2021 (8) TMI 279 - AT - Income Tax

Disallowance u/s 14A - CIT (Appeals) upholding of the disallowance being 0.5% on the average value of investment - AR submitted that assessee has not earned any exempt income during the year - HELD THAT - We find that the issue is squarely covered in favour of the assessee by the decision of the Hon ble Delhi High Court in the case of Cheminvest Limited 2015 (9) TMI 238 - DELHI HIGH COURT wherein it has been held that in absence of exempt income during the year no disallowance under Section 14A of the Act can be made. Thus ground No. 1 is allowed. Disallowance on account of increase in net profit being 1% of the turnover made by AO by disallowing the expenditure - AO was of the view that though the provisions of Section 92BA relating to the related party domestic transactions are effective only from 1 April 2013 but he looked into the reasons for making hundred percent purchases from a related party and whether the transactions are at arm s-length or not and unreasonable profit has not been transferred to the other related party. This was also for the reason that assessee has very low gross profit and net profit margins - HELD THAT - The turnover of the assessee is 52.99 crores whereas the turnover of the sister concern is 69.95 crores. Further assessee has stated that the sister concern is the manufacturing unit of the group whereas the assessee is a marketing unit of the group. Therefore comparison of the gross profit and net profit of a manufacturing unit with a marketing unit is not proper. If the revenue wanted to apply the provisions of Section 40A (2) of the act it has to prove that purchase price paid by the assessee are unreasonable and excessive looking to the market rate of such goods and further the needs of the business of the assessee. No such exercise has been carried out by the learned AO. In fact this exercise could have been carried out by the learned assessing officer by verifying the books of the sister concern where that sister concern sales to the assessee as well as to the other party. AO could have obtained the comparative prices of the similar goods supplied to the assessee by the sister concern and to the other parties. No such efforts have been made but merely a statistical analysis of the comparison of the profit was made by the learned assessing officer which is not warranted by the provisions of Section40A (2) of the act. Further the learned CIT - A has also casually dealt with the whole issue by comparing the tax arbitrage and confirming the party addition looking to the tax benefit derived by the group. In view of this the addition sustained by the learned CIT - A is devoid of any merit and not in accordance with the law. Therefore ground No. 2 is allowed. Disallowance being 30% of business promotion and advertisement expenditure disallowed by AO restricted to the extent of 10% by the ld. CIT (Appeals) - HELD THAT - The details of the expenditure incurred by the assessee were submitted before the Assessing Officer. This expenditure was incurred through the credit cards of the Directors but that fact itself cannot result into the disallowance. It needs to be tested under parameters of section 37 (1) of the Act. The details of the expenditure show that these are for the purchase of various diaries Diwali expenditure and entertainment and gifts to the customers. Naturally these expenditure are incurred by the Directors but that does not mean that these are the personal expenditure and not incurred wholly and exclusively for the purposes of the business of the assessee. Even otherwise in the case of the company assessee there cannot be any personal expenditure. In view of this Ground No. 3 of the appeal is allowed and the disallowance is directed to be deleted. Depreciation on Apple LCD monitor - assessee claimed depreciation @ 60% stating it to be computer and the Assessing Officer and CIT (Appeals) allowed it @ 15% holding it to be not a computer but general plant and machinery - HELD THAT - The assessee has purchased Apple LED DIS which is in fact a monitor for 45, 500/- which is required for display at the time of conferences and presentation and is required to be attached to a CPU. In fact it is a computer Monitor. Therefore we hold that it is a computer entitled to 60% of the depreciation as it is a monitor attached to the computers. Thus ground No. 4 is allowed. Disallowance of rent to the related parties - AO found that assessee has paid rent to specified persons under Section 40A (2) (b) - HELD THAT - Merely the tax arbitrage cannot be the reason to make disallowance under Section 40A (2) (b) of the Act. Valuation of perquisite if shown properly by directors in their tax returns and if it is less than Rent paid by the assessee to the land lord in whose house the directors are residing it is the duty of AO of the directors to see whether perquisites are correctly valued or not. It cannot straight away result in to disallowance u/s. 40A (2) of the Act unless it is shown that it is unreasonable and excessive having regard to the fair market value of such service or legitimate needs of the business of the assessee. All these ingredients are absent in the disallowance made by the revenue. In view of this we direct the ld. Assessing Officer to delete the disallowance of rent paid to related parties as Revenue failed to show that it is excessive and un-reasonable compared to the market rate. Disallowance of the medical expenses of the Directors - HELD THAT - The assessee has incurred total medical expenditure of 65, 053/- out of which 29, 506/- related to the Directors of the company. The ld. Assessing Officer disallowed as neither the appointment letter of the Directors nor the resolutions were filed. It were also not filed before the ld. CIT (Appeals) hence it was confirmed. Even before us it was not shown that the Directors are employees of the company and they were entitled to reimbursement of medical expenditure as per their terms of appointment. In view of this we do not find any infirmity in the orders of the lower authorities and ground No. 6 of appeal is dismissed. Disallowance of 10% of various expenditure such as Staff welfare Repair Telephone Travelling Vehicle running etc. - AO has disallowed 10% of such expenditure stating that the disallowance is in order to check leakage of profit under the guise of personal expenses debited under these heads - HELD THAT - We find that before the Assessing Officer assessee has submitted the complete details of this expenditure - assessee before us is a Pvt. Ltd. company and a company cannot have personal expenditure. It is not the case of the Revenue that disallowance is made as expenses are not incurred wholly and exclusively for the purposes of the business. No such instances despite submission of the details by the assessee were pointed out by the Revenue. The disallowance is also made on ad-hoc basis. Therefore we reverse the order of the lower authorities and direct the Assessing Officer to delete the disallowance.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Disallowance on account of increase in net profit being 1% of the turnover.
3. Disallowance of business promotion and advertisement expenditure.
4. Depreciation on Apple LED Cinema classified as computer.
5. Disallowance of rent paid to related parties under Section 40A(2)(b).
6. Disallowance of director's medical expenses.
7. Disallowance of 10% of various expenditures including staff welfare, repairs, telephone, traveling, and vehicle running.

