2021 (10) TMI 827 - AT - Income Tax

Disallowances u/s 14A r.w.r.8D - HELD THAT - Upon perusal of assessee s financial statements, it could be gathered that assessee s own funds in the shape of share capital and free reserves far exceeds the investment made by the assessee and therefore, a presumption would run in assessee s favor that the investments were funded out of own funds. Secondly, the assessee has not earned any exempt income during the year. Therefore, the additional interest disallowance is not sustainable in law as per the cited judicial pronouncements. Therefore, by deleting the disallowance we allow this ground of appeal. Adhoc 10% disallowance of labour / assortment charges - HELD THAT - Except for general observations, no specific defects have been pointed out by Ld. AO in sample documents produced by the assessee. Similar expenditure incurred by the assessee in AYs 2012-13 2014-15 has been accepted. The complete details of the expenditure along with relevant ledgers were furnished by the assessee during assessment proceedings - There is no dispute about genuineness and admissibility of claim of expenses. Regarding the observation of Ld. AO that there was drastic increase in such expenses during the year, the same stood explained by assessee s reply dated 19/01/2016 wherein it was submitted that the expenditure increased due to change in manufacturing pattern of the assessee which was necessitated due to customers requirements since the assessee diversified into small pieces for which higher labour charges were paid by the assessee. The net profit reflected by the assessee is 2.43% which is quite similar to net profit of 2.48% reflected in the earlier year. Thus, in terms of the cited decision R.G. BUILDWELL ENGINEERS LTD. 2017 (12) TMI 1614 - DELHI HIGH COURT and considering the facts of the case, we are inclined to delete the adhoc disallowance as made by Ld. AO. This ground stand allowed.

Summary

Issues:
1. Disallowance under section 14A
2. Adhoc disallowance of labor/assortment charges

Disallowance under section 14A:
The appeal pertains to the Assessment Year 2013-14 and involves the confirmation of disallowance under section 14A and adhoc disallowance of labor/assortment charges. The appellant contested the confirmation of 10% adhoc disallowance of labor/assortment charges. The appellant filed an additional ground challenging the disallowance made under section 14A, seeking deletion based on judicial pronouncements. The Tribunal admitted the additional ground as per the decision of the Apex Court and considered the appellant's arguments.

Upon careful consideration, the Tribunal noted that the appellant had offered a suo-moto disallowance under section 14A, but the Assessing Officer computed additional disallowance of interest under rule 8D(2)(ii). However, as the appellant had not earned any exempt income during the year, the additional interest disallowance was deemed not sustainable in law. The Tribunal observed that the appellant's own funds exceeded the investments made, and no exempt income was earned. Relying on judicial pronouncements, the Tribunal deleted the disallowance of interest, thereby allowing this ground of appeal.

Adhoc disallowance of Labor/Assortment Charges:
The appellant claimed labor/assortment charges amounting to ?777.80 Lacs, with an adhoc disallowance of 10% made by the Assessing Officer due to verification issues with supporting documents. The appellant contested this disallowance, arguing that the books of accounts were not rejected, and the expenditure nature was duly explained. The appellant provided ledgers and vouchers, citing similar expenses in previous years without disallowance.

After reviewing the facts, the Tribunal found that the books of accounts were not rejected, duly audited under the Companies Act and Income Tax Act, with no adverse findings by auditors. Specific defects in the documents were not identified, and similar expenses in previous years were accepted. The Tribunal noted that the increase in expenses was justified by changes in manufacturing patterns. Considering the explanations and evidence provided, the Tribunal deleted the adhoc disallowance of labor/assortment charges. The appeal was partly allowed based on the Tribunal's findings.

In conclusion, the Tribunal allowed the appeal in part, deleting the disallowance under section 14A and the adhoc disallowance of labor/assortment charges based on the detailed analysis and considerations presented in the judgment pronounced on 1st October, 2021.