2022 (1) TMI 876 - AT - Income Tax

Revision u/s 263 by CIT - disallowance of expenses relatable to exempt income by invoking the provisions of Section 14A r.w.r 8D(2)(ii) (iii) i.e., interest disallowance and disallowance of club expenses - HELD THAT - Admitted facts are that first of all this is a limited scrutiny assessment and assessee has filed reply to query raised by AO under notice issued u/s.142(1) - assessee before AO as well as before PCIT during revision proceedings filed complete details i.e., balance sheet and schedules forming part of balance sheet where complete details of own funds of ₹ 27,95,58,933/- and investments made in purchase of shares amounting to ₹ 19,19,96,254/- are available. Once these funds are available which are more than investment made, neither the AO nor PCIT proves any nexus, in that eventuality only presumption can be drawn that the assessee might have invested these funds out of interest free funds available with him. This presumption is supported by Hon ble Bombay High Court in the case of HDFC Bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT - Hence, we find that the revision order passed by PCIT is without any basis on this issue and hence, deserves to be quashed. Disallowance of club expenses - We noted that there is no finding by PCIT that these are not incurred for the purpose of business and PCIT himself noted that the AO should have investigated this issue further which he has not done. What amount of investigation is required, that AO has to take a call and he has made investigation by issuing notice u/s.142(1) of the Act and the assessee had filed details and explained that it is for the purpose of business. Once, this is the case and even on merits, we are of the view that club expenses are for the purpose of business. Hence, on this issue also we reverse the order of PCIT revising the assessment and this issue is decided in favor of the assessee. In the result, the revision order is quashed and the appeal of the assessee is allowed.

Summary

Issues:
1. Revision of assessment order under section 263 of the Income Tax Act.
2. Disallowance of expenses relatable to exempt income under Section 14A of the Act.

Analysis:
1. The appeal arose from the revision order of the Principal Commissioner of Income Tax-5, Chennai under section 263 of the Income Tax Act, challenging the assessment order framed by the Assessing Officer (AO) for the assessment year 2014-15. The main issue was the revision of the assessment order by the Principal Commissioner, specifically concerning the disallowance of expenses relatable to exempt income under Section 14A of the Act. The assessee contested this issue on jurisdiction and merits, particularly regarding interest disallowance and club expenses.

2. The facts revealed that the AO conducted a limited scrutiny assessment under the Computer Assisted Scrutiny Selection (CASS) scheme. The assessee provided details, including the computation of disallowance under Section 14A with Rule 8D(2) of the Income Tax Rules. The Principal Commissioner directed the AO to revise the assessment, disagreeing with the assessee's suo-motto disallowance and applying Rule 8D(2) formula without delving into the details or accounts of the assessee. The assessee argued that the funds available exceeded the investments, implying the use of own funds for investments generating exempt income. The Tribunal found the Principal Commissioner's revision order lacked a proper basis and quashed it.

3. Regarding the disallowance of club expenses, the Tribunal noted the absence of findings that these expenses were not for business purposes. The Principal Commissioner acknowledged the need for further investigation by the AO, which was not conducted. The Tribunal concluded that the club expenses were legitimate business expenses and reversed the Principal Commissioner's decision. Consequently, the Tribunal allowed the assessee's appeal, quashing the revision order.

4. The Tribunal emphasized that the limited scrutiny assessment was conducted appropriately, with the assessee providing necessary details during the assessment proceedings. The Tribunal highlighted the availability of funds exceeding investments, indicating a plausible use of own funds for investments generating exempt income. On the club expenses issue, the Tribunal found no justification for disallowance and upheld the business purpose of these expenses. Ultimately, the Tribunal ruled in favor of the assessee, allowing the appeal and setting aside the revision order.