2014 (1) TMI 944 - AT - Income Tax

Disallowance made u/s 14A of the Act Held that - Before making the aforesaid disallowance, it is imperative for the Assessing Officer to establish that the expenditure has been incurred in relation to the earning of tax-free income - relying upon Godrej & Boyce Manufacturing Co. Ltd. vs. DCIT 2010 (8) TMI 77 - BOMBAY HIGH COURT - once a proximate cause for the disallowance is established, which is the relationship of the expenditure with income which does not form part of the total income then a disallowance under Section 14A of the Act has to be effected - Factually, there is no negation by the assessee to the assertions of the Assessing Officer - there is a proximate cause for the disallowance under Section 14A of the Act - The matter being a factual aspect needs determination at the level of the Assessing Officer - thus, while upholding in the principle, the disallowance under Section 14A of the Act , the matter remitted back to the AO to restrict the same only to the expenditure incurred in relation to earning of the exempt income Decided in favour of Assessee. Disallowance made u/s 40(a)(ia) of the Act Held that - The provisions of Section 40(a)(ia) of the Act are applicable on payments made by the assessee towards earth moving charges which also contained an element of transportation charges - The element of transportation charges required deduction on tax at source and in the absence of any such deduction, the provisions of Section 40(a)(ia) of the Act has been invoked - apart from a bald assertion there is no other detail or information mentioned in the assessment order as to the similarities with other cases so as to justify the adoption of 25% - the entire exercise involves an element of estimation and guess work - it would be fit and proper to accept the estimate made by the assessee at 10% of the total expenditure the AO is directed to restrict the disallowance to 10% of the earth moving charges Decided in favour of Assessee. Disallowance made u/s 40A(3) of the Act Held that - The income of the assessee from business has not been estimated so as to justify the proposition being advanced - The disallowance under Section 40A(3) of the Act is a specific disallowance - the assessee has not advanced any reason Decided against Assessee.

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Disallowance under Section 40(a)(ia) of the Income Tax Act.
3. Disallowance under Section 40A(3) of the Income Tax Act.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:

The assessee challenged the disallowance of Rs. 6,97,012/- made by the Assessing Officer under Section 14A of the Income Tax Act. The assessee-firm, being a partner in M/s Thakur Mhatre Unity Joint Venture (TMUJV), had invested Rs. 1,84,28,793/- as capital contribution and Rs. 2,16,29,374/- as additional investment. The Assessing Officer noted that the assessee did not charge any interest on these investments, which yielded an exempt income of Rs. 75,91,821/- under Section 10(2A) of the Act. The Assessing Officer disallowed the proportionate interest expenditure related to this exempt income, calculated at Rs. 6,97,012/-, which was upheld by the CIT(A).

The Tribunal emphasized that for disallowance under Section 14A, it is essential to establish that expenditure has been incurred in relation to earning tax-free income. The Tribunal referred to the Hon'ble Jurisdictional Bombay High Court's decision in Godrej & Boyce Manufacturing Co. Ltd. vs. DCIT, which mandates a proximate cause for such disallowance. The Tribunal found that the interest expenditure was indeed related to the exempt income but required further examination to determine the exact amount of disallowance. The issue was remanded back to the Assessing Officer for re-evaluation, limiting the disallowance to the expenditure incurred in relation to the exempt income.

2. Disallowance under Section 40(a)(ia) of the Income Tax Act:

The assessee contested the disallowance of Rs. 44,80,303/- made by the Assessing Officer under Section 40(a)(ia) for non-deduction of tax at source on payments for earth moving charges. The assessee had debited Rs. 5,96,04,249/- in its Profit & Loss account, out of which Rs. 4,16,83,032/- was paid to different parties below Rs. 50,000/- each, and Rs. 1,79,21,212/- was paid to persons with one or two trucks or those insisting on cash payments.

The Assessing Officer disallowed 25% of Rs. 1,79,21,212/- on the grounds that it represented transportation charges subject to TDS. The Tribunal found the disallowance rate of 25% to be arbitrary and without sufficient justification. Considering the circumstances and the assessee's offer to disallow 10% of the expenditure, the Tribunal directed the Assessing Officer to restrict the disallowance to 10% of Rs. 1,79,21,212/-, amounting to Rs. 17,92,121/-.

3. Disallowance under Section 40A(3) of the Income Tax Act:

The assessee challenged the disallowance of Rs. 2,83,503/- made by the Assessing Officer under Section 40A(3) for cash payments exceeding the prescribed limit. The assessee had made cash payments of Rs. 14,17,515/- for labor charges, resulting in a 20% disallowance. The Tribunal rejected the assessee's plea that no specific disallowance under Section 40A(3) should be made once income is estimated, stating that the income was not estimated in this case. The disallowance was justified on facts, and the Tribunal upheld the same.

Conclusion:

The appeal of the assessee was partly allowed. The disallowance under Section 14A was remanded for re-evaluation, the disallowance under Section 40(a)(ia) was reduced to 10%, and the disallowance under Section 40A(3) was upheld. The order was pronounced in the open Court on 17th July, 2013.

← Previous Next →