2012 (11) TMI 272 - AT - Income Tax

Disallowance u/s 14A alleged that assessee made investment in mutual funds, yielding dividend income exempt u/s 10 of the Act - Assessing Officer has made the disallowance u/s 14A holding it is expenditure on financial charges directly related to the earning of exempt income from dividends Held that - There is nothing to suggest that any fresh investment was made in mutual funds or shares, yielding exempt income; rather investment in mutual funds came down to Rs.7,66,56,044/- as against Rs.12,00,45,300/- in the preceding year - Since no fresh investment has been made in the year under consideration, the ld. CIT(A), following the basis adopted in the preceding year - Revenue have not placed any evidence, controverting these findings of facts recorded by the ld. CIT(A) nor brought to our notice any material suggesting that borrowed funds were indeed utilized in making investment in the year under consideration, yielding tax free income Ad hoc disallowance - repair and maintenance expenses on plant, machinery and building and disallowance of 5% of miscellaneous and travel expenses alleged that assessee did not produce a majority of the vouchers assessee submitted that these were to be called from various units located in different places Held that - Matter remitted to the file of the AO with the directions to allow another opportunity to the assessee to produce all the bills and vouchers in relation to the aforesaid expenses on account of repairs to building and plant & machinery as also of miscellaneous and travel expenses and thereafter, pass appropriate orders in accordance with law - appeal is partly allowed for statistical purposes.

Issues Involved:
1. Disallowance under Section 14A of the Income-tax Act.
2. Disallowance of unverifiable expenses related to repairs and maintenance of plant, machinery, and building.
3. Disallowance of unverifiable expenses related to traveling and miscellaneous expenses.

Issue-Wise Detailed Analysis:

1. Disallowance under Section 14A of the Income-tax Act:

The first issue pertains to the disallowance of Rs.10,70,080/- under Section 14A of the Income-tax Act. The Assessing Officer (AO) noticed that the assessee made investments in mutual funds yielding exempt income. The AO disallowed a proportionate amount of financial charges related to these investments.

On appeal, the CIT(A) reduced the disallowance to Rs.4,93,760/-, providing relief of Rs.5,76,320/-. The CIT(A) observed that the AO did not establish a nexus between the interest expenses and borrowed funds used for investments. The CIT(A) also noted that the assessee had sufficient reserves and surplus to cover the investments, and no fresh investments were made during the year.

The Revenue argued that the assessee had provided the working of disallowance under Section 14A, and thus the CIT(A) was not justified in reducing it. However, the Tribunal found that no fresh investments were made, and the investment in mutual funds had actually decreased. The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal on this ground.

2. Disallowance of unverifiable expenses related to repairs and maintenance of plant, machinery, and building:

The second issue involves the disallowance of Rs.23,60,746/- for unverifiable expenses related to repairs and maintenance. The AO disallowed 50% of the expenses for building repairs and 10% for plant and machinery repairs due to the non-production of vouchers.

The CIT(A) deleted the disallowance, noting that similar disallowances in previous years had been deleted and accepted by the AO. The CIT(A) also referenced various rulings against ad hoc disallowances without specific evidence.

The Revenue argued that the assessee did not produce all the relevant bills and vouchers. The Tribunal found that neither the AO nor the CIT(A) verified the genuineness of the expenses due to the lack of vouchers. The Tribunal vacated the CIT(A)'s findings and remanded the matter back to the AO for reconsideration, directing the assessee to produce all relevant bills and vouchers.

3. Disallowance of unverifiable expenses related to traveling and miscellaneous expenses:

The third issue pertains to the disallowance of Rs.10,18,336/- for unverifiable traveling and miscellaneous expenses. The AO disallowed 5% of these expenses due to the non-production of vouchers.

The CIT(A) deleted the disallowance for similar reasons as the repair expenses, relying on past rulings and the non-appeal of previous disallowances by the Revenue.

The Revenue argued that the assessee did not produce all the relevant bills and vouchers. The Tribunal found that the CIT(A) did not verify the genuineness of the expenses due to the lack of vouchers. The Tribunal vacated the CIT(A)'s findings and remanded the matter back to the AO for reconsideration, directing the assessee to produce all relevant bills and vouchers.

General Grounds:

Ground no.4(a) was dismissed as it was general in nature, and no submissions were made on it. Ground no.4(b) was also dismissed as no additional grounds were raised.

Conclusion:

The appeal was partly allowed for statistical purposes, with the Tribunal upholding the CIT(A)'s decision on the Section 14A disallowance but remanding the issues of unverifiable expenses back to the AO for reconsideration.

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