Detailed Analysis:

1. Disallowance under Section 14A of the Act:
The first issue pertains to the disallowance of ?50,000 under Section 14A of the Act, confirmed by the CIT (Appeals). The assessee argued that no exempt income was earned during the year. The Tribunal found that the issue is covered in favor of the assessee by the Delhi High Court's decision in Cheminvest Limited Vs. CIT, which held that in the absence of exempt income, no disallowance under Section 14A can be made. Thus, this ground was allowed.

2. Disallowance on account of increase in net profit:
The second issue involves the disallowance of ?52,99,130 by the Assessing Officer, reduced to ?17,66,377 by the CIT (Appeals), based on 1% of the turnover. The AO questioned the reasonableness of transactions with a related party. The Tribunal noted that the provisions of Section 92BA, which were applied by the AO and CIT (Appeals), were omitted with effect from 1-4-2017. The Karnataka High Court in Principal Commissioner of Income Tax v. Texport Overseas (P.) Ltd. held that the omission of Section 92BA means it was never in effect. The Tribunal found that the AO did not properly apply Section 40A(2), which requires proving that the purchase price was unreasonable. The Tribunal directed the deletion of the addition, allowing this ground.

3. Disallowance of business promotion and advertisement expenditure:
The third issue is the disallowance of ?36,070, reduced to 10% by the CIT (Appeals). The AO disallowed 30% of the expenses, suspecting them to be personal. The Tribunal found that the expenses, incurred through directors' credit cards, were for business purposes and not personal. Thus, this ground was allowed, and the disallowance was deleted.

4. Depreciation on Apple LED Cinema:
The fourth issue concerns the depreciation on an Apple LED Cinema, claimed at 60% by the assessee but allowed at 15% by the AO and CIT (Appeals). The Tribunal held that the Apple LED Cinema is a computer monitor and thus entitled to 60% depreciation. This ground was allowed.

5. Disallowance of rent paid to related parties:
The fifth issue involves the disallowance of ?2,97,000 paid as rent to related parties. The AO and CIT (Appeals) viewed this as tax arbitrage. The Tribunal noted that the rent had been consistently allowed in previous years and that the revenue did not prove it was excessive or unreasonable. The Tribunal directed the deletion of the disallowance, allowing this ground.

6. Disallowance of director's medical expenses:
The sixth issue is the disallowance of ?29,506 for directors' medical expenses. The AO disallowed this as the appointment letters and resolutions were not provided. The Tribunal upheld the disallowance, noting that the directors were not shown to be employees entitled to such reimbursement. This ground was dismissed.

7. Disallowance of 10% of various expenditures:
The seventh issue involves the disallowance of 10% of various expenses totaling ?19,43,521. The AO made an ad-hoc disallowance to check for personal expenses. The Tribunal found that the company, being a private limited entity, cannot have personal expenses. The Tribunal directed the deletion of the disallowance, allowing this ground.

Conclusion:
The appeal was partly allowed, with several disallowances being deleted based on the Tribunal's findings that the expenditures were reasonable, business-related, and in accordance with legal provisions.