2019 (10) TMI 1600 - AT - Income Tax

Addition u/s 14A r.w.r. 8D - Addition against the dividend income which was claimed as exempt income under the provisions of the Income Tax Act - HELD THAT - As decided in Joint Investment P. Ltd. 2015 (3) TMI 155 - DELHI HIGH COURT disallowance if any, under section 14A of the Act is to be restricted to the amount to tax free income. Following the said ratio we direct AO to restrict the disallowance u/s 14A of the Act to Rs. 2,61,000/-. Thus, Ground No. 1 raised by the assessee is partly allowed. Nature of expenses - disallowance holding the expenditure to be capital in nature - HELD THAT - As expenditure incurred by the assessee for smooth running of its business is to be allowed as revenue expenditure. Further, by incurring the expenditure, no new asset had come into existence and hence, there is no merit in making the aforesaid disallowance in the hands of the assessee except the expenditure. Accordingly, we allow the expenditure as revenue expenditure in the hands of the assessee and direct the AO to capitalize the expenditure and allow depreciation on the same. Disallowance of travelling expenditure holding the expenditure to be personal in nature - HELD THAT - In the hands of the assessee, the expenditure has been incurred by the assessee on the travelling of the Directors and other employees of the assessee for foreign travel to Ghana, South Africa. The said expenditure is on air tickets and purchase of dollars. The assessee is a limited concern and there is no merit in the orders of the authorities below in making the aforesaid disallowance on account of personal nature. Allow the claim of the assessee in entirety.

Summary

Issues:
1. Disallowance made under section 14A of the Income Tax Act, 1961
2. Disallowance of expenditure claimed to be capital in nature
3. Disallowance of travelling expenditure as personal in nature

Issue 1: Disallowance under section 14A of the Income Tax Act, 1961
The appeal challenged the disallowance made under section 14A of the Income Tax Act, where the Assessing Officer disallowed Rs. 1,36,85,065 despite the exempt income being Rs. 2,61,000. The assessee relied on a Delhi High Court ruling limiting disallowance to tax-free income. The tribunal upheld the assessee's appeal, restricting the disallowance to Rs. 2,61,000, following the High Court's precedent.

Issue 2: Disallowance of expenditure claimed to be capital in nature
The second ground of appeal contested the disallowance of Rs. 55,27,111 as capital expenditure. The Assessing Officer viewed the expenditure as capital due to enduring benefits, disallowing it under section 37(1) but allowing depreciation. The tribunal reviewed various items of expenditure and held that most were revenue in nature, except for a Teakwood chair purchase of Rs. 10,68,750, which was to be capitalized. The tribunal directed the Assessing Officer to allow depreciation on the capitalized expenditure.

Issue 3: Disallowance of travelling expenditure as personal in nature
The final issue concerned the disallowance of travelling expenditure totaling Rs. 8,07,800 as personal. The expenditure was on foreign travel for Directors and employees. The tribunal disagreed with the lower authorities, deeming the disallowance on personal grounds unjustified. The tribunal allowed the claim in full, reversing the earlier decision.

In conclusion, the tribunal partly allowed the appeal, restricting the disallowance under section 14A, allowing most expenditure as revenue, and overturning the disallowance of travelling expenditure as personal.