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TMI Blog2024 (12) TMI 1165X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act shall be deleted on account of contributions made within the grace period. 4. The Ld. CIT(A) has erred in law and on facts of the case in confirming the disallowance of foreign commission of Rs. 57,74,100/- u/s. 40(a)(ia) of the Act. 5. Alternatively and without prejudice. the disallowance of foreign commission shall be restricted to 30% of the expenditure as per Section 40(a)(ia) of the Act. 6. The Ld. CIT(A) has erred in law and on facts of the case in confirming disallowance of interest expense of Rs. 35,18,785/- u/s. 36(1)(iii) of the Act. 7. Both the lower authorities have erred in law and on facts of the case in not following the decision of Hon'ble ITAT in earlier years in the appellant's own case wherein the disallowances made u/s. 40(a)(ia) and 36(1)(iii) on identical facts were deleted. 8. The Ld. CIT(A) has erred in law and on facts of the case in confirming additions u/s. 14A and 36(1)(iii) of the Act simultaneously. Legally it is well settled that the additions u/s. 14A and 36(1)(iii) cannot go together as the same results in double taxation not permissible as per the scheme of the Act. 9. Both the lower authorities have passed the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act and dividend of Rs. 60,000/- on shares of Kalupur Commercial Co. Op. Bank, which is offered to tax by the company. The Appellant further submits that annual average of monthly averages of opening and closing balances of investment during the year = Rs. 1873,22,85,124/12 = Rs. 156,10,23,762/-. Now, 1% of Rs. 156,10,23,762/- (i.e., amount of the annual average of the monthly average of the opening and closing balances of the value of investment as per Rule 8A(2)(ii) of the Rules) = Rs. 1,56,10,238/-. It is submitted that the Appellant has not incurred any expenses for earning such exempt income, due to which no disallowance of expenses is called for. 5.1. The submission of the appellant is duly considered. I find that the Ld AO has duly recorded his satisfaction for invoking the provisions of section 14A of the Act. It is admitted by the appellant company that it has invested in the shares of associate companies, which can generate exempt income. To do this, the appellant has incurred indirect cost in the form of administrative expenses and interest has been incurred in the process. Thus, there is a direct and proximate nexus between the investment made in these companies and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made by an assessee may not be relevant. No doubt, the assessee like Max opp Investment Limited may have made the investment in order to gain control of the investee company. However, that does not appear to be a relevant factor in determining the issue at hand. Fact remains that such dividend income is non-taxable. In this scenario, if expenditure is incurred on earning the dividend income, that much of the expenditure which is attributable to the dividend income has to be disallowed and cannot be treated as business expenditure. Keeping this objective behind Section14A of the Act in mind, the said provision has to be interpreted, particularly, the word 'in relation to the income' that does not form part of total income. Considered in this hue, the principle of apportionment of expenses comes into play as that is the principle which is engrained in Section 14A of the Act This is so held in Walfort Share and Stock Brokers P Ltd., relevant passage whereof is already reproduced above, for the sake of continuity of discussion, we would like to quote the following few lines there from. 35) The Delhi High Court, therefore, correctly observed that prior to introduction of Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. The situation here is, therefore, different from the case like Max opp Investment Ltd. where the assessee would continue to hold those shares as it wants to retain control over the investee company. In that case, whenever dividend is declared by the investee company that would necessarily be earned by the assessee and the assessee alone. Therefore, even at the time of investing into those shares, the assessee knows that it may generate dividend income as well and as and when such dividend income is generated that would be earned by the assessee. In contrast, where the shares are held as stock-in-trade, this may not be necessarily a situation. The main purpose is to liquidate those shares whenever the share price goes up in order to earn profits. In the result, the appeals filed by the Revenue challenging the judgment of the Punjab and Haryana High Court in State Bank of Patiala also fail, though law in this respect has been clarified hereinabove." 5.5. Coming to the contention of the appellant that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the employer. The first one is the employer's liability is to be paid out of its income whereas the second is deemed an income, by definition, since it is the deduction from employees' income and held in trust by the employer. The Hon'ble Apex Court held as under: "54. In the opinion of this Court, the reasoning in the impugned judgment that the non-obstante clause would not in any manner dilute or override the employer's obligation to deposit the amounts retained by it or deducted by it from the employee's income, unless the condition that it is deposited on or before the due date, is correct and justified. The non-obstante clause has to be understood in the context of the entire provision of Section 43B which is to ensure timely payment before the returns are filed, of certain liabilities which are to be borne by the assessee in the form of tax, interest payment and other statutory liability. In the case of these liabilities, what constitutes the due date is defined by the statute. Nevertheless, the assessees are given some leeway in that as long as deposits are made beyond the due date, but before the date of filing the return, the deduction is allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n paid to foreign agents by holding that the income arising on account of commission paid to overseas agents was deemed to accrue or arise in India and was accordingly taxable under the provision of section 5(2)(b) r.w.s. 9(1)(i) of the Act but the assessee has failed to make the compliances with the provisions of section 195(2) of the Act. In this case, the non-residents agents have rendered their services outside India in connection with procurement of sale. All the agents have overseas offices and they were not having any permanent establishment in India. At the time hearing learned DR has not brought any material on record suggesting that the non-resident agents are having any permanent establishment in India or services were provided within India. In absence of such finding it is held that the commission income earned by the foreign agent cannot be deemed to be accrue or arise in India. Regarding the applicability of section 195 of the Act, we observe that once the income is not taxable, there is no liability of deduction of tax, therefore, it was not applicable for the assessee to deduct tax. Therefore, there was no violation of provision of section 195 of the Act. Accordingl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. Explanation. Recurring subscriptions paid periodically by shareholders, or subscribers in Mutual Benefit Societies which fulfill such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause." INCOME TAY DEPARTMEN rowed within The sub section has three important words or phrases that are core to understanding of this Section i.e. (i) Interest, (ii) Borrowed and, (iii) For the purpose of business or profession. In the following paras we would elucidate the meaning of these with reference to this particular section. i. Meaning of "Interest" The definition of "interest" in Section 2(28A) means "interest payable in any manner in respect of any moneys borrowed or debt incurred". But for Section 36(1)(iii), "interest" is restricted to that on money borrowed and not on debt incurred. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure, if it was incurred on grounds of commercial expediency". Further, following this judgment the High Court of Delhi, in the case of Punjab Stainless Steel Inds. Vs. CIT 324 ITR 396, has further elaborated "The commercial expediency would include such purpose as is expected by the assessee to advance its business interest and may include measures taken for preservation, protection or advancement of its business interests, which has to be distinguished from the personal interest of its directors or partners, as the case may be. In other words, there has to be a nexus between the advancing of funds and business interest of the assessee-firm. The appropriate test in such a case would be as to whether a reasonable person stepping into the shoes of the directors/partners of the assessee- firm and working solely in the interest of the assessee-firm/ company, would have extended such interest free advances. Some business objective should be sought to have been achieved by extending such interest free advances when the assessee- firm/company itself is borrowing funds for running ..... X X X X Extracts X X X X X X X X Extracts X X X X
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