2017 (1) TMI 561 - AT - Income Tax

Disallowance u/s 14A read with rule 8D - Held that - As given the fact that the lenders take all their precautions to ensure the end use, which is on record, it is reasonable to assume that these borrowings have been used for the stated purposes. The assessee has given reasonable evidence, as would be normally possible in such a situation, and, in the light of such evidence, there is no reason to resort to the presumption, leave aside reaching the conclusion, that these borrowings for specific purposes have been used in making investments in question. As regards inadequacy of disallowance, even during the course of proceedings before us, learned Departmental Representative could not demonstrate that the disallowance offered by the assessee suo motu is inadequate. In view of these discussions as also bearing in mind entirety of the case, we are of the considered view that authorities below were indeed in error in sustaining the impugned disallowance - Decided in favour of assessee Addition of expenses disallowed u/s 14A while computing book profits u/s. 115JB - Held that - We uphold the grievance of the assessee and direct the Assessing Officer not to make any disallowance under section 14A while computing book profit under section 115JB. See Sobha Developers case 2015 (2) TMI 940 - ITAT BANGALORE - Decided in favour of assessee Disallowance of foreign travel expenditure - 75% time on the trip was used for personal purposes of the director - Held that - The foreign visit was at least partly for business purposes and, therefore, just because this visit resulted in, assuming it is correct, personal benefit to the director, the expenses incurred on the visit cannot be disallowed as personal expenses. This is at best expense of the assessee company which resulted in benefit to the director. In any event, there is no material whatsoever to come to the conclusion that 75% time on this trip was used for personal purposes of the director. The case relied upon by the CIT(A) was a case in which a detailed analysis of the activities of the director was carried out and then this conclusion was drawn. There is no such material on record in this case. Once the CIT(A) came to the conclusion that the trip was for some business purposes, it was not open to him to deny any part of deduction for these expenses- particularly when there is no material to hold that the visit was for personal purposes. In view of these discussions, as also bearing in mind entirety of the case, we uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned disallowance - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D.
2. Addition of expenses disallowed under Section 14A while computing book profits under Section 115JB.
3. Disallowance of foreign travel expenditure.

Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:
The assessee contested the disallowance of ?79.30 lakhs under Section 14A read with Rule 8D, arguing that the Assessing Officer (AO) did not record satisfaction regarding the incorrectness of the assessee's claim. The assessee maintained that sufficient own funds were available for investments, and borrowings were used for business purposes. The AO, however, noted that the assessee could not justify the non-diversion of interest-bearing funds for investments yielding tax-exempt income and invoked Rule 8D, resulting in a disallowance of ?79.30 lakhs.

The CIT(A) upheld the AO's decision, stating that the AO had recorded dissatisfaction and that it was reasonable to apportion interest to tax-exempt income investments. The CIT(A) referenced judicial precedents supporting the disallowance when no separate books of accounts are maintained.

The Tribunal observed that the AO must record specific satisfaction before resorting to disallowance under Section 14A read with Rule 8D. The Tribunal noted that the AO's observation that the assessee could not justify the non-diversion of interest-bearing funds was unsustainable, as the interest-free funds exceeded the investments. The Tribunal cited the jurisdictional High Court's decisions, which support the presumption that investments are made from interest-free funds when such funds are available. Consequently, the Tribunal found the AO's and CIT(A)'s reasoning incorrect and unsustainable in law, and deleted the disallowance of ?79.30 lakhs.

2. Addition of expenses disallowed under Section 14A while computing book profits under Section 115JB:
The assessee challenged the addition of ?79.30 lakhs disallowed under Section 14A while computing book profits under Section 115JB. The Tribunal referenced a coordinate bench's decision in DCIT Vs Sobha Developers, which clarified that the quantum of disallowance under Section 14A can be adopted for the purpose of addition under clause (f) of Explanation 1 to Section 115JB(2). The Tribunal agreed with the coordinate bench's view and directed the AO not to make any disallowance under Section 14A while computing book profit under Section 115JB.

3. Disallowance of foreign travel expenditure:
The assessee contested the disallowance of ?9,74,612 incurred on a foreign trip by Ms. Y R Amin, arguing that the visit was for business purposes. The AO disallowed the expenditure, citing a lack of tangible evidence proving the business purpose. The CIT(A) partially allowed the deduction, disallowing 75% of the expenses based on a precedent case.

The Tribunal noted that the revenue authorities did not dispute that the visit was partly for business purposes. The Tribunal cited the jurisdictional High Court's decision in Sayaji Iron & Engineering Co Ltd, which held that expenses incurred in the course of business that benefit a director personally are allowable. The Tribunal found no material to support the conclusion that 75% of the trip was personal and directed the AO to delete the disallowance of ?9,74,612.

Conclusion:
The Tribunal allowed the appeal, deleting the disallowance under Section 14A read with Rule 8D, directing no addition of such disallowance while computing book profits under Section 115JB, and deleting the disallowance of foreign travel expenditure.