2015 (7) TMI 361 - AT - Income Tax

Addition made invoking the provisions of S. 36(1)(iii) r.w.s. 40A(2)(b) - Held that - In the instant case, there is no question of disallowance of interest on account of interest free advances given to related parties. It is a reverse case wherein the assessee has obtained the loan from related parties by paying exorbitant rate of interest for which the Assessing Officer disallowed the excess interest paid to the related parties by invoking the provisions of section 40A(2)(b) of the I.T. Act. Since the assessee itself has agreed for the addition of ₹ 33,37,059/- to tax being excess interest paid to the related parties covered u/s.40A(2)(b), therefore, the CIT(A) in our opinion was fully justified in upholding the addition made by the Assessing Officer. - Decided against assessee. Disallowance u/s 14A r.w.r 8D - Held that - Since the assessee itself had admitted that it has incurred certain expenses although the same is negligible which cannot be correctly ascertained and since certain additions were made during A.Y. 2006-07 and 2008-09 by the Assessing Officer u/s.14A and nothing has been brought on record as to the outcome of the same including the quantum, therefore, we do not find any infirmity in the order of the CIT(A) upholding the disallowance made u/s.14A r.w. Rule 8D for the impugned assessment year. - Decided against assessee. Disallowance of 10% of the expenses on estimate basis being personal in nature - Held that - There is no dispute to the fact that certain bills and vouchers were supported by only self-made vouchers and were not amenable for verification for which the Assessing Officer made adhoc disallowances. We find similar disallowances were made in the preceding year and the assessee has not objected to the same. However, none of the parties has brought to our notice regarding the amount of disallowance. Considering the totality of the facts of the case, we are of the considered opinion that the disallowance at 10% on adhoc basis appears to be on the higher side. We therefore direct to restrict such disallowance to 5% of the expenses - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Confirmation of addition under Sections 36(1)(iii) and 40A(2)(b) of the Income Tax Act.
2. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules.
3. Ad-hoc disallowance of certain expenses.
4. Levy of interest under Sections 234A, 234B, and 234C of the Income Tax Act.

Detailed Analysis:

1. Confirmation of Addition under Sections 36(1)(iii) and 40A(2)(b):
The assessee contested the confirmation of an addition of Rs. 34,10,881 made by the Assessing Officer (AO) by invoking Sections 36(1)(iii) and 40A(2)(b) without a 'speaking order' and solely relying on the AO's version for the previous assessment year (2009-10). The Tribunal noted that a similar issue had been decided against the assessee in the preceding assessment year, where the AO had disallowed excess interest paid to Directors and related parties. The AO had justified the disallowance by comparing the interest rates paid to banks (14.75%) and related parties (21%). The assessee had offered the excess interest paid for taxation to buy peace of mind. The Tribunal held that the issue was factual, not legal, and upheld the disallowance, dismissing the grounds raised by the assessee.

2. Disallowance under Section 14A read with Rule 8D:
The assessee had shown dividend income of Rs. 2,25,517 as exempt under Section 10(34) and claimed no expenditure for earning this income. The AO disallowed Rs. 93,288 under Section 14A read with Rule 8D. The CIT(A) upheld the AO's action, stating that some expenditure is always incurred to earn income, such as staff time and bank charges. The Tribunal noted that a similar disallowance had been upheld in the assessee's case for the preceding assessment year and found no infirmity in the CIT(A)'s order. The ground raised by the assessee was dismissed.

3. Ad-hoc Disallowance of Certain Expenses:
The AO observed that some expenses under postage, telephone, furniture repairs, and cartage were not fully verifiable and made an ad-hoc disallowance of 10% (Rs. 1,32,400). The CIT(A) upheld this. The Tribunal, referring to the preceding assessment year, found that a similar issue had been addressed by restricting the disallowance to 5%. Following this reasoning, the Tribunal directed the AO to restrict the disallowance to 5% of the expenses claimed, partly allowing the assessee's ground.

4. Levy of Interest under Sections 234A, 234B, and 234C:
The assessee contested the levy of interest under Sections 234A, 234B, and 234C. The Tribunal held that the levy of interest under these sections is mandatory and consequential, thus dismissing the ground raised by the assessee.

Conclusion:
The Tribunal dismissed the grounds related to the confirmation of addition under Sections 36(1)(iii) and 40A(2)(b) and the disallowance under Section 14A read with Rule 8D. The ad-hoc disallowance of expenses was partly allowed by restricting it to 5%. The levy of interest under Sections 234A, 234B, and 234C was upheld as mandatory and consequential. The appeal filed by the assessee was partly allowed.