2016 (8) TMI 594 - AT - Income Tax

Disallowance u/s. 40A(2)(b) of electricity expense - Held that - In so far as the observations of the authorities below that the electricity bill is in the name of M/s. Kirloskar Oil Engines Ltd. is concerned, we are of the view that the same are unwarranted. Since, the premises from where the assessee is carrying on its activities belong to M/s. Kirloskar Oil Engines Ltd. the electricity connection would obviously be in the name of M/s. Kirloskar Oil Engines Ltd. In view of the entirety of facts we do not find any reason to disallow the electricity expenditure claimed by the assessee Disallowance u/s. 14A - Held that - The assessee has made investment of ₹ 2,04,527/- in M/s. Kirloskar Oil Engines Ltd. and other group concerns. The assessee has earned dividend of ₹ 3,56,000/-. The contention of the ld. AR of the assessee is that the assessee has not incurred any administrative expenditure on earning tax free income. It is not the case of the Revenue that the assessee has made investment from the interest bearing funds. We are of the considered view that the disallowance of ₹ 3,04,830/- made by the Commissioner of Income Tax (Appeals) is very much on the higher side. To meet the ends of justice disallowance of 5% of the exempt income earned would be fair and justified

Summary

Issues:
1. Disallowance of electricity expenses under section 40A(2)(b)
2. Disallowance under section 14A of the Income Tax Act

Analysis:

Issue 1: Disallowance of Electricity Expenses
The appeal was filed against the Commissioner of Income Tax (Appeals) order upholding the disallowance of ?22,22,000 out of electricity expenses under section 40A(2)(b). The assessee argued that the company was set up for uplifting underprivileged women, all employees were women, and the premises were provided by another company at nominal rent. The assessee claimed that the electricity expenses were shared and not claimed twice. The Tribunal found that the assessee was performing job work for the other company, and there was a clear connection between the work performed and electricity consumption. The Tribunal allowed the appeal, stating that the disallowance was unjustified.

Issue 2: Disallowance under Section 14A
Regarding the disallowance of ?3,04,830 under section 14A, the assessee had invested in various companies and earned dividend income. The contention was that no administrative expenditure was incurred for earning tax-free income. The Tribunal found the disallowance excessive and reduced it to 5% of the exempt income earned, considering it fair and justified. The Tribunal partially allowed the appeal on this ground.

In conclusion, the Tribunal allowed the appeal of the assessee on both issues, ruling in favor of the assessee regarding the disallowance of electricity expenses and reducing the disallowance under section 14A.