2018 (12) TMI 984 - AT - Income Tax

Disallowance made on rule 8D R.W.S. 14A - CIT(A) deleted the impugned disallowance made u/s 14A - Held that - Disallowance u/s 14A of the Act is not called for in the case of the assessee as there is no dividend income earned during the year and the assessee s case is squarely covered in the judgment of Hon ble Gujarat High Court in the case of CIT V/s Corrtech Energy (P) Ltd (2014 (3) TMI 856 - GUJARAT HIGH COURT) wherein the Hon ble High Court has held that where the assessee has not made any claim for any exemption then in such situation the disallowance u/s 14A of the Act have no application . Perusal of the audited balance sheet of the assessee shows that as on 31.03.2012 the total of the share capital and reserve and surplus at the end of the year stands at ₹ 39,28,44,695/- and against these interest free funds available with the assessee, the average value of investment is ₹ 29,83,62,600/-, which means that the average investments are less than the interest free fund available with the assessee. Further there is no specific satisfaction by the Ld.A.O which could prove that interest bearing funds have been applied for the investments in group concerns for non business purposes. Also see CIT V/s HDFC Bank Ltd (2014 (8) TMI 119 - BOMBAY HIGH COURT) wherein the assessee s capital, profit, reserve surplus and current account deposits were higher than the investment in tax free securities, then it would have to be presumed that investment made by the assessee would be out of the available interest free funds - no disallowance u/s 14A was called for by the Ld.A.O - Decided in favour of assessee Disallowance of expenses - Disallowance has been merely made on the observation that some of the expenditure are incurred in cash and some vouchers are self made - held that - Surprisingly there is no specific observation by the Ld.A.O which could prove that the assessee has claimed the expenses with a motive to evade the tax nor any observation has been made by the Ld.A.O for challenging the genuineness of the particular expenditure. In these given facts and circumstances merely making a ad-hoc disallowance of ₹ 2,00,000/- and completely disregarding the audited financial statements was certainly not justified on the part of Ld.A.O. Therefore we find no infirmity in the finding of Ld. CIT(A) deleting the disallowance - Decided in favour of assessee

Summary

Issues Involved:
1. Deletion of addition made by the AO under Rule 8D r.w.s. 14A of the Income Tax Act.
2. Deletion of ad-hoc disallowance of various expenses made by the AO.

Issue-wise Detailed Analysis:

1. Deletion of Addition under Rule 8D r.w.s. 14A:

The Revenue challenged the deletion of ?2,31,50,925/- made by the Assessing Officer (AO) under Rule 8D r.w.s. 14A of the Income Tax Act. The AO had observed that the assessee had invested considerable amounts in group companies without earning any exempt income and applied interest-bearing funds towards these investments. The AO computed the disallowance using Rule 8D of the IT rules.

The assessee argued that no exempt income was earned during the year, and therefore, no disallowance under Section 14A was warranted, citing the Delhi High Court's judgment in Cheminvest Limited vs. CIT. The CIT(A) deleted the disallowance, noting that the investments were made out of commercial expediency and no exempt income was earned.

The Tribunal upheld the CIT(A)'s decision, emphasizing that:
- No exempt income was earned during the year.
- The assessee's investments were made out of its own funds, not borrowed funds.
- The AO did not record any dissatisfaction with the assessee's explanation regarding the source of funds for the investments.
- The Tribunal relied on various judgments, including those from the Delhi High Court and Gujarat High Court, which held that disallowance under Section 14A is not applicable in the absence of exempt income.

2. Deletion of Ad-hoc Disallowance of Various Expenses:

The Revenue also challenged the deletion of an ad-hoc disallowance of ?2,00,000/- made by the AO on account of various expenses. The AO had disallowed these expenses on the grounds that some payments were made in cash and some vouchers were self-prepared, making them unverifiable.

The assessee contended that:
- The expenses were properly incurred and accounted for.
- The books of accounts, along with all bills and vouchers, were produced before the AO.
- The disallowance was made without pointing out any specific defect in any particular expenditure.

The CIT(A) deleted the disallowance, noting that:
- The books of accounts were audited and no specific defects were pointed out by the AO.
- Disallowance cannot be made on an estimated basis without pointing out specific discrepancies.

The Tribunal upheld the CIT(A)'s decision, observing that:
- The assessee maintained regular books of accounts and financial statements were audited.
- No major discrepancies were noticed by the AO.
- The disallowance was made merely on the observation that some expenditures were incurred in cash and some vouchers were self-prepared, without any specific observation proving that the expenses were claimed with a motive to evade tax.

Conclusion:

The Tribunal dismissed both grounds raised by the Revenue, upholding the CIT(A)'s deletion of the disallowances under Section 14A and the ad-hoc disallowance of various expenses. The Tribunal emphasized the necessity of specific findings and satisfaction by the AO to justify such disallowances, which were absent in this case.