2018 (12) TMI 1492 - AT - Income Tax

Disallowance u/s 14A - Held that - The provisions of sub-section 2 of section 14A are very clear and as per the said provision, if a certain claim is made by the assessee in respect of expenditure incurred in relation to exempt income, the AO cannot vary the amount of such expenditure for the purpose of making a disallowance u/s 14A unless and until he, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee. A perusal of the assessment order passed in the case of the assessee shows that the AO has not recorded any such dissatisfaction in respect of the correctness of the claim of the assessee and in the absence of the same, find myself in agreement with the learned counsel for the assessee that disallowance made by the AO u/s 14A by invoking Rule 8D is not sustainable and the same is liable to be deleted. - Decided in favour of assessee. Addition of miscellaneous expenses and Puja Chanda expenses - Held that - As regards the puja chanda expenses as find merit in the contention of the learned counsel for the assessee that the puja chanda expenses were required to be incurred by the assessee on account of payment to various sanghas and clubs on the occasion of puja at the locations where the projects of the assessee were being developed. Moreover, the details of such expenses show that the same were incurred by the assessee by cheques therefore hold that the disallowance of puja chanda expenses made by the AO and confirmed by the CIT(A) is not sustainable. As regards the disallowance made on account of security deposit paid to CESC and Post Delivery Expenses since the assessee was engaged in the business of development, construction and sale of apartments on ownership basis, the security deposit paid to CESC was in the nature of revenue expenditure incurred by the assessee for its project and the same therefore was allowable as deduction as claimed by the assessee. Similarly, the Post Delivery Expenses were duly explained by the assessee as the expenses for doing some finishing work which had remained incomplete mainly for the common area facilities after delivery of flats and this explanation offered by the assessee was rejected by the AO without giving any reasons whatsoever. Keeping in view the nature of the expenditure as well as the nature of assessee s business, the expenses incurred by the assessee on account of security deposit paid to CESC as well as Post Delivery work represented part of the project expenses incurred by the assessee and the same were allowable as deduction as rightly claimed by the assessee. - decided in favour of assessee.

Summary

Issues involved: Disallowance of expenses related to exempt income under section 14A of the Act, disallowance of specific expenses by the Assessing Officer and confirmation by the Ld. CIT(A).

Analysis:

Issue 1: Disallowance of expenses related to exempt income under section 14A of the Act

The assessee, a real estate company, filed a return of income claiming exemption for dividend income and disallowance of related expenses under section 14A. The Assessing Officer (AO) invoked Rule 8D to disallow expenses beyond what the assessee offered. However, the ITAT Kolkata found that the AO did not express dissatisfaction with the assessee's claim, as required by section 14A(2). Therefore, the disallowance made by the AO using Rule 8D was deemed unsustainable, and the ITAT ordered its deletion.

Issue 2: Disallowance of specific expenses by the Assessing Officer and Ld. CIT(A)

The AO disallowed expenses including Puja Chanda, security deposit, and post-delivery expenses, claiming they were not wholly and exclusively for business purposes. The Ld. CIT(A) upheld these disallowances. Upon review, the ITAT Kolkata found that the Puja Chanda expenses were legitimately incurred for community purposes related to the company's projects, supported by cheque payments. Hence, the disallowance was deemed unjustified. Regarding security deposit and post-delivery expenses, the ITAT noted that these were project-related costs essential for the business activities of development and construction. The AO's rejection of the explanations provided by the assessee was unfounded, and the expenses were considered allowable deductions. Consequently, the ITAT overturned the disallowances made by the AO and confirmed by the Ld. CIT(A).

In conclusion, the ITAT Kolkata allowed the assessee's appeal, emphasizing the correct application of provisions and principles to determine the allowability of expenses and disallowances related to exempt income, ensuring a fair and lawful assessment process.