2022 (4) TMI 38 - AT - Income Tax

Disallowance of interest expenditure u/s 14A read with Rule 8D - sufficiency of own funds - HELD THAT - As the present assessee before us undeniably has sufficient self-owned funds available with it to explain the investments made in exempt income yielding assets, therefore, in the backdrop of our aforesaid deliberations the disallowance of interest expenditure made by the A.O. under section 14A r.w Rule 8D(2)(ii) cannot be sustained and is accordingly vacated. Before parting, we may herein observe, that as the assessee has in his grounds of appeal assailed the disallowance u/s 14A only qua the disallowance of interest expenses, therefore, we are confining our adjudication only to the said extent. Ground of appeal No.1 is partly allowed in terms of aforesaid observations. Disallowance out of management and development expenses for investments - attributing the same towards investments made in exempt income yielding assets - HELD THAT - On the one hand the A.O. had worked out the disallowance of the administrative expenses to the extent the same were relatable to earning of the exempt income i.e, by triggering the provisions of Section 14A r.w Rule 8D, while for on the other hand he had separately, on a pro-rata basis, disallowed an amount out of the management and development expenses, for the reason, that the same to the said extent could be related to the investments made in exempt income yielding assets. We are unable to comprehend as to on what basis the A.O. had taken recourse to this double edged sword, on the basis of which, he had on the one hand worked out the disallowance under Sec. 14A as per the mechanism contemplated in Rule 8D, and thereafter, on a pro-rata basis made a separate disallowance of the amount debited in the P L A/c. We are unable to concur with the aforesaid novel disallowance made by the A.O. and set-aside the order of the CIT(A) to the extent he had upheld the same. Adhoc disallowance out of telephone and travelling expenses - HELD THAT - We find that the disallowance made by the A.O was prompted by the fact that assessee had not maintained any log book. Admittedly, non-maintenance of a log book would raise serious doubts as regards the claim of the assessee of having incurred the entire amount of expenditure in question wholly and exclusively for its business purpose. Considering the fact that personal telephone expenses of the partners of the assessee firm were separately debited in their respective capital accounts, therefore, A.O should have considered the same while working-out the disallowance on account of personal usage/element of the said expenditure. Although, the involvement of the personal element of the aforesaid expenditure cannot be ruled out, however, in all fairness the same can safely be estimated at ₹ 50,000/- Appeal of the assessee is partly allowed.

Summary

Issues involved:
1. Disallowance of interest expenditure
2. Disallowance of management and development expenses for investment
3. Lump sum disallowance of telephone and travelling expenses
4. General error in the order of the CIT(A)

Issue 1: Disallowance of interest expenditure:
The assessee challenged the disallowance of interest expenditure under section 14A by the A.O. The A.R. argued that the A.O. lacked jurisdiction as no satisfaction was recorded regarding the expenditure's relation to exempt income. Additionally, since the assessee had enough interest-free funds, no disallowance should apply. The D.R. supported the A.O.'s decision. The A.O. calculated the disallowance at ?4,70,298 using Rule 8D(2). The tribunal agreed with the A.R., noting the availability of sufficient interest-free funds. Citing the Pr. CIT vs. Syntex Industries Ltd. case, it ruled in favor of the assessee, vacating the disallowance of ?3,89,931. The judgment was based on the assessee's self-owned funds explaining investments in exempt income assets.

Issue 2: Disallowance of management and development expenses for investment:
The A.O. disallowed ?1,73,774 of management and development expenses, attributing them to exempt income investments. The tribunal disagreed with this approach, finding it unjustified. It criticized the A.O.'s double disallowance method under Section 14A and pro-rata disallowance, setting aside the decision. The tribunal allowed the appeal against this disallowance, emphasizing the lack of clarity in the A.O.'s reasoning.

Issue 3: Lump sum disallowance of telephone and travelling expenses:
The A.O. made an ad-hoc disallowance of ?1 lakh for telephone and travelling expenses due to the absence of a log book. The assessee argued that personal telephone expenses were separately recorded in partners' accounts, justifying the disallowance. The tribunal acknowledged the lack of a log book but considered the personal element of the expenses. It estimated a fair disallowance of ?50,000, partially allowing the appeal on this ground.

Issue 4: General error in the order of the CIT(A):
The fourth ground of appeal, concerning a general error in the CIT(A)'s order, was dismissed as the assessee did not press this issue. The tribunal partially allowed the assessee's appeal, considering the arguments and evidence presented regarding the disallowances.

This detailed analysis covers the key issues raised in the legal judgment, providing a comprehensive overview of the tribunal's decision on each matter.