2015 (10) TMI 1488 - AT - Income Tax

Disallowance under section 14A - expenditure incurred for earning of exempt income - Held that - The straightway application of rule 8D in the case of the assessee by the lower authorities is not sustainable. Taking into consideration the overall facts and circumstances of the case especially the nature of investments made by the assessee and further that most of the investments were made in earlier years, in our view, the expenses equal to 2% of the exempt income earned by the assessee would constitute a reasonable disallowance and the same is restricted to that extent accordingly. This ground of appeal of the assessee is thus partly allowed. Disallowance out of motor car expenses and depreciation at the rate of 33.3% as against the claim of the assessee that the same be restricted to 25% - Held that - The disallowance at the rate of 25% of the motor car expenses and also out of the claim of depreciation is a reasonable disallowance which assessee herself has offered. We accordingly restrict the disallowance in relation to motor car expenses and depreciation to the extent of 25% instead of 33.3% made by the lower authorities. - Decided in favour of assessee in part.

Summary

Issues:
1. Condonation of delay in preferring the present appeal.
2. Disallowance of expenditure under section 14A for earning exempt income.
3. Disallowance of motor car expenses and depreciation at a rate of 33.3% instead of 25%.

Analysis:

Issue 1: Condonation of Delay
The appeal was delayed by 30 days, and the assessee sought condonation of the delay, citing a genuine belief that the appeal period was 90 days. The Tribunal accepted the explanation and condoned the delay, proceeding to decide the appeal on its merits.

Issue 2: Disallowance of Expenditure for Exempt Income
The Assessing Officer observed exempt income of &8377; 32,04,703/- and disallowed &8377; 2,85,860/- under Rule 8D2(iii) of the Income Tax Rules, 1962. The CIT(A) confirmed the disallowance, stating that disallowance at 0.5% of average investment was reasonable. However, the Tribunal found that Rule 8D was not applicable for the assessment year in question. Considering the nature of investments and prior years' disallowances, a 2% disallowance of exempt income was deemed reasonable, partially allowing the appeal.

Issue 3: Disallowance of Motor Car Expenses
The AO disallowed 1/3rd of motor car expenses and depreciation at 33.3%, which the CIT(A) upheld. The Tribunal, considering the nature of the assessee's business and profession, reduced the disallowance to 25% as offered by the assessee, deeming it reasonable. Consequently, the disallowance was restricted to 25%, partially allowing the appeal.

In conclusion, the Tribunal partly allowed the appeal, condoning the delay, adjusting the disallowance of expenditure for exempt income, and reducing the disallowance of motor car expenses and depreciation to 25% from 33.3%.