2012 (7) TMI 365 - AT - Income Tax

Disallowance u/s 14A by invoking Rule-8D - steep increase in the expenses claimed under the head bank interest as compared from previous year concludes that the borrowing of funds has been resorted to by the assessee mainly for purchase of shares - Held that - As decided in M/s Lala Ram Finance & Investment Versus DCIT 2012 (7) TMI 127 (Tri) disallowance cannot be made in case where the assessee is having sufficient interest free funds - as the assessee was having sufficient interest free funds to cover the investment made in shares of which income is exempt under section 10 disallowance cannot be warranted. Disallowance of power and fuel, manufacturing and out of selling expenses after comparing the expenses with earlier years - Held that - Neither AO nor CIT(A) found that the expenditure incurred and claimed by the assessee was not for the purpose of business. The adhoc disallowance was made merely on the basis that some of the vouchers were self-made as merely that the assessee has accounted for the expenditure by self-made vouchers automatically does not prove that the expenditure incurred was for other than business purposes - decided in favour of assessee.

Summary

Issues:
1. Disallowance under section 14A of the Income Tax Act, 1961
2. Adhoc disallowance of expenses

Disallowance under section 14A:
The appellant, a Private Limited Company, appealed against the disallowance of &8377; 21,94,877 under section 14A for the Assessment Year 2007-08. The Assessing Officer disallowed the amount due to the investment made in shares of a sister concern, which generated exempt dividend income. The CIT(A) confirmed the disallowance based on the significant increase in bank interest expenses related to the share purchase. The appellant argued that the investment was for business purposes and relied on various decisions to support their claim. The ITAT analyzed the available own capital of the appellant and cited precedents to conclude that disallowance was not warranted as the appellant had sufficient interest-free funds to cover the share investment. The ITAT deleted the disallowance amount based on these findings.

Adhoc disallowance of expenses:
The second ground of appeal involved adhoc disallowance of &8377; 5,00,000 from power and fuel expenses, &8377; 3,00,000 from manufacturing expenses, and &8377; 2,00,000 from selling expenses. The CIT(A) reduced the disallowance to &8377; 1,00,000 for each expense category due to some vouchers being self-made. The ITAT emphasized that the taxing authority cannot determine the reasonableness of expenses incurred by the assessee unless they are not solely and exclusively for business purposes. It was noted that the disallowance was made based on self-made vouchers without proving that the expenses were not for business purposes. As a result, the ITAT allowed the appellant's appeal and deleted the additional disallowance sustained by the CIT(A) for each expense category.

In conclusion, the ITAT allowed the appeal of the assessee based on the detailed analysis and findings regarding the disallowance under section 14A and the adhoc disallowance of expenses.