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Income Tax Appellate Tribunal, BANGALORE BENCHES “A”, BANGALORE
Before: Shri Chandra Poojari & Shri Keshav Dubey
O R D E R
Per Keshav Dubey, JM :
This appeal at the instance of the assessee is directed against the order of CIT(A) /National Faceless Appeal Centre, Delhi dated 18.12.2023 vide DIN & order No. ITBA/NFAC/S/250/2003-24/1058843119(1) passed u/s.250 of the Income-tax Act, 1961 (“the Act”) for Assessment Year (AY) 2014-2015.
The assessee has raised the following grounds:-
“1. Consultancy fees paid to director has been disallowed u/s 36(1)(ii) as commission in lieu of dividend, on the incorrect assumption on that the director is in receipt of salary in addition to the consultancy fees. For disallowing consultancy fees as commission in lieu of dividend has placed reliance on the decision of the Mumbai Bench D (Special Bench) of the Honorable Income Tax Appellate Tribunal in the case of Dalal Broacha Stock Broking (P.)
(AY 2014-15) M/s.A-Kal Televerse Private Limited. Ltd v. Addl.Comm. Of Income Tax, Range 4(1), Mumbai [2011] 10 ITRT) 357 (Mumbai) SB, while the facts are just not comparable.
2. Consultancy fees disallowed is an amount of Rs. 1,08,46,615/- and salary paid is stated to be Rs. 1.36 crores in the assessment order. The assessment order is not clear as to how this amount of Rs. 1,08,46,615/- is arrived at, when the consulting fees actually paid is Rs. 1.36 crores and salary paid is Rs. NIL.
3. Non exclusion of investment in the capital of group companies, which did not generate any income exempt from tax, in the computation of disallowance u/s 14A.”
Before going into the merits of the case, first we proceed with the application for condonation of delay in filing the appeal before this Tribunal. We find that there is delay of 33 days in filing the appeal before this Tribunal. The assessee has filed an application for condonation of delay stating that the Director of the company, Dr. Arjun Kalyanpur was overseas and returned to India only on 16th March, 2024. Thereafter, the appeal documents were discussed with him and got signed. In support of his claim, copy of passport along with entry / exist stamping by the immigration authorities of respective countries is also enclosed along with the stay petition and accordingly prayed to condone the short delay of 33 days in the interest of justice.
On the contrary, the learned Departmental Representative though objected, could not controvert the genuineness in causing the delay.
We have carefully gone through the condonation petition filed by the assessee as well as copies of the passport along with entries / exists stamping by the immigration authorities. We find that there is good and sufficient reason and also there is no malafide intention in (AY 2014-15) M/s.A-Kal Televerse Private Limited. filing the appeal belatedly before the Tribunal. Respectfully following the ratio laid down by the Hon’ble Supreme Court in the case of Collector, Land Acquisition v. Mst. Katiji & Others reported in (1987) 167 ITR 471 (SC), the delay caused in filing the appeal before this Tribunal stands condoned. Accordingly, in the interest of justice and equity, we condone the delay and admit the appeal for adjudication.
Now the brief facts of the case are that the assessee-company is engaged in the business of information technology enabled healthcare services. The assessee Company had filed its return of income for the assessment year 2014-2015 on 25.09.2014 declaring total income of Rs.8,98,94,110/-. Thereafter the case was selected for scrutiny under CASS and accordingly notices u/s.143(2) and 142(1) of the Act were issued. During the course of assessment proceedings it was observed by the AO that Dr. Arjun Kalyanpur being the Director of the company is also the key person in the assessee-company. The AO further observed that as the Director of the assessee-company has received remuneration and also consultancy fee of Rs.1,08,46,615/- out of the total consulting fee expenditure of Rs.13,89,35,566/- disallowed the claim of deduction u/s.36(1)(ii) of the Act on the ground that as the dividend was payable by the company and if the assessee-company instead of paying dividend had paid commission to their employee shareholder such payment of commission will be in lieu of dividend and accordingly an amount of Rs.1,08,46,05/- was disallowed as dividend paid to the Director. Further, during the course of assessment proceedings, the ld.AO observed that in Form 3CD, the assessee had claimed interest on delayed payment of TDS of Rs.15,68,800/- out of which Rs.10,328/- has been paid as interest
(AY 2014-15) M/s.A-Kal Televerse Private Limited. on delayed TDS is penal in nature, which the AO disallowed on the ground that it cannot be allowed as business expenditure. Further, during the course of assessment proceedings the AO found that the assessee has made long term investments in the equity shares / mutual funds. The return in the form of dividend from such investments would be exempt from tax u/s.10(34) of the Act. Under the provisions of sec.14A of the Act, no expenditure incurred for the purpose of earning of exempt income shall be allowed against the taxable profits. The AO was of the opinion that even if no dividend is earned and claimed as exempt during the year, the disallowance u/s.14A could be made. He relied on the decision of the Hon’ble High Court of Kerala in the case of CIT v. SBT as reported in 16 taxmann.com 289 (Ker.) (2011) has ruled that the purpose of investment is immaterial. Reliance is also placed on the decision of the Hon’ble Bombay High Court in the case of Godrej & Boyce v. DCIT , wherein it has been held that the disallowance under Rule 8D r.w.s 14A(2) of the Act is fair and reasonable.
