2015 (11) TMI 1207 - AT - Income Tax

Disallowance u/s 14A - Held that - In the case of assessee no bank borrowings, no bank over-draft/deposits and nor any interest expenditure has been claimed by the assessee in the computation of total income and the port-folio management was looked after by the Director. There was sufficient source of funds which was required to make fresh investment in shares and mutual funds during the year and nothing contrary to the above facts have been brought on record by the Revenue, and in these circumstances, we find it justified to delete the addition made by the AO in regard to disallowance made u/s 14A - Decided in favour of assessee. Disallowance from rental income on estimated ad hoc basis - Held that - Assessee has earned rental income and has shown the same under the head income from house property, claimed 30% deduction for repairs allowable under section 24. Assessee s books are audited and it is a limited company and working since 94 years. AO in his assessment order has not been able to bring any specific material on record to prove that expenses shown in the profit and loss a/c were in any way attributable specifically for earning rental income. But has made ad hoc disallowance of ₹ 1,50,000/- deeming that there has been some nexus of some portion of the expenses incurred by the assessee company during the year to earn rental income. Therefore, in view of the above and for the lack of proper working to show that expenses specifically for earning rental income having claimed as expenditure under the head business or profession, we are of the view that AO was not justified in making such ad hoc disallowance. - Decided in favour of assessee.

Summary

Issues Involved:
1. Applicability of Section 14A of the Income-tax Act, 1961.
2. Disallowance of Rs. 1,50,000 from Rental Income on an estimated and ad hoc basis.

Issue-Wise Detailed Analysis:

1. Applicability of Section 14A of the Income-tax Act, 1961:

The primary issue was whether the provisions of Section 14A, which deals with disallowance of expenditure incurred in relation to income not includible in total income, were correctly applied by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)].

The CIT(A) observed that the assessee made substantial investments in shares and securities, generating exempt income. The AO disallowed Rs. 45,375 under Section 14A, calculated as per Rule 8D, which became mandatory from the assessment year in question. The assessee contended that no expenditure was incurred to earn the tax-free income and that the disallowance was made on an ad hoc and estimate basis.

The Tribunal examined the financials and noted that the assessee had sufficient funds for making investments and had not used borrowed funds for such purposes. The Tribunal referenced judicial precedents, including the Gujarat High Court's decision in CIT vs. Torrent Power Ltd., which held that disallowance under Section 14A is not justified if the assessee had sufficient funds and did not incur actual expenditure for earning tax-free income.

Given that the assessee had no bank borrowings, overdrafts, or interest expenses and the portfolio management was handled by the Director, the Tribunal found it justified to delete the disallowance of Rs. 45,375 made under Section 14A. This ground of the assessee was allowed.

2. Disallowance of Rs. 1,50,000 from Rental Income on an Estimated and Ad Hoc Basis:

The second issue was the disallowance of Rs. 1,50,000 by the AO from rental income on an estimated and ad hoc basis, which was confirmed by the CIT(A). The CIT(A) reasoned that the assessee did not maintain detailed records of expenses attributable to various incomes and claimed all expenses against warehouse income, which constituted only 30% of the total income.

The assessee argued that all expenses were incurred wholly and exclusively for business purposes and maintained all vouchers, bills, and receipts. The AO did not provide any show cause notice or personal hearing before making the disallowance. The Tribunal referenced several judicial precedents, including the Gujarat High Court's decision in the assessee's own case, which held that bona fide business expenditure should be deductible regardless of the income earned.

The Tribunal noted that the AO did not bring any specific material on record to prove that the expenses were attributable to earning rental income. The ad hoc disallowance was made without proper evidence. Consequently, the Tribunal found the AO's action unjustified and deleted the disallowance of Rs. 1,50,000. This ground of the assessee was also allowed.

Conclusion:

The appeal of the assessee was allowed, with the Tribunal deleting both the disallowance under Section 14A and the ad hoc disallowance from rental income. The order was pronounced in the open court on 9/10/2015.