2017 (11) TMI 677 - AT - Income Tax

Disallowance of expenses relatable to exempt income u/s 14A read with rule 8D - Held that - No disallowance under section 14A read with Rule 8D of the Rules can be made wherein, investments on which income earned is exempted, but the investment held as stock-in-trade. However, the AO will verify that the investment is made in stock-in-trade and will, accordingly decide the claim. This issue in both the appeals of the assessee is allowed for statistical purposes and remanded the matter back to the file of AO for verification. Adhoc disallowances to the extent of 50% of expenses on computer software, conveyance expense and diwali expenses - Held that - According to AO, the expenses are not fully vouched and hence, he disallowed by estimating at the rate of 10% and accordingly, he disallowed ₹ 75,000. Aggrieved, assessee preferred the appeal before CIT(A). The CIT(A) also confirmed the action of the AO. As the assessee is unable to controvert the findings of the Assessing Officer even now before us, the assessee could not substantiate the disallowance made by the AO, hence, we confirmed the disallowance.

Summary

Issues:
1. Disallowance of expenses relatable to exempt income under section 14A of the Income Tax Act, 1961.
2. Restriction of adhoc disallowances on specific expenses.

Issue 1: Disallowance of expenses relatable to exempt income under section 14A:
The appeals arose from the CIT(A)'s order confirming the disallowance of expenses related to exempt income under section 14A of the Act read with rule 8D of the Rules for the assessment years 2010-11 and 2011-12. The assessee argued that investments were held as stock-in-trade and the disallowance should not apply to dividend income earned on such investments. The Tribunal noted that the issue was identical for both years and remanded the matter back to the AO for verification. The Tribunal held that no disallowance under section 14A could be made for investments held as stock-in-trade, directing the AO to verify the nature of investments before deciding the claim.

Issue 2: Restriction of adhoc disallowances on specific expenses:
The second issue concerned the adhoc disallowances on computer software, conveyance, and Diwali expenses. The AO had disallowed a portion of these expenses due to lack of proper vouchers. The CIT(A) upheld the disallowance, and the Tribunal confirmed it as the assessee failed to substantiate the expenses. The Tribunal allowed the appeals partly for statistical purposes, maintaining the adhoc disallowances made by the AO.

In conclusion, the Tribunal remanded the first issue back to the AO for verification regarding the nature of investments held as stock-in-trade. The Tribunal upheld the adhoc disallowances on specific expenses as the assessee could not provide sufficient evidence to support the expenses. The appeals were partly allowed for statistical purposes.