Aggrieved by the assessment completed u/s.143(3) of the Act, vide order dated 29.12.2016, the assessee preferred an appeal before the CIT(A)/NFAC. With regard to the disallowance of deduction u/s.36(1)(ii) of the Act amounting to Rs.1,08,46,615/-, the ld.CIT(A) by relying on the decision of the Special Bench of ITAT Mumbai Benches in the case of Dalai Broacha Stock Broking (P) Ltd. v. Addl.CIT (order dated 16th December, 2010) find no justification to interfere with the order of the AO and accordingly confirmed the disallowance u/s.36(1)(ii) of the Act.
(AY 2014-15) M/s.A-Kal Televerse Private Limited.
Now regarding the interest on delayed payment of TDS, the ld.CIT(A) was of the view that the assessee has not claimed interest on delayed payment of TDS of Rs.15,68,800/- as deduction in the computation of taxable income. Accordingly, the addition made by the AO on this count is deleted and the ground of the assessee is allowed.
With regard to the third addition, i.e., expenditure attributable to the exempt income disallowed u/s.14A of the Act amounting to Rs.15,79,000/-, the CIT(A) is of the opinion that even if no dividend is earned and claimed as exempt during the year, the AO was right in making the disallowance u/s.14A of the Act. Accordingly, this ground was disallowed and the addition made by the AO on this count is confirmed. Thus, the appeal before the CIT(A) is partly allowed.
Aggrieved by the order of the CIT(A), the assessee has filed the present appeal before the Tribunal. Before us, the learned AR of the assessee vehemently submitted that Dr. Arjun Kalyanpur, who is also the Director of the assessee-company, is a radiologist by profession. He is well educated and well reputed in the medical industry and also hold US license to practice as a Doctor. Since he is a radiologist by profession, he cannot be in the full time employment. For the assessment year under consideration, the company has paid consultancy charges amounting to Rs.1.36 crore, which is much lower as compared to the consultant who is of the same qualification and experience. The said consultancy fees was paid in the ordinary course of business and therefore, claimed under the head total consulting fee expenditure. Further the AR of the Assessee strongly
(AY 2014-15) M/s.A-Kal Televerse Private Limited. contended that the authorities below on the mistaken assumption that the assessee-company having paid separate remuneration over and above the consultancy fees has held that as the dividend was payable by the company and the assessee-company instead of paying the dividend had paid commission to their employee shareholder and such amount of commission will be in lieu of dividend and the claim of deduction will not be allowable u/s.36(1)(ii) of the Act. With regard to the expenditure attributable to exempt income disallowed u/s.14A of the Act amounting to Rs.15,79,000/-, the ld.AR vehemently submitted that no disallowance u/s.14A could be made in the absence of receipt of dividend. As per the provisions of section 14A of the Act, any sum incurred for earning income exempt from tax cannot be allowed as expenditure in computing the taxable income. Since the assessee-company has not earned any exempt income, the question of disallowance of expenditure does not arise in the case of the assessee-company.
The learned DR, on the other hand, relied on the orders of the authorities below.
