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2020 (3) TMI 467 - AT - Income TaxDisallowance u/s 14A - No exempt income earned - HELD THAT - We are of the view that since no exempt income in the form of dividend has been earned by the assessee from the investments made and relying on the aforesaid decision of M/S CHETTINAD LOGISTICS PVT. LTD. 2018 (7) TMI 567 - SC ORDER no disallowance u/s 14A of the Act is called for in the present case. We therefore direct the AO to delete the disallowance made by the AO . Thus, the ground of assessee is allowed. Disallowance u/s 40A(2)(b) - excessive or unreasonable payments made to specified persons - Expenses towards RCC Labour contractor / masonary work paid - HELD THAT - In the present case, it is seen that AO has not done any exercise to determine as to whether the amount paid by the Assessee to the aforesaid two ladies were excessive or unreasonable by comparing the prevalent market rates. He has not arrived at an exact figure of excessive payment by comparing the amount paid by the assessee with the market rates for similar services but he has rather proceeded to disallow the expenses @ 5% on adhoc basis. We are of the view that in the present case, no case has been made out for disallowance u/s 40A(2)(b) of the Act and therefore no disallowance can be made u/s 40A(2)(b) of the Act. We therefore delete the disallowance made by the AO . Thus the ground of the Assessee is allowed.
Issues:
1. Disallowance under section 14A of the Income Tax Act, 1961. 2. Disallowance under section 40A(2)(b) of the Income Tax Act, 1961. Issue 1: Disallowance under section 14A of the Income Tax Act, 1961: The appeal filed by the assessee challenges the disallowance under section 14A of the Income Tax Act, 1961. The Assessing Officer (AO) made the disallowance based on the investments made by the assessee in Venkatesh Group, even though no exempt income was earned. The AO relied on CBDT Circular No.5/2014 to justify the disallowance. The Commissioner of Income Tax (Appeals) upheld the AO's order. However, the assessee argued that no exempt income was earned, citing the decision of the Hon’ble Apex Court in CIT Vs. Chettinad Logistics (P) Ltd. The ITAT Pune, referring to the decision of the Hon’ble Apex Court, ruled in favor of the assessee, stating that when no exempt income is earned, section 14A cannot be invoked. Hence, the disallowance was deleted. Issue 2: Disallowance under section 40A(2)(b) of the Income Tax Act, 1961: The second ground of appeal concerns the disallowance under section 40A(2)(b) of the Income Tax Act, 1961. The AO disallowed 5% of the expenses incurred towards RCC Labor contractors, suspecting them to be a colorable device to inflate expenses. The AO believed that the genuineness of the payments was not fully verifiable. However, the assessee contended that the payments were made at a comparable rate to outside parties and were for legitimate business purposes. The ITAT Pune observed that the AO did not determine if the payments were excessive or unreasonable by comparing them with market rates. The AO's decision to disallow expenses on an adhoc basis was not justified. Consequently, the ITAT Pune ruled in favor of the assessee and deleted the disallowance under section 40A(2)(b) of the Act. In conclusion, the ITAT Pune partially allowed the assessee's appeal, deleting both the disallowance under section 14A and section 40A(2)(b) of the Income Tax Act, 1961. The judgment emphasized the necessity of earning exempt income for invoking section 14A and the requirement for a proper assessment of excessive or unreasonable expenses under section 40A(2)(b).
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