2016 (6) TMI 1083 - AT - Income Tax

Agricultural income - source and proof of undisclosed income - Held that - We find the assessee before the CIT(A) has explained that it is owning 27 Acres of land. It is also a fact that during A.Y. 2007-08 the AO in the order passed u/s.143(3) has accepted the agricultural income of ₹ 5,24,332/-. Similarly, in A.Y. 2008-09, the agricultural income of ₹ 5,56,528/- has been accepted in the order passed u/s.143(1). However, it is also a fact that in A.Y. 2009-10 as against ₹ 4,37,498/- declared by the assessee as agricultural income, the AO had disallowed an amount of ₹ 1 lakh and the assessee has not challenged the same. We further find for the impugned assessment year although the assessee has declared agricultural income of ₹ 4,52,530/-, however, the assessee had expressed its inability to substantiate the same on the ground that he has not maintained any books of account. Under these circumstances, the entire agricultural income declared by the assessee cannot be accepted. At the same time, the disallowance of ₹ 1 lakh made by the AO appears to be on the higher side. Considering the totality of the facts of the case, disallowance of ₹ 50,000/- out of the agricultural income declared by the assessee in our opinion will meet the ends of justice. Disallowance u/s 14A - Held that - Following the above decision the Hon ble Bombay High Court in the case of HDFC Bank Ltd. (2014 (8) TMI 119 - BOMBAY HIGH COURT ) has held that where assessee s capital and free reserves are higher than the investment in tax free securities, it would have to be presumed that investment made by the assessee would be out of the interest free funds available with assessee and no disallowance is warranted u/s.14A. Since the capital of the assessee in the instant case is admittedly much more than the investment in shares, the dividend income of which is tax free, therefore, respectfully following the decisions of the jurisdictional High Court cited (Supra) we hold that no disallowance of interest u/s.14A is required. So far as the administrative expenses is concerned, we find the AO has disallowed ₹ 30,475/- which has been upheld by the CIT(A). Although it is the submission of the Ld. Counsel for the assessee that no expenditure has been incurred, however, the same cannot be accepted in toto. It cannot be said that no expenditure has been incurred for supervising and monitoring the investments made by the assessee. Considering the totality of the facts of the case, disallowance of ₹ 15,000/- in our opinion will meet the ends of justice. We accordingly modify the order of the CIT(A) and direct the AO to disallow an amount of ₹ 15,000/- u/s.14A r.w. Rule 8D. Business loss - Disallowance of rejecting the appellant s claim of deduction u/s. 28 or section 37(1) - Held that - For claiming the business loss, the onus is always on the assessee to prove that the amounts written off in the books is infact business loss. The assessee has to prove that he has taken reasonable steps for recovery of the same and was unsuccessful and nothing can be recovered from the party for which he has written off the same as business loss. However, from the submission made by the assessee, it does not appear that the assessee has conclusively proved that the amount has been written off after taking reasonable steps for recovery of the same. Before the AO the assessee has not made any such claim and although it was argued before the CIT(A) he has rejected the claim of the assessee on the ground that these amounts written off are not in the nature of expenditure and therefore cannot be allowed u/s.37(1) of the Act. Considering the totality of the facts of the case and in the interest of justice, we deem it proper to restore the issue to the file of the AO with a direction to give one more opportunity to the assessee to substantiate with evidence to his satisfaction that these amounts are in the nature of business loss

Summary

Issues Involved:

1. Justification of addition of ?1,00,000/- by disallowing part of the agricultural income.
2. Justification of disallowance of ?2,58,751/- on account of expenditure related to exempt income under section 14A read with Rule 8D.
3. Justification of disallowance of ?4,13,218/- by rejecting the claim of deduction under section 28 or section 37(1) of the Act.

Issue-wise Detailed Analysis:

1. Justification of Addition of ?1,00,000/- by Disallowing Part of the Agricultural Income:

The assessee, engaged in construction activities, declared agricultural income of ?4,52,530/- but could not provide documentary evidence such as income details, expenses, bills, and vouchers. The AO treated ?1,00,000/- of this income as "income from other sources" due to lack of substantiation. The CIT(A) upheld this decision, noting the absence of bills and vouchers and the appellant's acceptance of similar additions in the preceding year. The Tribunal, after considering past accepted agricultural incomes and the extent of landholding, concluded that the entire agricultural income declared could not be accepted without evidence. However, the disallowance of ?1,00,000/- was deemed excessive, and a reduced disallowance of ?50,000/- was directed, partly allowing the appeal.

2. Justification of Disallowance of ?2,58,751/- on Account of Expenditure Related to Exempt Income:

The AO noted the assessee's investment in shares/mutual funds and interest payments of ?10,02,879/-. Since no expenses were apportioned towards earning exempt income, the AO disallowed ?2,28,276/- as interest and ?30,475/- as administrative expenses under section 14A read with Rule 8D. The CIT(A) upheld this, stating that the AO correctly invoked section 14A, and the appellant failed to provide details of expenditure directly related to dividend income. The Tribunal, referencing the assessee's capital exceeding the investment in shares and mutual funds, followed the precedents set by the Hon’ble Bombay High Court in Reliance Utilities and Power Ltd. and HDFC Bank Ltd. It held that no disallowance of interest was required but reduced the administrative expenses disallowance to ?15,000/-, partly allowing the appeal.

3. Justification of Disallowance of ?4,13,218/- by Rejecting the Claim of Deduction under Section 28 or Section 37(1):

The AO disallowed the claim of bad debts of ?4,13,218/- as they were advances to contractors and not part of sales included in previous years' total income. The CIT(A) upheld this, stating the claim was not in accordance with section 36(1)(vii) read with section 36(2), and the amounts were not in the nature of expenditure under section 37(1). The Tribunal acknowledged the need for the assessee to prove the amounts written off as business loss, which was not conclusively done. The issue was remanded back to the AO to give the assessee another opportunity to substantiate the claim with evidence, allowing the appeal for statistical purposes.

Conclusion:

The Tribunal provided a balanced judgment by partially allowing the appeals on the grounds of agricultural income and disallowance related to exempt income, while remanding the issue of bad debts back to the AO for further verification. The judgment emphasizes the importance of substantiating claims with proper evidence and documentation.