2011 (12) TMI 415 - AT - Income Tax

Disallowance as per provisions of section 40A(3) of the Act - cash payment exceeded the limit prescribed - The assessee submitted that the provisions of section 40A(3) are not applicable as payment made in cash was towards electricity bill, telephone bill and Octroi and made to the Government/local authorities Held that - Since the tax auditor has also found that amount was inadmissible under section 40A(3) of the Act and the payments were not made to the Government within clause (b) of Rule 6DD and the cash payment exceeding Rs.20,000/- has been made by the assessee without any exceptional circumstances ground of assessee is dismissed. Disallowance of prior period expenses AO stated that the debit notes produced covered only a part of such expenditure assessee submitted the additional evidence reflecting prior period expenses Held that - in the interest of natural justice and fair play the matter is restored back to the file of AO for fresh adjudication after providing reasonable opportunity of being heard to the assessee. This ground of assessee is allowed for statistical purposes. Disallowance out of Employees Welfare expenses being amount paid to Shroff Foundation Trust Held that - Details of payments made to Shroffs Foundation Trust (copy of the ledger account and copies of invoices received, on sample basis) to substantiate that the payment was made for services availed of the medical centre run by the said trust and was not a donation to the said trust - on submitting additional evidence and in the interest of natural justice and fair play the matter is restored back to the file of AO for fresh adjudication after providing reasonable opportunity of being heard to the assessee - ground of assessee is allowed for statistical purposes. Additional ground of assessee CIT(A) held that the provisions of section 14A of the Act read with Rule 8D of the Income tax Rules, 1962 are applicable in the facts and circumstances of the case - AO stated that assessee has received dividend/UTI income claiming exemption u/s 10(33) without allocating any expenses against this income - investment in shares, govt. securities, UTI, etc., which are dividend bearing investments - AO disallowed interest on average rate of borrowings u/s 14A - CIT(A), he directed the AO to recompute the disallowance in terms of section 14A read with rule 8D Appeal by both assessee and revenue Held that - Rule 8D of Income tax Rules is applicable w.e.f. Asst. Year 2008-09, the ld. CIT(A) s order is not sustainable in law as the asst. year under appeal in this case is 2002-03 and the additional evidence of copy of the ledger account and copies of invoices received appeal of both allowed.

Issues Involved:
1. Disallowance under Section 40A(3)
2. Disallowance of prior period expenses
3. Ad hoc disallowance of welfare and foreign travel expenses
4. Disallowance of employees' welfare expenses
5. Disallowance of foreign travel expenses
6. Disallowance under Section 14A

Issue-wise Detailed Analysis:

1. Disallowance under Section 40A(3):
The assessee challenged the disallowance of Rs.2,32,645/- under Section 40A(3) for cash payments exceeding the prescribed limit. The assessee argued that payments were made to government/local authorities, which should be exempt under Rule 6DD(b). However, the Tribunal upheld the CIT(A)'s decision, noting that the payments did not fall under the exceptions in Rule 6DD and thus confirmed the disallowance.

2. Disallowance of Prior Period Expenses:
The AO disallowed Rs.54,27,076/- claimed as prior period expenses, citing insufficient details. The CIT(A) upheld this disallowance. The Tribunal admitted additional evidence submitted by the assessee and remanded the matter back to the AO for fresh adjudication, emphasizing the need for natural justice and fair play.

3. Ad hoc Disallowance of Welfare and Foreign Travel Expenses:
For the Asst. Year 2001-02, the AO disallowed Rs.10,94,881/- on an ad hoc basis, which included welfare and foreign travel expenses. The CIT(A) reduced this disallowance to Rs.2,00,000/-. The Tribunal found no reason to interfere with the CIT(A)'s decision and upheld the reduced disallowance.

4. Disallowance of Employees' Welfare Expenses:
For the Asst. Year 2002-03, the AO disallowed Rs.1,26,987/- paid to Shroff Foundation Trust, treating it as a donation rather than a business expense under Section 37(1). The CIT(A) confirmed this disallowance. The Tribunal admitted additional evidence provided by the assessee and remanded the matter back to the AO for fresh adjudication.

5. Disallowance of Foreign Travel Expenses:
The AO disallowed Rs.5,32,146/- incurred for foreign travel by Shri A. G. Shroff, deeming it non-business related. The CIT(A) reduced the disallowance to Rs.2,32,146/-. The Tribunal upheld the CIT(A)'s decision, dismissing both the assessee's and Revenue's appeals on this issue.

6. Disallowance under Section 14A:
The AO disallowed Rs.1,35,62,834/- under Section 14A for expenses related to exempt income. The CIT(A) directed the AO to recompute the disallowance as per Rule 8D. The Tribunal noted that Rule 8D applies from Asst. Year 2008-09 and thus the CIT(A)'s direction was not applicable for Asst. Year 2002-03. The Tribunal admitted additional evidence and remanded the matter back to the AO for fresh adjudication.

Conclusion:
The Tribunal upheld some disallowances, remanded others for fresh adjudication, and provided detailed justifications for each decision, ensuring adherence to legal standards and principles of natural justice.

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