2016 (11) TMI 1297 - AT - Income Tax

Disallowance u/s 14A - AO given a finding that the assessee had not used any borrowed funds for earning exempt income - Held that - It is not disputed that the assessee for the relevant previous year had not claimed any income as exempt. In other words even if the investment made by the assessee was capable to raise any exempt income in future assessee had not earned any such income during the impugned assessment year. That Sec. 14A cannot be invoked where the assessee has not claimed any income of exempt is a view taken by various High Courts of the country. It has been held so by the Delhi High Court in the case of Cheminvest vs CIT 2015 (9) TMI 238 - DELHI HIGH COURT . Accordingly we are of the opinion that disallowance u/s 14A would not have been made and such disallowance is deleted. - Decided in favour of assessee Addition being the expenditure incurred for business promotion/advertisement - expenditure incurred for sponsoring of special box - Held that - No commercial concern would employ a software concern for development of software through its exposure from hoardings at a cricket tournament. They would be looking into the skills of the concern to decide whether it would be an appropriate choice for developing software. It is also an admitted position that the Managing Director of the assessee-company was the Vice President of Tamilnadu Cricket Association. The special box sponsored by the assessee could be used by 15 persons and was an air-conditioned one. It is difficult to imagine how 15 persons sitting in an air-conditioned box and watching a cricket match would help the business of the assessee. As per the ld AR similar disallowances ought to have been made in the case of other concerns who had sponsored similar boxes. In our opinion this would not help the assessee s case in any manner. Sec. 37 mandates that an expenditure could be allowed only if it was incurred wholly and exclusively for the purpose of business. The assessee has not been able to show the nexus of the business of the assessee with the expenditure incurred for sponsoring of special box. Hence we are of the view that the CIT(A) had rightly confirmed the disallowance made by the Assessing Officer - Decided against assessee

Summary

Issues:
1. Disallowance of expenses under section 14A of the Income Tax Act.
2. Disallowance of business promotion/advertisement expenditure.

Issue 1: Disallowance of expenses under section 14A of the Income Tax Act:
The appellant contested the disallowance of ?2,20,841 under section 14A of the Income Tax Act, arguing that no exempt income was earned during the relevant assessment year. The Assessing Officer disallowed the amount under rule 8D(2)(iii) stating that administrative costs would have been incurred for potential exempt income. However, it was established that no exempt income was claimed by the appellant during the year. Citing various High Court judgments, it was concluded that section 14A cannot be invoked if no exempt income is claimed. Consequently, the disallowance under section 14A was deemed unnecessary and was deleted.

Issue 2: Disallowance of business promotion/advertisement expenditure:
The appellant's expenditure of ?14,95,000 for business promotion was disputed by the Assessing Officer, who disallowed the amount. The appellant's explanation regarding sponsorship for the Tamilnadu Cricket Association was not accepted, with the Assessing Officer noting limited clientele and extraneous reasons for the expenditure. The CIT(A) upheld the disallowance, stating the expenditure was not wholly and exclusively for business purposes. The appellant argued that the expenditure aimed to attract new clients through enhanced visibility. However, it was found that the expenditure lacked a clear business purpose, especially concerning sponsorships for cricket events. The Tribunal agreed with the lower authorities, emphasizing the lack of a direct business nexus for the expenditure. Consequently, the disallowance was upheld, and the appeal was partly allowed.

This judgment addressed the disallowance of expenses under section 14A and business promotion/advertisement expenditure, providing detailed reasoning for each issue and ultimately upholding the disallowance of the latter expenditure.