2019 (5) TMI 1119 - AT - Income Tax

Disallowance of miscellaneous expenses - alleged that assessee failed to substantiate such claim by producing verifiable details - adhoc disallowance of 20% of the claim - HELD THAT - It has to be kept in mind that if there is any deficiency in the vouchers or the bills supporting the incurrence of expenditure, then at the most the expenses to the extent that which are not supported by the vouchers can be regarded to be non-genuine and can be disallowed by the AO while computing the income of the assessee. AO has resorted to estimating the disallowance of the claim without resorting to the procedure prescribed in section 145(3) r.w.s 144. Therefore, the action of the AO is arbitrary in nature and therefore, adhoc disallowance cannot be allowed to sustain - Decided in favour of assessee Disallowance u/s 14A u/r 8D(2)(ii) - as contended assessee has made investment from own funds in securities which fetched exempt income and not from the interest bearing loan funds and therefore no disallowance was warranted u/s Rule 8D2(ii) - HELD THAT - There is no allegation in the present case before us that the loan funds taken by the assessee from United Bank of India and the Tea Board of India has been utilized for any other business purpose other than for which it was sanctioned and since the loan funds has not been diverted for investment in securities, find force in arguments of the learned AR that no disallowance on account of Rule 8D(2)(ii) was warranted and therefore, we direct deletion of addition made by applying Rule 8D(2)(ii). - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of 20% of miscellaneous expenses.
2. Disallowance under Rule 8D(2)(ii) of the Income Tax Rules, 1962.

Issue 1: Disallowance of 20% of miscellaneous expenses:
The appellant challenged the disallowance of ?1,85,903 (20% of total miscellaneous expenses) by the Ld. CIT(A) and AO. The AO disallowed the amount as the appellant failed to substantiate the expenses for business purposes. However, the ITAT Kolkata found the AO's action arbitrary as it did not follow the prescribed procedure under section 145(3) read with section 144 of the Act. The tribunal directed the deletion of the disallowance as it was not supported by proper evidence.

Issue 2: Disallowance under Rule 8D(2)(ii) of the Income Tax Rules, 1962:
The AO disallowed ?5,05,355 under Rule 8D(2)(ii) for not applying section 14A read with Rule 8D. The appellant argued that the investments were made from non-interest bearing own funds, thus no disallowance was warranted. Referring to case law, the appellant presented a chart showing sufficient own funds for investments. The ITAT Kolkata considered the appellant's submission, citing a previous case where a similar chart led to the deletion of disallowance. The tribunal concluded that since there was no diversion of loan funds for non-business purposes, the disallowance under Rule 8D(2)(ii) was not justified, directing the deletion of the addition.

In conclusion, the ITAT Kolkata allowed the appeal of the assessee, ruling in favor of the appellant on both issues. The judgment emphasized the importance of following proper procedures and providing adequate evidence to support expense claims and disallowances under tax rules.