2016 (7) TMI 1400 - AT - Income Tax

Disallowance u/s 14A - Held that - We find that assessee had not claimed any deduction in respect of exempt income nor has it claimed any expenditure against the income which does not form part of the total income.Thus both the basic ingredients for making a disallowance u/s.14A are missing.Secondly, the fund flow statement made available to the FAA, during the appellate proceedings, clearly show that it had sufficient own funds to make investments(Pg-1 of the PB).The FAA has admitted that funds available to the assessee were more than the investments made during the year under consideration.Therefore in our opinion there was no justification for making disallowance as per the provisions of section 14A r.w.r 8D of the Rules. Considering all these factors we are of the opinion that the FAA was not justified in upholding the order of the AO. Hence reversing his order we decide the effective ground of appeal in favour of the assessee .

Summary

Issues:
1. Disallowance of unascertained expenditure being reward points against current year's sales.
2. Disallowance made by the AO under section 14A of the Income-tax Act.

Issue 1: Disallowance of unascertained expenditure being reward points against current year's sales:

The Appellate Tribunal considered the appeal challenging the order of the CIT(A)-40, Mumbai. The Assessing Officer (AO) and the assessee had filed appeals regarding the assessment completed under section 143(3) of the Act, determining the income of the assessee. The effective ground of appeal raised by the AO pertained to the deletion of disallowance of unascertained expenditure related to reward points against the current year's sales. The Tribunal noted that a similar issue had been decided in favor of the assessee in earlier years. Referring to previous Tribunal decisions, it was established that the assessee incurred a liability when providing customers with reward points, and only a portion of these points were likely to be encashed. The Tribunal upheld the findings of the Commissioner (Appeals) based on historical data and consistent accounting policies, dismissing the revenue's ground of appeal against the AO.

Issue 2: Disallowance made by the AO under section 14A of the Income-tax Act:

In this case, the solitary issue raised by the assessee was the disallowance made by the AO under section 14A of the Act. The AO had found that the assessee made investments in shares and claimed interest expenditure. The AO directed the assessee to explain why disallowance under section 14A should not be made. Despite the assessee's submissions on having sufficient own funds, the AO made an addition based on Rule 8D of the Income-tax Rules. The assessee appealed to the First Appellate Authority (FAA), citing investments made from interest-free surplus funds. However, the FAA upheld the AO's order, emphasizing the authority to make reasonable disallowances under section 14A.

During the appeal before the Appellate Tribunal, the AR argued that no exempt income was claimed, investments were strategic, and sufficient non-interest bearing funds were available. The Tribunal observed that the basic requirements for disallowance under section 14A were not met, as the assessee had not claimed any deduction for exempt income and had adequate own funds for investments. The Tribunal disagreed with the FAA's decision and reversed it, ruling in favor of the assessee. Consequently, the appeal filed by the AO was dismissed, and the assessee's appeal was allowed.

In conclusion, the Appellate Tribunal's judgments addressed the issues of disallowance of unascertained expenditure related to reward points and the disallowance made under section 14A of the Income-tax Act. The decisions provided detailed analyses based on legal provisions, previous rulings, and factual considerations, ultimately resulting in the dismissal of the AO's appeal and the allowance of the assessee's appeal.