2021 (2) TMI 449 - AT - Income Tax

Addition u/s 14A r.w.r. 8D - Non recording dissatisfaction about its claim - HELD THAT - Regarding the addition made on account of interest expenses, we note that the assessee has substantial amount of interest free fund in the form of share capital and reserve which exceeds the amount of investment. This fact can be verified from the balance sheet of the assessee. Intterest free fund of the assessee is sufficient enough to meet the investment then no any disallowances on account of interest is warranted under section 14A r.w.r. 8D of the Act. - we direct the AO to delete the addition made on the account of interest expenses. Addition on account of administrative expenses - AR not submitted before us any details of the expenditure suggesting/justifying that no expenditure was incurred by the assessee in connection with the impugned exempted income. As such the onus lies upon the assessee to provide the documentary evidence that it has not incurred any expense against the exempted income. In the absence of such details, the AO had no option except to resort to the provisions of section 14A read with rule 8D for making the disallowance against the exempted income. Accordingly, we confirm the disallowance made by the AO which was subsequently confirmed by the learned CIT(A) towards the administrative expenses. Disallowance of deduction claimed u/s. 35(1)(ii) - investigation wing of Kolkata in the case of ''School of Human Genetics and Population Health (here in after SHGPH) in survey as accepted by the office bearer and chartered accountant that the SHGPH has been working as entry provider through bogus bills and donation - institution is receiving bogus donation through the banking channel and thereafter remitting the amount in cash to donor - HELD THAT - Admittedly, the basis of disallowance was the material gathered during the survey under section 133A of the Act at SHGPH but the same was not supplied as well as no opportunity of cross examination was provided to the assessee despite the specific request made to the AO. It is the settled law that there cannot be any addition/disallowances of the claim made by the assessee until and unless the materials on the basis of which the addition/disallowance was proposed, provided to the assessee for the rebuttal and cross-examination. In this regard we find support and guidance from the judgment of Hon'ble Supreme court in case of Maneka Gandhi vs. Union of India 1978 (1) TMI 161 - SUPREME COURT wherein as laid down that rule of fair hearing is necessary before passing any order. Similarly, we also note that the revenue has not brought anything on record suggesting that the assessee has received any cash against the donation made by it to SHGPH which was very vital to establish that the assessee has made bogus claim - also see S.G. VAT CARE P. LTD. VERSUS ITO, WARD-4 SABARKANTHA. 2019 (1) TMI 1694 - ITAT AHMEDABAD - Decided in favour of assessee.

Summary

Issues Involved:
1. Invocation of Rule 8D without recording dissatisfaction.
2. Disallowance under Section 14A of the Income Tax Act.
3. Disallowance of deduction under Section 35(1)(ii).
4. Breach of Principles of Natural Justice.
5. Levying interest under Section 234A/B/C.
6. Initiating penalty under Section 271(1)(c).

Issue-wise Detailed Analysis:

1. Invocation of Rule 8D without recording dissatisfaction:
The assessee, a private limited company, claimed exemption under Section 10(34) for dividend income and did not disallow any expenses under Section 14A. The AO invoked Rule 8D, disallowing ?70,55,064/- without recording dissatisfaction with the assessee's claim. The CIT(A) upheld the AO's decision. The Tribunal noted that the assessee had sufficient interest-free funds, and thus, no disallowance on interest expenses was warranted. However, for administrative expenses, the Tribunal found that the AO had derived satisfaction as per Rule 8D and confirmed the disallowance. The Tribunal partly allowed the appeal, directing the AO to delete the interest expense disallowance but upheld the administrative expenses disallowance.

2. Disallowance under Section 14A of the Income Tax Act:
The AO disallowed ?70,55,067/- under Section 14A r.w.r. 8D, including ?49,37,315/- for interest and ?21 lakh for administrative expenses. The Tribunal found that the assessee had sufficient interest-free funds to cover the investments, thus no interest expense disallowance was warranted. However, the Tribunal upheld the administrative expenses disallowance, as the AO had recorded satisfaction for invoking Rule 8D.

3. Disallowance of deduction under Section 35(1)(ii):
The AO disallowed ?3,50,00,000/- claimed as a deduction under Section 35(1)(ii) for donations made to SHGPH, based on a survey revealing SHGPH as an entry operator. The CIT(A) confirmed the disallowance. The Tribunal noted that the survey materials were not provided to the assessee for rebuttal, and no cross-examination was allowed, violating natural justice principles. The Tribunal, following precedents, set aside the CIT(A)'s order and directed the AO to delete the disallowance.

4. Breach of Principles of Natural Justice:
The assessee argued that the lower authorities ignored submissions and explanations, violating the Principles of Natural Justice. The Tribunal acknowledged that the AO did not provide survey materials or allow cross-examination, which was a breach of natural justice. The Tribunal directed the AO to delete the disallowance based on these grounds.

5. Levying interest under Section 234A/B/C:
The CIT(A) confirmed the AO's action of levying interest under Section 234A/B/C. The Tribunal did not specifically address this issue in detail, focusing instead on the primary grounds of appeal related to disallowances and natural justice breaches.

6. Initiating penalty under Section 271(1)(c):
The CIT(A) upheld the AO's initiation of penalty proceedings under Section 271(1)(c). The Tribunal did not provide a detailed analysis on this issue, as the primary focus was on the disallowances and procedural fairness.

Conclusion:
The Tribunal partly allowed the appeal, directing the AO to delete the interest expense disallowance under Section 14A and the disallowance of the donation under Section 35(1)(ii), while upholding the administrative expenses disallowance under Section 14A. The Tribunal emphasized the importance of procedural fairness and adherence to the Principles of Natural Justice.