2017 (11) TMI 1545 - AT - Income Tax

Disallowance u/s 14A - non identification of expenses - Held that - In the present case AO has not even identified any specific item of expense he merely says that explanation of assessee is not correct as huge investment is made. As per above discussion respectfully following above authorities which are binding on us it is held that there is no satisfaction of terms of s. 14A read with Rule 8 D. Copy of order for AY 08-09 is also placed as per which no disallowance u/s 14A was made, hence assessee is right in submitting that disallowance is also against the principle of consistency in the absence of any facts. - Decided in favour of assessee Ad-hoc disallowance of business promotion expenses - non rejection of books of accounts - Held that - It is on record that assessee has made all the compliance from time to time. Purchases are fully vouched and accounts are not rejected. It is also a fact that no single item of expense is identified by AO which he could have stated as not incurred for business purposes. It is also borne out from order that such expenses are accepted in past when even % of expenses on sale was more in Ay 06-07. Sales have increased substantially. AR has relied on cases Ganpati Enterprises Ltd. (2013 (12) TMI 1097 - ITAT DELHI) and NATIONAL INDUSTRIAL CORP. LTD. Vs CIT 2002 (8) TMI 93 - DELHI High Court in support of proposition that without rejection of accounts and without finding any basis/defect in specific expense, ad-hoc disallowance cannot be made. Accordingly, the addition of ₹ 2,00,000/- is hereby deleted. Replacement of compressor of Colling unit - Nature of expenses - revenue or capital expenditure - Held that - Compressor is admittedly a part of unit which is replaced and it longer life or it is procured independently is wholly irrelevant. Issue is covered by various decisions in favor of assessee and expenditure is revenue in nature.

Issues Involved:
1. Disallowance of expenses related to exempt income under section 14A read with Rule 8D
2. Ad-hoc disallowance of business promotion expenses
3. Treatment of replacement of compressor as capital expenditure

Analysis of Judgment:

Issue 1: Disallowance of expenses related to exempt income under section 14A read with Rule 8D
The appellant contested the disallowance of expenses related to exempt income under section 14A. The Assessing Officer (AO) proposed the disallowance as no expenses were booked against the exempt dividend income earned during the year. The appellant argued that no expenditure was incurred as the dividend income was directly credited to UTI Liquid fund and through e-transfer. The Commissioner of Income Tax (Appeals) upheld the addition, citing the necessity of invoking section 14A and Rule 8D when the AO is not satisfied with the claim of no expenditure. However, the appellant demonstrated that no specific expenditure was related to the exempt income, and previous years' assessments did not disallow such expenses. The Tribunal held in favor of the appellant, ruling that there was no satisfaction under section 14A read with Rule 8D, and the addition was deleted.

Issue 2: Ad-hoc disallowance of business promotion expenses
The appellant challenged the ad-hoc disallowance of business promotion expenses. The AO disallowed a portion of the claimed expenses, stating that not all were fully for business purposes. The appellant provided evidence of the nature of expenses and demonstrated compliance with vouching and accounting standards. The Tribunal observed that no specific expense was identified as non-business related by the AO, and past acceptance of similar expenses supported the appellant's claim. Relying on relevant case law, the Tribunal deleted the ad-hoc disallowance, emphasizing the necessity of rejecting accounts or finding specific defects before making such disallowances.

Issue 3: Treatment of replacement of compressor as capital expenditure
The AO treated the replacement of a compressor as a capital expenditure due to its long life, which was upheld by the CIT(A). However, the Tribunal disagreed, stating that the compressor was part of a unit and its longer life was irrelevant. Various decisions supported the revenue nature of the expenditure, leading the Tribunal to delete the addition. The Tribunal emphasized that each part of the unit, including the compressor, should be considered a replacement and procured independently, supporting the appellant's position.

In conclusion, the Tribunal allowed the appeal of the assessee, deleting the additions made by the lower authorities. The judgment highlighted the importance of specific findings, compliance with rules, and consistency in making disallowances, ultimately ruling in favor of the appellant on all contested issues.

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