2019 (4) TMI 1436 - AT - Income Tax

Disallowance of interest - HELD THAT - It is clear that AO disallowed the interest because the issue is similar as has been considered in AY 2009-10. In AY 2009-10 the Tribunal deleted the similar additions. We, therefore, following the reasons for decision for AY 2009-10 (supra) found that issue is covered in favour of the assessee. We, accordingly, set aside the orders of the authorities below and delete the addition. Disallowance u/s 14A read with Rule 8D(2)(iii) - assessee has earned income exempt from tax from dividends - assessee was asked to give details and justify the claim in view of section 14A read with Rule 8D with reference to the dividend income - HELD THAT - As decided in assessee's own case AY 2009-10 there is no proper record of satisfaction as to the expenses incurred by the assessee for earning the exempt income. By following the decision reported in CIT vs. Taikisha Engineering India Ltd. 2014 (12) TMI 482 - DELHI HIGH COURT and Joint Investments (P) Ltd. vs. CIT 2015 (3) TMI 155 - DELHI HIGH COURT , we are of the opinion that the AO at the first instance should have examined the correctness of the statement made by the assessee that no expenses were incurred for earning the exempt income during the year and if and only if the Ld. AO is not satisfied on this account after making reference to the accounts, he is entitled to adopt the method under Rule 8D of the Rules. While allowing the plea of the assessee direct AO to delete the addition made on this score also. Ad hoc disallowance on account of telephone and vehicle expenses - 1/8th of these expenses was disallowed u/s 37(1) being of personal nature - CIT(A) restricted the addition to 1/10th of the expenses claimed - HELD THAT - Entire addition is wholly unjustified. The AO has not pointed out on which items personal element was involved in claiming the aforesaid expenses. AO has not pointed out any specific item which is used by the assessee for personal purposes. It is ad hoc addition made by the AO by disallowing 1/8th out of these expenditures. It is well settled law that ad hoc addition cannot be sustained unless AO has pointed out any specific item in which personal element is involved. There was thus, no justification to make any disallowance out of these expenditures. We, accordingly, set aside the orders of the authorities below and delete the entire addition. Addition on account of electricity and water expenses - assessee has not apportioned the expenses having personal element in view of residence-cum-office nature of premises. The assessee has not installed separate electricity meter for residence and office. The assessee has also not shown such expenses in drawing account - HELD THAT - No justification to interfere with the order of Ld. CIT(A) in sustaining the part addition . This ground is accordingly, dismissed. Revenue expenses claimed on account of upgradation/ subscription of software - HELD THAT - Matter requires reconsideration at the level of the AO. AO has not pointed out as to which capital has been generated out of the aforesaid expenses incurred by the assessee for the purpose of profession of the assessee. AO has also not pointed out that after incurring the expenditure how the same could be considered enduring in nature. Assessee pointed out the details noted in the bills/vouchers of these expenses shows that the matter requires reconsideration at the level of the AO. We, accordingly, set aside the orders of the authorities below and restore this issue to the file of AO with direction to re-decide the issue after giving an opportunity of being heard to the assessee, after verifying the bills and vouchers produced on this issue. This ground is allowed for statistical purposes.

Issues Involved:
1. Sustaining of additions/disallowances by CIT(A).
2. Disallowance of interest on car loan.
3. Disallowance under Section 14A read with Rule 8D.
4. Ad hoc disallowance of telephone and vehicle expenses.
5. Ad hoc disallowance of electricity and water expenses.
6. Disallowance of software upgradation/subscription expenses as capital expenditure.

Issue-wise Detailed Analysis:

1. Sustaining of additions/disallowances by CIT(A):
The assessee contended that the CIT(A) erred both in law and on facts by partially sustaining the additions/disallowances made by the AO. The Tribunal noted that the general ground does not require adjudication.

2. Disallowance of interest on car loan:
The AO disallowed ?1,42,376/- interest on the car loan, reasoning that the assessee had advanced interest-free loans to related parties. The CIT(A) confirmed this addition. The Tribunal found the addition unjustified, noting that the issue was similar to AY 2009-10, where the Tribunal had deleted the addition. The Tribunal stated that the car loan was specifically for business purposes and not diverted for any other use. Therefore, the disallowance was deleted.

3. Disallowance under Section 14A read with Rule 8D:
The AO disallowed ?6,08,180/- under Section 14A read with Rule 8D, stating that the assessee earned exempt income but did not claim any expenses against it. The CIT(A) upheld this disallowance. The Tribunal found the addition unjustified, referencing the Tribunal's decision for AY 2009-10, which deleted a similar disallowance. The Tribunal emphasized that the AO did not establish a specific nexus between the expenditure and the exempt income. Hence, the disallowance was deleted.

4. Ad hoc disallowance of telephone and vehicle expenses:
The AO disallowed ?2,50,674/- (later reduced to ?2,00,538/- by CIT(A)) on an ad hoc basis, attributing a personal element to telephone and vehicle expenses. The Tribunal found this addition unjustified as the AO did not point out specific items used for personal purposes. The Tribunal reiterated that ad hoc additions cannot be sustained without specific evidence. Therefore, the disallowance was deleted.

5. Ad hoc disallowance of electricity and water expenses:
The AO disallowed ?80,010/- (later reduced to ?74,438/- by CIT(A)) for electricity and water expenses, citing personal use. The CIT(A) disallowed specific amounts for the farm house, residence-cum-office, and residence. The Tribunal upheld the CIT(A)'s partial disallowance, noting that the assessee had conceded to some disallowances and did not provide sufficient justification against others. Therefore, this ground was dismissed.

6. Disallowance of software upgradation/subscription expenses as capital expenditure:
The AO disallowed ?9,56,424/- of software expenses, treating them as capital expenditure. The CIT(A) upheld this disallowance. The Tribunal found that the matter required reconsideration, noting that the AO did not specify how the expenses were of an enduring nature. The Tribunal directed the AO to re-examine the issue, considering the nature of the expenses and verifying the bills and vouchers. This ground was allowed for statistical purposes.

Conclusion:
The appeal was partly allowed, with several disallowances deleted and one issue remanded for reconsideration. The Tribunal emphasized the need for specific evidence and proper examination of facts before making disallowances.

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