit issue to the AO for re-examination.