2018 (1) TMI 787 - AT - Income Tax

Disallowance u/s. 14A read with Rule 8D - Held that - Disallowance u/s 14A be restricted to the exempt income earned by the assessee Disallowing being 10% of repairing expenses on estimate basis - Held that - AO disallowed 10% of the repairs and maintenance claimed by the assessee as deduction in computing the total income on the ground that the assessee could not produce the related bills and vouchers. The CIT(A) confirmed the order of the AO. Before me the prayer of the ld. Counsel for the assessee was that the disallowance is excessive and should commensurate with the quantum of total expenditure and the scale of business of the assessee. There has been no basis for the disallowance by the AO or CIT(A). Disallowance of 5% of the repair expenses would be just and fair. Accordingly ground no.4 is partly allowed. Receipt of surrender value of Keyman Insurance Policy as Central Income when the premium when paid was allowed as deduction from the composite income of the assessee at the time of payment - Held that - The only business of the assessee is growing and manufacturing of tea. The surrender value of keyman insurance policy is admittedly connected with the business of growing and manufacture by the assessee and therefore it has to be considered as part of the composite income on which Rule 8 should be applied. In this regard it is also noticed by me that the insurance premium was paid when the policy was in force was allowed as deduction while computing the composite income. Therefore the nexus with the business of the assessee has been accepted by the revenue in the past. Therefore the surrendered value of keyman insurance policy received during the previous year had also to be considered as part of the composite income on which Rule 8 has to be applied

Summary

Issues:
1. Disallowance of expenses under section 14A read with Rule 8D without recording satisfaction of nexus with exempt income.
2. Disallowance under section 14A exceeding exempt income earned.
3. Disallowance of repairing expenses on an estimate basis.
4. Treatment of surrender value of Keyman Insurance Policy as Central Income.

Analysis:

1. Disallowance under section 14A read with Rule 8D:
The assessee appealed against the AO's disallowance of expenses under section 14A read with Rule 8D without establishing a nexus with the exempt income. The CIT(A) confirmed the AO's order. The tribunal referred to the decision in the case of CIT vs. Hollin India Pvt. Ltd. and restricted the disallowance to the extent of exempt income earned by the assessee, citing various High Court decisions. The tribunal held that the disallowance under section 14A should not exceed the amount of exempt income received by the assessee.

2. Disallowance under section 14A exceeding exempt income earned:
The tribunal held that the disallowance under section 14A should be limited to the exempt income earned by the assessee. The tribunal relied on previous judgments and restricted the disallowance to the amount of exempt income received by the assessee, thus partly allowing the grounds raised by the assessee.

3. Disallowance of repairing expenses on an estimate basis:
The AO disallowed 10% of the repairing expenses claimed by the assessee, citing lack of related bills and vouchers. The CIT(A) upheld the AO's decision. The tribunal found the disallowance excessive and without basis. It reduced the disallowance to 5% of the repair expenses, considering it fair and just based on the circumstances, thereby partly allowing the assessee's appeal.

4. Treatment of surrender value of Keyman Insurance Policy:
The assessee received cash surrender value on assignment of Keyman Insurance Policy. The AO treated it as income from business chargeable at 100%, contrary to the assessee's claim that only 40% should be brought to tax under Rule 8. The tribunal held that the surrender value, being connected with the business of growing and manufacturing of tea, should be considered part of the composite income. The tribunal allowed the appeal by the assessee, emphasizing the nexus with the business and the past acceptance of insurance premium deductions.

In conclusion, the tribunal partly allowed the assessee's appeal concerning disallowances under section 14A, repairing expenses, and treatment of surrender value of Keyman Insurance Policy, emphasizing the need for nexus with business income and fair assessment of expenses.