2019 (10) TMI 723 - AT - Income Tax

Disallowance u/s 14A - mandation of recording proper satisfaction by AO - HELD THAT - The Hon ble Punjab Haryana High Court in the case of Abhishek Industries Ltd., 2015 (2) TMI 672 - PUNJAB AND HARYANA HIGH COURT held that onus upon A.O. to record satisfaction that interest bearing funds used for investment to earn tax free income . The assessee in the present case has claimed that receipt of dividend income does not involve any expenditure since the dividend is directly credited through ECS in the Bank Account. The assessee has not borrowed any funds for investment in shares and mutual funds during assessment year under appeal and no fresh investments have been made, rather assessee repaid unsecured loans in assessment year under appeal. Therefore, it was incumbent on the part of the A.O. to record satisfaction that revised disallowance made by the assessee as per the direction of the A.O. at ₹ 62,701/- was unreasonable and improper. No compliance have been made by the A.O. Therefore, there was no justification for the authorities below to disallow the amount in question - set aside the Orders of the authorities below and delete the addition made by the A.O Disallowance of Office expenses and office maintenance expenses - A.O. disallowed the amounts in question by applying the provisions of Section 40A(2)(b) - HELD THAT - even for applying the provisions of Section 40A(2)(b) it is for the A.O. to make out a case that expenditure incurred is excessive or unreasonable having regard to the fair market value of such services. No efforts in this regard have been made by the A.O. Therefore, there were no justification for the A.O. to divide the entire amount between 16 parties to make the disallowance. The method applied by the A.O. is not acceptable in view of the language prescribed under section 40A(2)(b) of the I.T. Act, in which A.O. has made disallowance. The Hon ble Supreme Court in the case of Upper India Publishing House Pvt. Ltd., 1978 (12) TMI 2 - SC ORDER held that before applying the provisions of Section 40A(2)(b) the A.O. should have prove that the expenditure is excessive or unreasonable. It may also be noted here that A.O. disallowed both the expenses considering that expenses have not been incurred wholly and exclusively for the purpose of business. The assessee has filed return of income declaring net income of ₹ 27.86 crores. Therefore, there were no reason for the assessee company to have inflated the expenses which are connected wholly and exclusively for the purpose of business - authorities below were not justified in making the disallowance - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Disallowance of office expenses and office maintenance expenses under Section 40A(2)(b) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The assessee challenged the disallowance of ?13,12,995 under Section 14A for the A.Y. 2011-2012. The Assessing Officer (A.O.) noted that the assessee had various sources of income, including exempt dividend income of ?69,08,245, and had only added back ?10,000 as disallowance under Section 14A. The A.O. required the assessee to calculate disallowance proportionate to the exempt income earned, resulting in a fresh calculation of ?62,701. However, the A.O. did not accept this and disallowed ?13,12,995, which was upheld by the CIT(A).

The Tribunal found that the A.O. did not point out any infirmity in the fresh calculation of ?62,701 and failed to record satisfaction as to why the assessee's calculation was incorrect. The Tribunal cited several judicial precedents, including the Hon’ble Supreme Court's decision in Maxopp Investments Ltd., which mandates that the A.O. must record satisfaction if the assessee's disallowance is incorrect. Consequently, the Tribunal set aside the orders of the authorities below and deleted the disallowance, restricting it to ?52,701 as offered by the assessee. Ground No.1 of the appeal was partly allowed.

For A.Y. 2012-2013, the same issue arose with a disallowance of ?25,64,434 instead of ?5,768. Following the reasoning for A.Y. 2011-2012, the Tribunal set aside the orders and restricted the addition to ?5,768. Ground No.1 was partly allowed.

2. Disallowance of Office Expenses and Office Maintenance Expenses under Section 40A(2)(b) of the Income Tax Act:
The assessee challenged the disallowance of ?4,82,925 out of office expenses and ?5,73,216 out of office maintenance expenses for A.Y. 2011-2012. The A.O. noted that the assessee was paying rent and maintenance to related parties without any formal agreement and shared the office space with 15 other companies. The A.O. applied Section 40A(2)(b) and disallowed a portion of the expenses, which was upheld by the CIT(A).

The Tribunal found that the assessee was indeed using the office space and paying maintenance charges. The A.O. did not make efforts to prove that the expenditure was excessive or unreasonable. The Tribunal cited the Hon’ble Supreme Court’s decision in Upper India Publishing House Pvt. Ltd., which requires the A.O. to prove that the expenditure is excessive or unreasonable. The Tribunal concluded that the authorities below were not justified in making the disallowance and set aside the orders, deleting both additions. Ground No.2 of the appeal was allowed.

For A.Y. 2012-2013, the same issue arose with disallowances of ?4,82,925 towards office rent and ?7,32,000 towards office maintenance expenses. Following the reasoning for A.Y. 2011-2012, the Tribunal set aside the orders and deleted both additions. Ground No.2 was allowed.

Conclusion:
Both appeals of the assessee for A.Y. 2011-2012 and A.Y. 2012-2013 were partly allowed, with the Tribunal setting aside the disallowances under Section 14A and Section 40A(2)(b) as discussed. The Tribunal emphasized the necessity of the A.O. recording satisfaction and proving that the expenses were excessive or unreasonable before making disallowances.