2015 (6) TMI 1086 - AT - Income Tax

Ad-hoc disallowance at the rate of 5% of the total expenditure - Held that - All the expenses were incurred against bills and for commercial expediency, thus, no disallowance is expected to be made u/s 37(1) of the Act. The assessee is a institution, thus, no ad-hoc addition is permitted unless and until it is proved otherwise. There is no recording of satisfaction by the Assessing Officer that the assessee made a bogus claim. There are no borrowed funds also, thus, to put an end to litigation, the disallowance is restricted to 2% against 5% sustained by the ld. Commissioner of Income Tax (Appeals). It is made clear that the observation made by the Bench is peculiar to the facts available to the impugned assessment year and may not be quoted for further reference. This ground of the assessee is partly allowed Ad-hoc disallowance made towards estimated expenses - addition u/s 14A - Held that - Rule-8D of the Rules can be applied, if the Assessing Officer is not satisfied with the correctness of the claim of the assessee with respect to the expenditure incurred in relation to exempt income. Even if, the assessee claims that no expenditure was incurred in respect to exempt income, the Assessing Officer is supposed to follow the mandate of Rule-8D. Section 14A is called for when the Assessing Officer is not satisfied with the claim of the assessee having incurred no expenditure or some amount expenditure in relation to exempt income. Therefore, following the decision of jurisdictional High Court in Godrej & Boyce, (2010 (8) TMI 77 - BOMBAY HIGH COURT ), wherein, it was held that the disallowance has to be on reasonable basis, therefore, to put an end to the litigation, I direct the ld. Assessing Officer to reduce the disallowance to ₹ 1 lakh in place of ₹ 3,41,763/- sustained by the ld. Commissioner of Income Tax (Appeals).

Summary

Issues:

1. Disallowance of expenditure for business purposes
2. Ad-hoc disallowance under section 14A for estimated expenses

Analysis:

Issue 1: Disallowance of expenditure for business purposes

The assessee contested the ad-hoc disallowance at the rate of 5% of total expenditure, arguing that the expenses were solely for business purposes. The Assessing Officer suspected personal use in the claimed expenses and made a disallowance. The Commissioner of Income Tax (Appeals) restricted the disallowance to 5% of the claimed expenses. The Tribunal noted that the Assessing Officer did not specify which expenses were personal in nature and that the genuineness of the expenses was not proven. The assessee provided ledger accounts and argued that all expenses were for business purposes. The Tribunal held that no ad-hoc addition should be made for an institution like the assessee unless proven otherwise. The disallowance was reduced to 2% from the 5% sustained by the Commissioner of Income Tax (Appeals).

Issue 2: Ad-hoc disallowance under section 14A for estimated expenses

The second ground pertained to an ad-hoc disallowance of &8377; 3,41,763 made for estimated expenses not incurred for earning tax-free dividend income. The assessee argued that Rule-8D cannot be applied automatically to the case. The Tribunal held that Rule-8D can be applied if the Assessing Officer is not satisfied with the correctness of the claim regarding expenditure related to exempt income. Even if the assessee claims no expenditure was incurred, Rule-8D must be followed. Citing a decision by the jurisdictional High Court, the Tribunal directed the Assessing Officer to reduce the disallowance to &8377; 1 lakh from the &8377; 3,41,763 sustained by the Commissioner of Income Tax (Appeals).

In conclusion, the Tribunal partly allowed the appeal of the assessee, reducing the disallowances under both issues.