2021 (7) TMI 218 - AT - Income Tax

Disallowance of contribution of employee provident fund due to delay in furnishing the statement before due on dates before Provident Fund authorities - HELD THAT - Assessee submitted that legislature by Finance Act, 2021 has amended section 36 substantial right of assessee are involved as the Assessing Officer has disallowed the entire payment of employee contribution, though it was deposited before the authorities concerned. Therefore, considering the facts and circumstances of the case and the prayer made by Ld. A.R. of the assessee, we deem it appropriate to restore this grounds of appeal raised by the assessee and restore that the issue to the file of Ld. CIT(A). Disallowance u/s 14A - AO made disallowance by taking view and the assessee has made investment of ₹ 1.69 crores and incurred expenses interest expenses - HELD THAT - We find that during the assessment, in reply to the show cause notice, the assessee specifically contended that no exempt income earned during the relevant period under consideration - the assessee stated that no expenses was incurred for the purpose of earning exempt income - Assessing Officer in instead of verifying the fact invoked provision of Rule 8D(2) and made disallowance under Rule 8D(2)(ii) and under Rule 8D(2)(iii) thereby making total disallowance. As assessee made similar submission as made before us and contended that assessee has not earned any exempt income. The Ld. CIT(A) confirmed the action of Assessing Officer. It is now settled positional law that if no exempt income is earned, no disallowance under section 14A can be made. The Hon'ble Supreme Court recently in PCIT v. Oil Industry Development Board 2019 (3) TMI 1571 - SC ORDER while dismissing appeal of the Revenue held that in absence of any exempt income, disallowance under section 14-A of any amount was not permissible. Considering the settled position under the law the Assessing Officer is directed to delete the entire disallowance under section 14A. Disallowance of various expenses to the extent of 10% - assessee submits that the assessee incurred total expenses on account of sales and business promotion office, miscellaneous expenses, labour expense and conveyance - whether expenses were incurred wholly and exclusively for the purpose of business? - HELD THAT - As assessee is a corporate entity and all expenses were incurred wholly and exclusively for the purpose of business. We find merit in the submission of Ld. A.R. of the assessee that in absence of specifying specific discrepancies, or rejecting books of accounts no ad-hoc disallowance of various expenses is permissible. We further find that the disallowance are ad-hoc and not based on any reasoning. Thus we direct the Assessing Officer to delete the entire disallowance. In the result, ground No. 4 is allowed.

Summary

Issues:
1. Disallowance of provident fund contribution
2. Disallowance under section 14A
3. Disallowance of various expenses

1. Disallowance of Provident Fund Contribution:
The appeal was against the disallowance of provident fund contribution due to a delay in depositing employees' contributions. The Assessing Officer disallowed the amount, but the assessee argued that the disallowance was not justified. The Tribunal noted that there were divergent views on the issue among different High Courts. The Finance Act, 2021 amended section 36, impacting the disallowance. The Tribunal decided to restore the issue to the CIT(A) for further consideration, allowing the assessee to present all factual and legal submissions.

2. Disallowance under Section 14A:
The Assessing Officer made a disallowance under section 14A, alleging that the assessee had earned exempt income. However, the assessee contended that no exempt income was earned during the relevant period and that no expenses were incurred for earning such income. The Tribunal observed that if no exempt income is earned, no disallowance under section 14A can be made. Citing relevant case law, the Tribunal directed the Assessing Officer to delete the entire disallowance under section 14A.

3. Disallowance of Various Expenses:
The dispute involved the disallowance of various expenses to the extent of 10%. The Assessing Officer had made an ad-hoc disallowance without specific verification, which the CIT(A) reduced to 10%. The Tribunal found that the disallowance was not based on any specific discrepancies and directed the Assessing Officer to delete the entire disallowance. The Tribunal emphasized that ad-hoc disallowances without proper reasoning are impermissible. The appeal was partly allowed, with the Tribunal announcing the order during a virtual court hearing.