2014 (11) TMI 1223 - AT - Income Tax

Disallowance of telephone expenses - assessee non furnishing telephone wise amount of claim and the places where telephones were installed - personal expenditure - HELD THAT - We find that the assessee before the AO could not furnish any details of expenses, neither with regard to purpose for which the telephone was used and where such telephones were installed. In such a case, personal user by the partners cannot be ruled out. There cannot be any precedence on factual matter, when in A.Y. 2004-05, the Ld.CIT(A) has deleted the disallowance on the ground that there was no basis of ad hoc disallowance by the AO. It was in this background the Tribunal had deleted the said addition. The learned counsel was unable to furnish the details or point out that on similar reasons disallowance was made in the earlier years. Thus looking to the facts of the case, we are of the opinion that this matter should go back to the file of the AO to examine this issue afresh - Decided in favour of assessee for statistical purpose. Disallowance of business promotion expenses being 20% - AO disallowed said expenses on ad hoc basis on the ground that these expenses pertain to expenditure incurred on hotels and clubs and similar disallowance in the pased were made - Assessee submitted a very important fact and distinguishing feature in this year is that, assessee has paid Fringe Benefit Tax on payments relating to business promotion, therefore to the proportion of FBT paid, no disallowance should be made - HELD THAT - We agree with the contention of the learned counsel that, if the assessee has paid FBT on the said amount then no disallowance is called for. However, in order to verify, this contention the matter is restored to the file to the AO, to see whether, any FBT has been paid on the amount debited for business promotion expenses. In case FBT has been paid then no disallowance should be made on such payment. Accordingly, ground no. 2 is partly allowed. Disallowance u/s 14A read with rule 8D - HELD THAT - So far as assessee s contention that no interest should be disallowed as the investments have been made from surplus and were made prior to the loan taken from the bank, have not been examined either by the AO or by the Ld.CIT(A). This contention of the assessee should be examined by the AO. Further we agree with the contention of the learned counsel that, so far as investment in debentures and mutual funds which are debt oriented, the same should be excluded while taking the average investment for the purpose of disallowance under clause (iii) of rule 8D (2). Only average investment made in the shares should be taken into account. We direct the AO to compute the disallowance under clause (iii) of rule 8D (2) only on average investment made in shares. Thus the entire issue of disallowance u/s 14A is restored back to the file of the AO to examine the issue of interest and indirect expenses as per directions given above. - Decided partly in favour of assessee for statistical purposes.

Summary

Issues:
1. Disallowance of telephone expenses on ad hoc basis
2. Disallowance of business promotion expenses on ad hoc basis
3. Disallowance under section 14A read with Rule 8D
4. Disallowance under section 14A read with Rule 6D

Issue 1: Disallowance of Telephone Expenses on Ad Hoc Basis
The appeal challenged the disallowance of telephone expenses amounting to Rs. 89,911, being 20% of total telephone expenses, due to lack of details provided by the assessee. The Tribunal noted that no details were furnished regarding the purpose and installation of telephones, raising concerns about potential personal use. While the appellant cited precedents where similar disallowances were deleted, the Tribunal emphasized the need for specific details to support business use. Consequently, the matter was remanded to the AO for fresh examination based on relevant details to determine the actual business-related expenses.

Issue 2: Disallowance of Business Promotion Expenses on Ad Hoc Basis
The disallowance of business promotion expenses of Rs. 97,640, being 20% of the total expenses, was contested by the assessee. The AO and Ld.CIT(A) upheld the disallowance citing potential personal elements. However, the appellant highlighted the payment of Fringe Benefit Tax (FBT) on these expenses, suggesting that no further disallowance should be made. The Tribunal agreed that if FBT was paid, no additional disallowance was warranted. The matter was referred back to the AO to verify FBT payment and decide on the disallowance accordingly.

Issue 3: Disallowance under Section 14A read with Rule 8D
The AO calculated a disallowance under section 14A based on exempt income claimed by the assessee, which was confirmed by Ld.CIT(A). The appellant argued against interest disallowance due to investments made from surplus funds before a bank loan. Additionally, they contended that only equity shares' average investment should be considered for disallowance under rule 8D (2)(iii). The Tribunal directed the AO to reexamine the interest disallowance issue and exclude debt-oriented investments while computing the disallowance under rule 8D (2)(iii). The entire matter of disallowance under section 14A was remitted to the AO for further assessment based on the provided directions.

In conclusion, the appeal by the Assessee was partly allowed for statistical purposes, with various issues remanded back to the AO for fresh examination based on specific details and relevant considerations.