2017 (1) TMI 860 - AT - Income Tax

Disallowance u/s. 14 A read with Rule 8D 2 (iii) - Held that - The departmental authorities were not justified in invoking the provisions of section 14 A r.w.r.8D of the Rules. The fundamental principle for making disallowance against the exempt income is that the assessee should have claimed some expenditure against the such income and thus should have availed double deductions. In the case under consideration, the assessee had not claimed any expenditure against the dividend income of ₹ 2,000/-. Therefore, there was no justification for making any disallowances under any of the heads under rule 8D(2)of the Rules. The Tribunal had,in the AY.2009-10, upheld the disallowance because the assessee itself had offered for it. - Decided in favour of the assessee Bogus purchases - Held that - We find that the assessee had made payment of ₹ 2.76 lakhs to VE, that in the statement before the VAT authorities it had admitted to have issued bogus bills, that the assessee had produced the purchase bills and copies of the bank statement showing the payments made by it to VE,that cross examination of VE was not allowed to the assessee though it had made a specific request for it. The issue can be decided against the AO and in favour of the assessee only on this count,as the principles of natural justice were violated. The settled principles of taxation envisage that no adverse material should be used against an assessee without affording it an opportunity to rebut it. But, we would like to decide the issue on merits also. The AO or the FAA has relied upon the statement made by VE,but has not mentioned that it had specifically named the assessee in its statement. A general statement of issuing of bogus bills by an alleged hawala dealer cannot be used against a particular assessee to establish the fact that the purchase bills obtained by it were not genuine. It is to be noted that all the payments were made by cheques and there is no evidence of money coming back to the assessee. Secondly,the provisions of section 69C of the Act are not applicable to the facts of the case. The assessee had not made cash purchases - Decided in favour of the assessee

Summary

Issues:
1. Disallowance under section 14A read with Rule 8D of the Income Tax Rules, 1962.
2. Addition of expenditure amounting to ?2.76 lakhs under section 69C of the Income Tax Act.

Issue 1: Disallowance under section 14A read with Rule 8D of the Income Tax Rules, 1962:
The appellant, a textile manufacturing company, challenged the disallowance of ?3.68 lakhs under section 14A read with Rule 8D of the Income Tax Rules. The Assessing Officer (AO) found that the appellant had earned dividend income of ?2,000 but had not claimed it as exempt income or made any disallowance under section 14A. The AO directed the appellant to explain why expenses attributable to earning exempt income should not be disallowed. The First Appellate Authority (FAA) upheld the disallowance of administrative expenses but deleted the disallowance of interest expenditure based on the Tribunal's decision for the AY 2009-10. The Tribunal held that no disallowance was justified as the appellant did not claim any expenditure against the dividend income, reversing the FAA's order.

Issue 2: Addition of expenditure amounting to ?2.76 lakhs under section 69C of the Income Tax Act:
The AO added ?2.76 lakhs to the appellant's income, alleging that the expenditure was not genuine as the vendor was declared a hawala dealer. The FAA upheld the AO's decision based on the vendor's statement to VAT authorities. The appellant argued that the AO did not allow cross-examination of the vendor and that the provisions of section 69C were wrongly invoked. The Tribunal found that the AO violated principles of natural justice by not allowing cross-examination and held that the provisions of section 69C were not applicable as the appellant made payments through cheques. The Tribunal also noted that the vendor's statement did not specifically name the appellant and that there was no evidence of cash transactions. Therefore, the Tribunal decided in favor of the appellant on this issue.

This judgment highlights the importance of following due process and ensuring that adverse material is not used against an assessee without providing an opportunity to rebut it. It also emphasizes the need for a thorough examination of facts and circumstances before making additions to an assessee's income.