2015 (11) TMI 58 - AT - Income Tax

Disallowance u/s 14A - Held that - There is no doubt that the assessee definitely has to incur higher expenses for rendering professional services and thereby earning professional receipts. The contention of the assessee that the value of jewellary of ₹ 41,63,417/- included by the assessing officer in the determination of average investment need to be excluded is to be accepted as any gain on sale of jewellary is taxable under the Act. Keeping in view the peculiar facts and circumstances of the case , the end of justice will be met if the disallowance of the expenses is restricted to 10% of common expenses of ₹ 12,83,814/- whereby the disallowance will come to ₹ 1,28,381/- u/s 14A of the Act. The amount of disallowance is restricted to ₹ 1,28,381/- keeping in view the peculiar facts and circumstances of the case and shall neither be construed as our making any aspersion on the applicability of Section 14A of the Act read with rule 8D of Income Tax Rules,1962 for the impugned assessment nor setting any precedent whatsoever.- Decided partly in favour of assessee. Disallowance of Foreign Exchange Fluctuation Loss on balance maintained in foreign currency in EEFC A/c. - Held that - The assessee is consistently following the accounting policy of offering to tax both income/loss on mark to market basis as on the date of balance-sheet in the return of income filed with the revenue with respect to the EEFC account. The LD AR has made statement before us that the EEFC account is being maintained by the assessee and the credits in the earlier years were on account of professional fee received by the assessee in foreign exchange in the earlier years. We, therefore, hold that on the basis of principles of consistency in the accounting policy followed by the assessee from several years which accounting policy is also in consonance with the prescribed Indian accounting standards, the loss incurred by the assessee on account of foreign exchange fluctuation loss in the EEFC account as at the year end is to be allowed and the addition made by the assessing officer and as confirmed by the CIT(A) needs to be deleted. - Decided in favour of assessee. Disallowance of Dentistry expenses u/s 40(a)(ia) - non deduction of TDS - Held that - We have observed that the assessee is a cine artist /actress and her beauty and personality is one of the most important trait for generating business and revenue. The assessee spent dentistry charges which are part and parcel of her beautification to generate the revenue. The assessee has paid 89,500/- towards the material cost while the rest ₹ 85350/- is towards the professional fees paid to doctor for treatment of her teeth. The assessee is required to deduct TDS u/s 194J of the Act on the professional fees paid to doctor which the assessee has failed to deduct and hence ₹ 85,350/- being professional fees out of total expenditure of ₹ 1,74,850/- is held to be disallowable expenditure u/s 40(a)(ia) of the Act as no TDS was deducted by the assessee u/s 194J of the Act while we allow expenditure of ₹ 89,500/- being incurred by the assessee towards the material cost paid for her treatment. - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Disallowance of Foreign Exchange Fluctuation Loss of EEFC Account.
3. Disallowance of Dentistry expenses under Section 40A(ia).

Issue-wise Detailed Analysis:

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

The assessee contested the disallowance of Rs. 3,44,545/- under Section 14A, arguing that the Assessing Officer (AO) did not establish any nexus between the disallowed expenses and the tax-free income. The assessee maintained that all expenses were related to professional income and no separate administrative expenses were incurred for earning exempt income. The AO, however, observed that the assessee had substantial tax-free income and had not allocated any expenses towards earning this income. The AO applied Section 14A read with Rule 8D, disallowing 0.5% of the average investment. The CIT(A) upheld this disallowance, noting that the assessee failed to discharge the initial onus under Section 14A. Upon appeal, it was noted that the assessee had common expenses and specific expenses related to professional income. The Tribunal found it implausible that no expenses were incurred for maintaining investments and restricted the disallowance to 10% of common expenses, amounting to Rs. 1,28,381/-, excluding the value of jewelry from the average investment calculation.

2. Disallowance of Foreign Exchange Fluctuation Loss of EEFC Account:

The assessee claimed a loss of Rs. 3,77,580/- due to foreign exchange fluctuation in her EEFC account, following Accounting Standard-11. The AO disallowed this claim, stating that the EEFC account was dormant, and the loss arose from a mere book entry, not related to professional activity. The CIT(A) upheld this disallowance, emphasizing that the assessee followed the cash method of accounting, which does not permit such accrual-based recognition. On appeal, the Tribunal noted that the assessee consistently followed a hybrid system of accounting, recognizing both profits and losses from foreign exchange fluctuations. Given the consistency and alignment with Indian accounting standards, the Tribunal allowed the loss, reversing the disallowance.

3. Disallowance of Dentistry Expenses under Section 40A(ia):

The assessee, a cine artist, claimed Rs. 1,74,850/- as dentistry expenses necessary for her profession. The AO disallowed this, considering it personal and noting no TDS was deducted. The CIT(A) agreed that the expenses were professional but upheld the disallowance due to non-deduction of TDS under Section 194J. On further appeal, the Tribunal acknowledged the professional necessity of the expenses but differentiated between material costs and professional fees. It allowed Rs. 89,500/- (material cost) and disallowed Rs. 85,350/- (professional fees) due to non-deduction of TDS under Section 194J.

Conclusion:

The appeal was partly allowed, with modifications to the disallowances under Section 14A and the dentistry expenses, while fully allowing the foreign exchange fluctuation loss. The Tribunal's decisions were based on detailed analysis of the nature of expenses and adherence to accounting standards and tax laws.