2019 (2) TMI 1825 - AT - Income Tax

Disallowance u/s 14A - expenditure incurred in relation to the exempt income - HELD THAT - The very process of determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the A.O. returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. In fact the A.O before discarding the claim of the assessee as regards the amount of expenditure incurred in relation to the exempt income remains under a statutory obligation to record cogent reasons as regards his dissatisfaction in respect of the said claim before embarking upon the determination of the amount of expenditure in accordance with the method prescribed in Section 14A r.w. Rule 8D. We find that our aforesaid view stands fortified by the judgment of the Hon ble Supreme Court in the case of Godrej Boyce Manufacturing Company Limited 2017 (5) TMI 403 - SUPREME COURT We therefore not being able to persuade ourselves to uphold the disallowance made by the A.O under Section 14A r.w. Rule 8D. Bogus purchases - Purchase from grey market - HELD THAT - As the assessee had failed to substantiate the veracity of the purchase transactions under consideration therefore it can safely be concluded that the material was purchased by him at a discounted price from the open/grey market as against that shown in its accounts. Insofar the estimation of the profit element is concerned the same in our considered view can safely be taken at 12.5% of the aggregate value of purchases of 1, 85, 321/- in the backdrop of the judgment of the Hon ble High Court of Gujarat in the case of CIT Vs. Simit P. Sheth 2013 (10) TMI 1028 - GUJARAT HIGH COURT - We thus in terms of our aforesaid observations restrict the addition in the hands of the assessee to the extent of the profit element of 23, 125/- (i.e 12.5% of 1, 85, 321/-) that would have been involved for making the aforementioned purchases from the open/grey market.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D.
2. Reopening of assessment and disallowance of alleged bogus purchases.

Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:

Issue:
The first issue concerns the disallowance of ?2,13,382/- under Section 14A read with Rule 8D(2)(iii), being 0.5% of the value of average investments earning exempt income. The assessee contended that no expenditure was incurred for earning the exempt dividend income, and the Assessing Officer (A.O) did not record his satisfaction regarding the correctness of the assessee's claim before making the disallowance.

Judgment:
The Tribunal observed that the A.O must record a finding of dissatisfaction with the assessee's claim before determining the amount of expenditure incurred in relation to exempt income. This requirement is mandated by law and supported by the Supreme Court's judgment in Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT & Anr. The Tribunal found that the A.O failed to satisfy this fundamental requirement and thus vacated the disallowance of ?2,13,382/-. The appeal was allowed in favor of the assessee.

2. Reopening of Assessment and Disallowance of Alleged Bogus Purchases:

Issue:
The second issue pertains to the reopening of the assessment based on information that the assessee had made bogus purchases from two parties. The A.O disallowed ?1,85,321/- claimed as an expense during the year, as the parties were not traceable and the purchases were deemed non-genuine.

Judgment:
The Tribunal noted that the assessee failed to substantiate the genuineness of the purchases and the parties were non-existent at the given addresses. However, the Tribunal also considered that the material purchased was used for setting up sets for the promotion of a movie. Given the consumption of the material was proved, the Tribunal concluded that the purchases were made from unidentified suppliers in the open/grey market. The Tribunal estimated the profit element involved in these purchases at 12.5% of ?1,85,321/-, amounting to ?23,125/-, based on the judgment of the Gujarat High Court in CIT Vs. Simit P. Sheth. Thus, the addition was restricted to ?23,125/-. The appeal was partly allowed.

Conclusion:
The Tribunal allowed the appeal concerning the disallowance under Section 14A and partly allowed the appeal related to the reopening of assessment and disallowance of bogus purchases, restricting the addition to the profit element involved. The orders were pronounced in the open court on 28.02.2019.