2023 (10) TMI 441 - AT - Income Tax

Disallowances of 10% of operating expenses, cost of material consumed and employee benefits and other expenses debited in P L account - CIT(A) deleted the addition - HELD THAT - AO has considered the total amount as found debited in the profit and loss account while making adhoc disallowance of 10%. AO has completely ignored the fact that the assessee itself has made suo-moto disallowance u/s 40a(ia) of the Act while computing the total income. Therefore, it is manifest from the order of the AO that the adhoc disallowance is made by the AO in a casual manner without considering any material on record and facts. AO has not brought any fact or material before us to controvert the fact recorded by the Ld. CIT(A) while deciding this issue. Decided against revenue. Difference in the liability as on 31.03.2012 and 31.03.2013 - CIT(A) deleted the addition - HELD THAT - CIT(A) has specifically stated the statutory liability arisen from provisions of TDS, Income Tax, Service Tax, entry tax, professional tax, interest and interest on these taxes for the various years cannot be treated as unexplained liability. It is further recorded that the increase in current and long term liabilities is due to amount received from directors and their relatives and concerns. Assessee filed a copy of confirmation letter from these creditors/lenders giving the details of name, Pan, Address and date of transactions. CIT(A) has also recorded the fact that no fresh long term borrowing has been taken by the assessee. Rather the assessee has paid of Rs. 75,48,418/- on outstanding loan of Rs. 3.90 crore as on 31.03.2012 the payment of interest was subjected to TDS. AO has not controverted these facts records and considered by the Ld. CIT(A) while deleting addition even the AO was given an opportunity of verification and examination of additional evidence but the same was not availed by the AO. Hence we do not find any error or illegality in the impugned order of the Ld. CIT(A) same is upheld. Disallowance u/s 14A r.w. Rule 8D - CIT(A) deleted the addition - HELD THAT - We note that there is no exempt income earned by the assessee during the year under consideration whereas the AO has made disallowance u/s 14A@ 0.5% of the average value of investment. Ld. CIT(A) has deleted this addition by considering the fact that there is no exempt income earned by the assessee and by following the decision of Cheminvest Limited 2015 (9) TMI 238 - DELHI HIGH COURT as well as decision of Keti KJ Construction Limited 2023 (1) TMI 1285 - ITAT INDORE - Thus as there is no exempt income in the year under consideration no error or illegality in the impugned order of the Ld. CIT(A) for this issue. Appeal of revenue dismissed.

Summary

Issues Involved:
1. Deletion of addition made by AO on account of disallowances of operating expenses, cost of material consumed, employee benefits, and other expenses.
2. Deletion of addition made by AO on account of differences in long-term liabilities, current liabilities, and statutory liabilities.
3. Deletion of disallowance made under section 14A of the Income Tax Act, 1961.

Summary of Judgment:

Issue 1: Disallowance of Operating Expenses, Cost of Material Consumed, Employee Benefits, and Other Expenses
The department contended that the Ld. CIT(A) erred in deleting the addition of Rs. 3,79,85,854/- made by the AO due to the assessee's failure to substantiate these expenses with documents during the assessment proceedings. The AO had made an adhoc disallowance of 10% of these expenses, citing a lack of verification and previous search and seizure proceedings indicating inflated expenses. However, the Ld. CIT(A) deleted this addition, noting that the assessee had already made a suo-moto disallowance of Rs. 18,84,65,541/- under section 40a(ia) of the Act, which accounted for about 50% of the total expenses. The Tribunal upheld the Ld. CIT(A)'s decision, emphasizing that the AO's adhoc disallowance was made without considering the material on record and the suo-moto disallowance by the assessee.

Issue 2: Disallowance of Differences in Liabilities
The AO made an addition of Rs. 1,68,64,954/- due to unexplained differences in long-term liabilities, current liabilities, and statutory liabilities between the current and previous years. The Ld. CIT(A) deleted this addition, accepting additional evidence from the assessee, which included confirmation of creditors and lenders. The AO had not verified these additional evidences during the remand proceedings. The Tribunal upheld the Ld. CIT(A)'s decision, noting that the statutory liabilities arose from provisions of TDS, Income Tax, and other taxes, and the increase in liabilities was due to amounts received from directors and their relatives, which were adequately documented and confirmed.

Issue 3: Disallowance under Section 14A
The AO made a disallowance under section 14A r.w. Rule 8D, despite the assessee not earning any exempt income during the year. The Ld. CIT(A) deleted this addition, referencing the decision of the Hon'ble Delhi High Court in Cheminvest Limited vs. CIT, which held that section 14A does not apply if no exempt income is received or receivable. The Tribunal upheld the Ld. CIT(A)'s decision, reiterating that no disallowance under section 14A can be made in the absence of exempt income and following the precedent set by the Hon'ble Delhi High Court.

Conclusion:
The Tribunal dismissed the revenue's appeal, upholding the Ld. CIT(A)'s deletions of the additions made by the AO on all three issues. The order was pronounced in the open court on 30.05.2023.