2021 (7) TMI 3 - AT - Income Tax

Disallowance of depreciation on car - AO has made ad hoc disallowance of 25% of depreciation on car, on the ground that use of car for personal purposes cannot be ruled out - HELD THAT - AO has disallowed ad hoc depreciation on car without bringing on record any evidence to prove that the assessee has used car for personal purpose. No doubt, if an asset is used for personal purpose, expenses relatable to such personal use can be disallowed. However, before doing so, it is for the AO to bring on record to suggest use of asset for personal purpose. In this case, nothing has been brought on record to prove the case of the AO that car was used for personal purpose. Therefore, we are of the considered view that the AO was erred in making ad hoc disallowance of depreciation on car and hence, we direct the AO to delete addition made towards ad hoc disallowance of depreciation on car. Disallowance u/s 14A - AO has determined disallowance of ₹ 2,19,054/- u/s. 14A by invoking Rule 8D of the IT Rules, as against total exempt income being dividend income earned for the year at ₹ 1,990/- - HELD THAT - It is a well settled principle of law that disallowance contemplated u/s. 14A of the Act, cannot exceed exempt income earned for the year. In this case, although the assessee has earned exempt income of ₹ 1,990/-, the AO has determined disallowance of ₹ 2,19,054/- which is over and above exempt income earned for the year, contrary to the legal position. CIT(A) after considering relevant facts has rightly restricted disallowance to the extent of exempt income. Therefore, we are of the considered view that there is no error in findings recorded by the ld. CIT(A) to restrict disallowance to the extent of exempt income and hence, we are inclined to uphold the findings of ld. CIT(A) and reject ground taken by the assessee. Appeal filed by the assessee is partly allowed.

Issues Involved:
1. Disallowance of 25% depreciation on car for probable personal use.
2. Disallowance of expenditure under section 14A.
3. Invocation of Rule 8D read with Section 14A.
4. Consideration of expenditure nexus with exempted income.
5. Condonation of delay in filing the appeal.
6. Admissibility of appeal for adjudication.

Analysis:

1. Disallowance of 25% depreciation on car for probable personal use:
The appellant contested the disallowance of 25% depreciation on the car for possible personal use, arguing that once a car is used for business, it becomes a business asset and cannot be segregated for personal use. The appellate tribunal found that the assessing officer (AO) did not provide evidence to support the claim of personal use. Therefore, the tribunal directed the AO to delete the ad hoc disallowance of depreciation on the car.

2. Disallowance of expenditure under section 14A:
The AO disallowed expenses amounting to &8377; 2,19,054 under section 14A, exceeding the total exempt income of &8377; 1,990. The tribunal emphasized that the disallowance under section 14A cannot surpass the exempt income earned. The Commissioner of Income Tax (Appeals) correctly limited the disallowance to the extent of the exempt income. Consequently, the tribunal upheld the Commissioner's decision and rejected the appellant's claim.

3. Invocation of Rule 8D read with Section 14A:
The tribunal noted that the AO invoked Rule 8D in conjunction with Section 14A to determine the disallowance. However, the disallowance should not exceed the exempt income earned, as per legal principles. As the disallowance exceeded the exempt income in this case, the tribunal supported the Commissioner's decision to restrict the disallowance to the level of the exempt income.

4. Consideration of expenditure nexus with exempted income:
The appellant argued that the expenditure incurred in earning the exempted income had no connection with the exempted income. However, the tribunal did not find merit in this argument, as the disallowance was appropriately linked to the exempt income earned. Therefore, the tribunal upheld the decision regarding the consideration of expenditure nexus with exempted income.

5. Condonation of delay in filing the appeal:
The appeal was initially considered time-barred due to an 11-day delay in filing. However, the appellant provided a reasonable cause for the delay, citing personal circumstances beyond their control. The tribunal accepted the explanation and condoned the delay, allowing the appeal for adjudication.

6. Admissibility of appeal for adjudication:
Despite the initial time-barred status, the tribunal admitted the appeal for adjudication after condoning the delay based on the reasonable cause presented by the appellant. The tribunal considered the circumstances surrounding the delay and deemed them acceptable under the Income Tax Act.

In conclusion, the appellate tribunal partially allowed the appeal, directing the deletion of the ad hoc disallowance of depreciation on the car while upholding the restriction of disallowance under section 14A to the extent of the exempt income earned. The tribunal also admitted the appeal for adjudication after condoning the delay, ensuring justice for the appellant.

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