THE issue before the Bench is - Whether any disallowance u/s 40(a)(ia) is possible, when the AO has accepted in his remand report that the assessee has discharged all its TDS obligations. NO is the answer.
Facts of the case
The assessee is engaged in the business of ship management and also involved in the activity of horse breeding and owning and maintaining Race Horses. In the return of income for A.Y. 2007-08, the assessee claimed agricultural income and lease rent on agricultural land. The A.O. examined the agricultural income stated to have been earned from the land taken on lease from three directors of the assessee company to whom lease rents was paid. The A.O stated that extracts of the revenue records pertaining to agricultural operations did not give any details of agriculture activities on the lands taken on lease. It was further stated that the details of agricultural income and expenditure were also not furnished. Therefore, A.O issued a show cause notice and since as per the AO the assessee failed to substantiate the details of agricultural income, the same was disallowed and treated as income from Other Sources. Regarding the lease rents paid to the directors of the company towards the lands taken on lease, the assessee stated that the assessee company owned a large extent of land and has always used the lands to raise agricultural products, which are suitable for consumption by the horses and by the staff. Any surpluses were sold to persons in the nearby localities not with an intention of earning income but to avoid wastage of perishable goods. The A.O took the view that there was no agricultural activity carried on the lands taken on lease and, therefore, the income claimed to have been earned from agricultural activities has to be treated as Income under 'Other Sources'. Further, it was held that the expenditure incurred towards the lease rent paid to the directors as disallowable. A.O also took an alternative stand that since the lease rent paid to the directors pertained to earning income, which was exempted from taxation, the expenditure in relation to earning such income cannot be allowed u/s 14 A of the Act.
On appeal, the CIT(A) after considering the assessee's submission as well as the remand report held that the expenditure incurred for earning agricultural income had to be set off against the income from agricultural operations. Consequently, the expenditure amounting to Rs. 26.59 lakhs was set off against the income of Rs. 8.01 lakhs and the resultant loss from agricultural operations amounting to Rs. 18.57 lakhs was treated as the net disallowance u/s 14A of the Act.
Ship Management Fees
The A.O. had disallowed an expenditure on account of ship management fees on the ground that the assessee had not disclosed the total amount of receipts pertaining to ship management segment of the business. It was further pointed out by the A.O. that the assessee had not proved the expenditure as laid out for the purpose of earning the ship management business income. Further, it was stated in the show cause notice dated 24.12.2009 that the expenditure of Rs.60,42,28,258/- is liable to be disallowed U/S 40(a)(ia) since the TDS provisions were not complied with. In response to the show cause notice, the assessee furnished a reply wherein it was stated that it had been consistently following the accounting practice of excluding the reimbursement amounts received from M/s. Great Eastern Shipping Company Limited and M/s Five Star Bulk Carrier Limited, which have engaged the appellant for ship management. It was further stated that the accounting treatment was approved by the Tribunal in its own' case for the A.Y. 1989-90. No disallowance U/S 40(a)(ia) of the Act was called for since the TDS provisions under the applicable head of Professional or Technical services have been complied with and the TDS returns have also been filed. However, A.O disagreed with the explanations and disallowed the same. On appeal, the CIT(A) remanded the matter back to the A.O. for verification and the A.O. in the remand report accepted that the assessee had deducted and paid the TDS wherever deductible.
Having heard the parties, the Tribunal held that,
Agricultural Income
++ the CIT(A) observed that the assessee had sold French Beans, Cabbage, Cauliflowers, Carrot, Cucumber, Ladies Finger, Mango during the relevant previous year which constituted the agricultural income which was credited to the P&L account under the head "other income". The CIT(A) also recorded a finding to the effect that 7/12 extracts reflected that mango trees, coconut trees, guava, jamun, rice, cashew nut etc. are being grown. The finding recorded by the CIT(A) has not been controverted by the D.R. by bringing any positive material on record, therefore, there is no reason to interfere with the findings recorded by the CIT(A) holding that the assessee had earned agricultural income. With regard to lease rent expenditure incurred by the assessee, the CIT(A) has disallowed the same on the plea that the expenditure was incurred for earning exempt income. The lease rent was paid to the directors of the assessee company for leasing the lands to the assessee which deserves to be disallowed u/s 14A of the Act to the extend attributable to earning of exempt income;
++ the A.O. has not given sufficient opportunity to the assessee, insofar as the documents were asked at the fag end of the assessment proceedings, therefore, the assessee could not furnish the same before the A.O. These documents were filed before the CIT(A) who has sent all these documents to the A.O. for his remand report. The A.O. has examined all these documents and sends his remand report. Accordingly, there is no violation of Rule 46A insofar as the A.O. has been given due opportunity by the CIT(A) by examining the documents and give his report. After considering the remand report sent by the A.O., the CIT(A) has decided the issue. Thus there is no contravention of Rule 46A, we, therefore, do not find any merit in the ground taken by the Revenue;
Ship Management Fees
++ the A.O. on full verification did not find any discrepancy and he has clearly stated in the remand report that the assessee has deducted and paid TDS wherever applicable and accordingly, the CIT(A) has allowed the relief. The A.O. himself in all the other assts. including A.Y. 2008-09 has not made such disallowance and has accepted that the assessee has made TDS payments. The CIT(A) also recorded a categorical finding after considering the remand report that the A.O. has neither raised any issues nor brought any other material on record to doubt the genuineness of the expenses incurred towards the ship management activities. The CIT(A) has also observed that the ship management fees has arrived at after netting off the expenses is not found to be incorrect or inconsistent with the accounting policies of the assessee company. The ITAT in assessee's own case for A.Y. 1989-90 vide order dated 01-09-2003 has approved the accounting policy followed by the assessee company.
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