2014 (10) TMI 951 - AT - Income Tax

Addition u/s.14A - rule 8D applicability - computation of claim - Held that - As gone though the order of the authorities below. It is the settled proposition of law that the application of Rule 8D is mandatory on and from A.Y. 2008- 09. We find that the disallowance has been computed as per the formula given under Rule 8D. We, therefore, do not find any reason to interfere with the findings of the ld. CIT(A). Ground no. 1 with its sub-ground is dismissed. Addition of cash expenses - addition u/s 40A - Held that - It is not in dispute that the assessee has incurred expenditure amounting to ₹ 2,39,73,409/- in cash. It is also an undisputed fact that the auditors have qualified in their report that amount of ₹ 9.18 lacs have been paid in cash in violation of the provisions of section 40A(3) of the Act. Although the same was claimed to be allowable as per Rule 6DD, however, no details have been furnished, neither before the Revenue authorities nor before us. Therefore, the expenditure of ₹ 9.18 lacs are clearly disallowable, as per the qualification of the Auditors. That leaves us with a balance disallowance of ₹ 38.76 lacs. In our considered opinion, 50% out of this should meet the ends of justice, therefore, in addition to the disallowance of ₹ 9.18 lacs, we direct the A.O. to restrict the disallowance out of the balance expenditure at ₹ 19.38 lacs meaning thereby that the total disallowance should be restricted to ₹ 28.56 lacs. Ground no. 2 with its sub ground is partly allowed.

Summary

Issues:
1. Disallowance under section 14A of the Act.
2. Disallowance of cash expenses under section 40A(3).

Analysis:
1. The appeal was against the order of the CIT(A) regarding the Assessment Year 2008-09. The assessee contested the addition made under section 14A and the addition of cash expenses. The Assessing Officer computed the disallowance under section 14A based on Rule 8D, considering office premises and staff expenses. The disallowance was upheld by the CIT(A) and ITAT, stating the mandatory application of Rule 8D from A.Y. 2008-09. The disallowance of Rs. 5,03,361 under section 14A was confirmed, as the explanation provided by the assessee was not accepted.

2. Regarding the disallowance of cash expenses, the Assessing Officer found discrepancies in the cash expenses claimed by the assessee. The auditors also highlighted cash payments in violation of section 40A(3). The ITAT directed the disallowance of Rs. 9.18 lakhs as it was clearly in violation. Additionally, a balance disallowance of Rs. 38.76 lakhs was considered, with 50% of it being restricted to meet the ends of justice. The total disallowance was thus restricted to Rs. 28.56 lakhs. The appeal by the assessee was partly allowed on this issue.

In conclusion, the ITAT upheld the disallowance under section 14A but partially allowed the appeal concerning the disallowance of cash expenses, limiting the total disallowance amount. The judgment highlighted the importance of complying with tax provisions and the need for accurate documentation to support expenses claimed.