2016 (12) TMI 748 - AT - Income Tax

Disallowance u/s. 14A - Held that - From going through the audited balance sheet of the assessee and more specifically schedule-5 of the paper book we observe that there are various investments regularly made during the year in the Mutual Funds and tax free bonds, some of them are brought forward, some have been sold out and in some cases there have been addition to the previous balance. In all regular activity in the investment account has been carried out during the year and certain amount of expenditure towards administrative cost, salary expenditure, bank charges etc. cannot be ignored in the given circumstances. Further looking to the provisions of rule 8D(iii) r.w.s. 14A of the Act we believe that it is not easy for the Assessing Officer to go into the intricacies of the books of accounts in order to extract particular details in order to calculate the cost incurred towards managing investment. In order to cure this situation amended Rule 8D comes into fore play. We find that as per rule 8D (iii) amount of ₹ 3,53,002/- has been calculated and looking to the size and variety of investments, we find that the disallowance has been reasonably sustained by ld. CIT(A). We uphold the same. Accordingly, this ground of assessee is dismissed. Addition made u/s. 41(1) - Held that - One last opportunity may be given to assessee and we restore this limited issue to the file of Assessing Officer for verifying unpaid liability of Pal Peogeot Limited ₹ 5,49,929/- and Oriental Transport Co. ₹ 4,93,486/-. Further we direct the assessee also to show all necessary evidences and documents to prove that there exists a dispute to the extent of impugned amount of ₹ 10,33,414. In case assessee is unable to prove the dispute both these parties in the past then the impugned amount of ₹ 10,33,414/- will be sustained as an addition u/s. 41(1) of the Act. Accordingly, this ground is allowed for statistical purposes. Assessing Officer erred in rejecting the books of account and estimate the profit.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D.
2. Addition under Section 41(1) for outstanding balances of creditors.
3. Disallowance under Section 40(a)(ia).
4. Addition for low Gross Profit (GP).
5. Disallowance of professional fees as capital expenditure.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:
The assessee challenged the disallowance of ?3,53,002 under Section 14A. The Assessing Officer (AO) initially disallowed ?12,58,430, but the CIT(A) reduced it to ?3,53,002 by limiting the calculation to 0.5% of the average value of investments fetching exempt income. The Tribunal upheld the CIT(A)'s decision, noting that the assessee had earned tax-free interest and dividend income, and a reasonable amount of expenditure towards managing these investments could not be ignored. The Tribunal found the disallowance of ?3,53,002 reasonable and dismissed the assessee's ground.

2. Addition under Section 41(1) for Outstanding Balances of Creditors:
The AO added ?22,44,109 under Section 41(1) for outstanding balances of creditors, which was reduced by the CIT(A) to ?10,33,414 for two creditors, Pal Peogeot Limited and Oriental Transport Co., due to lack of evidence for disputes. The Tribunal restored the issue to the AO for verification, directing the assessee to provide evidence of the disputes. If the assessee fails to prove the disputes, the addition will be sustained.

3. Disallowance under Section 40(a)(ia):
The CIT(A) upheld a disallowance of ?60,000 under Section 40(a)(ia), which the assessee did not press during the appeal. The Tribunal dismissed this ground as not pressed.

4. Addition for Low Gross Profit (GP):
The AO added ?21,30,870 for low GP by rejecting the books of account. The CIT(A) deleted the addition, noting that the assessee's GP and NP rates were consistent with the average of the last three years. The Tribunal upheld the CIT(A)'s decision, finding no defects in the books of account and dismissing the Revenue's ground.

5. Disallowance of Professional Fees as Capital Expenditure:
The AO treated ?2,00,000 paid for legal fees in a land dispute as capital expenditure, but the CIT(A) allowed it as revenue expenditure. The Tribunal upheld the CIT(A)'s decision, noting that the expenditure was for safeguarding the business asset and not for acquiring it.

Revenue's Appeal:
The Revenue's appeal included grounds on the deletion of additions under Section 41(1) and Section 14A, which were addressed in the assessee's appeal. The Tribunal partly allowed the Revenue's appeal for statistical purposes concerning the addition under Section 41(1) and dismissed the ground on Section 14A.

Conclusion:
The Tribunal partly allowed both the assessee's and the Revenue's appeals for statistical purposes, restoring the issue of unpaid creditors to the AO for verification and upholding the CIT(A)'s decisions on other grounds. The order was pronounced on 11th November 2016.