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2017 (7) TMI 1393 - AT - Income TaxDisallowance u/s 14A r.w.r 8D - disallowance being 0.5% on the average value of investment - HELD THAT - AR submitted that assessee has not earned any exempt income during the year - we find that the issue is squarely covered in favour of the assessee by the decision of the Hon'ble Delhi High Court in the case of Cheminvest Limited 2015 (9) TMI 238 - DELHI HIGH COURT wherein it has been held that in absence of exempt income during the year no disallowance under Section 14A of the Act can be made. Thus, ground No. 1 is allowed. Disallowance on account of increase in net profit being 1% of the turnover made by AO by disallowing the expenditure - AO was of the view that though the provisions of Section 92BA relating to the related party domestic transactions are effective only from 1 April 2013 but he looked into the reasons for making hundred percent purchases from a related party and whether the transactions are at arm's-length or not and unreasonable profit has not been transferred to the other related party - HELD THAT - Neither the learned assessing officer nor the learned CIT - A has applied the provisions of Section 92BA of the income tax act in its true spirit. In fact the adjustment has been made by disallowing part of the purchase prices from the related party by the learned assessing officer which is actually in conformity with the provisions of Section 40A (2) of the act. Now it is required to be seen whether the addition made by the learned assessing officer and partly confirmed by the learned CIT - AE is in accordance with that provisions of not Assessee has stated that the sister concern is the manufacturing unit of the group whereas the assessee is a marketing unit of the group. Therefore comparison of the gross profit and net profit of a manufacturing unit with a marketing unit is not proper. If the revenue wanted to apply the provisions of Section 40A (2) of the act it has to prove that purchase price paid by the assessee are unreasonable and excessive looking to the market rate of such goods and further the needs of the business of the assessee. No such exercise has been carried out by the learned AO. In fact this exercise could have been carried out by the learned assessing officer by verifying the books of the sister concern where that sister concern sales to the assessee as well as to the other party. The learned assessing officer could have obtained the comparative prices of the similar goods supplied to the assessee by the sister concern and to the other parties. No such efforts have been made but merely a statistical analysis of the comparison of the profit was made by the learned assessing officer which is not warranted by the provisions of Section40A (2) of the act. Further the learned CIT - A has also casually dealt with the whole issue by comparing the tax arbitrage and confirming the party addition looking to the tax benefit derived by the group. In view of this the addition sustained by the learned CIT - A is devoid of any merit and not in accordance with the law. Therefore, ground No. 2 is allowed. Disallowance being 30% of business promotion and advertisement expenditure - Addition of expenditure are incurred by the assessee through its Directors by credit cards and gifts to various customers - CIT (Appeals) restricted the same to the extent of 10% - HELD THAT - The details of the expenditure incurred by the assessee were submitted before the Assessing Officer. This expenditure was incurred through the credit cards of the Directors, but that fact itself cannot result into the disallowance. It needs to be tested under parameters of section 37 (1) of the Act. The details of the expenditure show that these are for the purchase of various diaries, Diwali expenditure and entertainment and gifts to the customers. Naturally these expenditure are incurred by the Directors, but that does not mean that these are the personal expenditure and not incurred wholly and exclusively for the purposes of the business of the assessee. Even otherwise, in the case of the company assessee, there cannot be any personal expenditure. In view of this, Ground No. 3 of the appeal is allowed and the disallowance is directed to be deleted. Depreciation on Apple LCD monitor - assessee claimed depreciation @ 60% stating it to be computer and AO and CIT (Appeals) allowed it @ 15% holding it to be not a computer but general plant and machinery - HELD THAT - As assessee has purchased Apple LED DIS which is in fact a monitor for ₹ 45,500/- which is required for display at the time of conferences and presentation and is required to be attached to a CPU. In fact, it is a computer Monitor. Therefore, we hold that it is a computer entitled to 60% of the depreciation, as it is a monitor attached to the computers. Thus, ground No. 4 is allowed. Disallowance of rent to the related parties - AO found that assessee has paid rent to specified persons under Section 40A (2) (b) - HELD THAT - For the purpose of Section 40A (2) (b) the Revenue authorities should have brought on record that the rent paid to the related party is excessive and un-reasonable. Merely the tax arbitrage cannot be the reason to make disallowance under Section 40A (2) (b) of the Act. Valuation of perquisite if shown properly by directors in their tax returns and if it is less than Rent paid by the assessee to the land lord in whose house the directors are residing, it is the duty of AO of the directors to see whether perquisites are correctly valued or not. It cannot straight away result in to disallowance u/s. 40A (2) of the Act unless it is shown that it is unreasonable and excessive having regard to the fair market value of such service or legitimate needs of the business of the assessee. All these ingredients are absent in the disallowance made by the revenue. In view of this, we direct the ld. Assessing Officer to delete the disallowance of rent paid to related parties as Revenue failed to show that it is excessive and un-reasonable compared to the market rate. Disallowance of the medical expenses of the Directors - AO disallowed as neither the appointment letter of the Directors nor the resolutions were filed - HELD THAT - Even before us, it was not shown that the Directors are employees of the company and they were entitled to reimbursement of medical expenditure as per their terms of appointment. In view of this, we do not find any infirmity in the orders of the lower authorities. Confirmation of the disallowance of 10% of various expenditure such as Staff welfare, Repair, Telephone, Travelling, Vehicle running etc. - HELD THAT - CIT (Appeals) held that the above disallowance is reasonable for the reason that appellant is a private company run by its Directors and naturally certain expenditure have to be of personal nature. We find that before the Assessing Officer assessee has submitted the complete details of this expenditure. It is also submitted before us in Paper Book No. 2. We note that the assessee before us is a Pvt. Ltd. company and a company cannot have personal expenditure. It is not the case of the Revenue that disallowance is made as expenses are not incurred wholly and exclusively for the purposes of the business. No such instances despite submission of the details by the assessee were pointed out by the Revenue. The disallowance is also made on ad-hoc basis - we reverse the order of the lower authorities and direct the Assessing Officer to delete the disallowance.
Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act. 2. Disallowance on account of increase in net profit being 1% of turnover. 3. Disallowance of business promotion and advertisement expenditure. 4. Depreciation on Apple LED Cinema. 5. Disallowance of rent paid to related parties under Section 40A(2)(b). 6. Disallowance of director's medical expenses. 7. Disallowance of 10% of various business expenses. Issue-wise Detailed Analysis: 1. Disallowance under Section 14A: The first issue pertains to the confirmation of disallowance of ?50,000/- under Section 14A of the Income Tax Act, being 0.5% on the average value of investments. The assessee argued that no exempt income was earned during the year. The Tribunal found that the issue is covered in favor of the assessee by the decision of the Hon'ble Delhi High Court in the case of Cheminvest Limited Vs. CIT, where it was held that in the absence of exempt income, no disallowance under Section 14A can be made. Thus, this ground was allowed. 2. Disallowance on Account of Increase in Net Profit: The second issue involves the disallowance made by the Assessing Officer (AO) by increasing the net profit by 1% of the turnover, which was scaled down by the CIT (Appeals). The AO noted that the assessee made 100% purchases from a related party and questioned the arm's-length nature of these transactions. The CIT (Appeals) applied Section 92BA and reduced the disallowance to ?17,66,377/-. The Tribunal found that the AO and CIT (Appeals) did not properly apply Section 92BA, and the adjustment was actually in line with Section 40A(2). The Tribunal held that the AO did not prove that the purchase prices were unreasonable or excessive and thus allowed this ground. 3. Disallowance of Business Promotion and Advertisement Expenditure: The third issue concerns the disallowance of ?36,070/- being 30% of business promotion and advertisement expenditure, which was restricted to 10% by the CIT (Appeals). The AO disallowed the expenses on the grounds that they were incurred through the directors' credit cards and could be personal. The Tribunal noted that the expenses were for business purposes and should not be disallowed merely because they were incurred through directors' credit cards. Thus, this ground was allowed. 4. Depreciation on Apple LED Cinema: The fourth issue relates to the depreciation on an Apple LED Cinema, which the assessee claimed at 60%, treating it as a computer. The AO and CIT (Appeals) allowed it at 15%, considering it general plant and machinery. The Tribunal held that the Apple LED Cinema is a computer monitor and thus is entitled to 60% depreciation. This ground was allowed. 5. Disallowance of Rent Paid to Related Parties: The fifth issue is the disallowance of ?2,97,000/- paid as rent to related parties under Section 40A(2)(b). The AO found that the rent paid was excessive compared to the perquisite value disclosed by the directors. The Tribunal noted that the rent had been consistently paid and allowed in previous years, and the Revenue did not prove that the rent was excessive or unreasonable. Thus, this ground was allowed. 6. Disallowance of Director's Medical Expenses: The sixth issue involves the disallowance of ?29,506/- as director's medical expenses. The AO disallowed the expenses due to a lack of appointment letters or resolutions. The Tribunal upheld the disallowance as the assessee did not provide evidence that the directors were entitled to medical reimbursement as per their terms of appointment. This ground was dismissed. 7. Disallowance of 10% of Various Business Expenses: The seventh issue concerns the disallowance of 10% of various business expenses, amounting to ?1,94,350/-. The AO disallowed the expenses to check leakage of profit under personal expenses. The Tribunal noted that the assessee is a private limited company, and personal expenses cannot be attributed to it. The disallowance was made on an ad-hoc basis without proving that the expenses were not incurred for business purposes. Thus, this ground was allowed. Conclusion: The appeal of the assessee was partly allowed, with the Tribunal directing the deletion of several disallowances while upholding the disallowance of director's medical expenses. The order was pronounced in the open court on 27/07/2021.
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