We have heard the rival submissions and perused the material on record. In this appeal, the assessee has raised three grounds of appeal, which we shall deal with in seriatim. It is an undisputed fact that Dr. Anjun Kalyanpur is a Radiologist by profession. He received professional fees by way of consultancy charges from the assessee- company amounting to Rs.1.36 crore. Apart from this consultancy fees, he had not received any commission, bonus or salary from the assessee-company. In this regard, the AR of the assessee drew our
(AY 2014-15) M/s.A-Kal Televerse Private Limited. attention on letters submitted on 31st May, 2018 requesting to seek report from the AO, another letter submitted on 9th October, 2018 along with the full salary register with a request to seek report from the AO as well as another letter submitted on 24th October, 2018 sharing full salary register again with a request to seek report from the AO. The ld.CIT(A), on the other hand, considered the submissions made by the assessee during the course of appellate proceedings and held to be not tenable. Before proceeding further it is appropriate to take note of section 36(1)(ii) of the Act, which reads as under:-
“36. Other deductions.—(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28— (i)….. (ii) any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission;”
Thus, this section allows deduction if the expenditure is – (i) on account of bonus or commission, (ii) is paid to an employee; (iii) for services rendered and, (iv) is not in lieu of payment of dividend. Therefore, we are of the opinion that the provisions of section 36(1)(ii) of the Act covers the only case of expenditure on account of bonus or commission paid to an employee. In the present case, the assessee being a professional doctor also holding the US License cannot hold the employment received only professional fees by way of consultancy charges. Both the authorities below failed to appreciate the fact that the assessee had only in receipt of consultancy charges of Rs.1.36 crore and no salary had been paid to Dr. Arjun Kalyanpur. We also could not understand how the consultancy fees of Rs.1,08,46,615/- arrived by the Authorities below when actual consultancy fees paid
(AY 2014-15) M/s.A-Kal Televerse Private Limited. is Rs.1.36 crore and the salary paid is Nil. Therefore, we are of the opinion that both the authorities below mistakenly hold that the consultancy fees is paid over and above salary and accordingly concluded unreasonably that as the dividend was payable by the company and if the assessee-company instead of paying dividend had paid commission to their employee shareholder such payment of commission will be in lieu of dividend and the claim of deduction will not be allowable u/s.36(1)(ii) of the Act. As in the present case neither the Bonus nor the commission was paid to the Director the question of disallowance U/s 36(1)(ii) does not arise. It is ordered accordingly. In the result, ground Nos.1 and 2 are allowed.
With regard to ground No.3, which relates to disallowance u/s.14A of the Act, amounting to Rs.15,79,000/- admittedly, the assessee has not earned any exempt income in the year under consideration. Therefore, in the absence of any exempt income, no disallowance u/s.14A r.w. Rule 8D of the Income-tax Rules, is warranted. In holding so, we rely on the order of the co-ordinate Bench in the case of Maini Materials Movement Pvt. Ltd. v. DCIT in (order dated 22.07.2024), the Bangalore Bench held as under:-
“7. We have heard the rival contentions of both the parties and perused the materials available on record. Admittedly, the assessee has not earned any exempt income in the year under consideration, therefore, in the absence of any exempt income, no disallowance under section 14A r.w.r. 8D of Income Tax Rules is warranted. In holding so, we rely on the judgment of Hon’ble High Court of Gujarat in the case of CIT vs. Corrtech Energy Private Limited reported in 45 taxmann.com 116 where it was held that the provision of section 14A of the Act cannot be applied in the absence of any exempted income. The relevant observation of the Hon’ble Bench reads as under:
(AY 2014-15) M/s.A-Kal Televerse Private Limited. Section 14A(1) provides that for the purpose of computing total income under chapter IV, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. In the instant case, the Tribunal has recorded the finding of fact that the assessee did not make any claim for exemption of any income from payment of tax. It was on this basis that the Tribunal held that disallowance under section 14A could not be made. In the process tribunal relied on the decision of Division Bench of Punjab and Haryana High Court in case of CIT v. Winsome Textile Industries Ltd. [2009] 319 ITR 204 in which also the Court had observed that where the assessee did not make any claim for exemption, section 14A could have no application. Respectfully following the orders of the Hon’ble High Court as mentioned above, we hold that disallowance under the provision of section 14A r.w.r. 8D of Income Tax Rules cannot exceed the exempted income in the given facts and circumstances. As such, there is no dividend income in the year under consideration and therefore, there cannot be any disallowances of the expenses as envisaged under the provision of section 14A r.w.r. 8D of Income Tax Rules. Hence, the ground of appeal of the assessee is allowed.”
We also rely on the decision in the case of CIT v. Chettinad Logistics Pvt. Ltd. (2017) 80 taxmann.com 221 (Madras HC) as well as 95 taxmann.com 250 (SC), wherein the SLP against the Hon’ble Madras High Court ruling has been dismissed.
Considering the precedents cited supra and the facts and circumstances of the case, we allow this ground of appeal also.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 30th July, 2024.