2019 (5) TMI 948 - AT - Income Tax

Disallowance u/s.14A - whether exempt dividend income from mutual funds and shares was received during the year - disallowance under Rule 8D(2)(ii) towards interest paid - HELD THAT - This issue is no more res integra in view of the recent judgment delivered in Godrej Boyce Manufacturing Company Ltd. vs. DCIT 2017 (5) TMI 403 - SUPREME COURT in which it has been held that when interest free funds in the form of share capital and reserves are more than investment then no disallowance of interest can be made u/s 14A. Disallowance made by the AO has been wrongly sustained in the first appeal therefore order to delete the same. Disallowance u/s.14A read with Rule 8D(2)(iii) is 0.5% of the average value of the investments - AO computed 0.5% of the average value of investments and made disallowance for the same which came to be affirmed in the first appeal - AR submitted that the disallowance made in this regard is excessive and submitted that the disallowance may be made on the reasonable basis may be at 1, 000/- per entry - HELD THAT - This type of ad hocism is impermissible in view of the clear mandate of Rule 8D(2)(iii). As the assessment year under consideration is a period after the insertion of Rule 8D I hold that the disallowance at 0.5% being the prescription of the rule as made and sustained in the first appeal is in order. To sum up disallowance u/s.14A of the Act is sustained at 4, 88, 721/- and the assessee gets relief of 2, 73, 505/-. Disallowance of foreign tour expenses - allowable business expenses - AO made addition on the ground that the assessee failed to produce any submission on the performance of foreign tour and how it was related to business - HELD THAT - A copy of the assessee s Profit and loss account has been placed and it is seen that the assessee made export sales of 2.81 crore as against domestic sales amounting to 40.55 lakh. CIT(A) has recorded the assessee s submission made before him on page 16 of the impugned order vide which it was stated that foreign tour was undertaken to USA where the assessee has got its customers. Not only that the assessee also filed copies of bills and vouchers before the AO during the course of assessment proceedings. This shows that the assessee genuinely undertook foreign visit to USA. Since his major sales are to foreign countries including USA there can be no reason to disallow the foreign travel expenses incurred in this regard - order to delete the addition. - Decided in favour of assessee.

Summary

Issues:
1. Delay in presenting the appeal before the Tribunal.
2. Disallowance under section 14A of the Income Tax Act, 1961.
3. Disallowance of foreign tour expenses.

Issue 1: Delay in presenting the appeal before the Tribunal
The appeal arose due to a delay of 33 days in presenting the appeal before the Tribunal. The assessee filed an affidavit explaining the reasons for the delay, which were found satisfactory. Consequently, the delay was condoned, and the appeal was taken up for disposal on merits.

Issue 2: Disallowance under section 14A of the Income Tax Act, 1961
The disallowance under section 14A pertained to exempt dividend income from mutual funds and shares received during the year. The Assessing Officer (AO) computed the disallowance under Rule 8D(2)(ii) at a specific amount towards interest paid. The Tribunal examined the provisions of section 14A read with rule 8D(2)(ii) and emphasized that interest relatable to investments yielding exempt income should be disallowed. The judgment discussed the relevance of interest-free funds and interest-bearing loans in determining the disallowance of interest paid. Citing various legal precedents, including judgments from the Bombay High Court and the Supreme Court, it was concluded that if interest-free funds are available and sufficient to meet investments, no disallowance of interest can be made under section 14A. The disallowance made by the AO was deemed unsustainable, and the order to delete the same was passed.

The second component of disallowance under section 14A, as per Rule 8D(2)(iii), was also addressed. The Tribunal upheld the disallowance at 0.5% of the average value of investments, rejecting the request for a lower ad hoc disallowance. The disallowance under section 14A was ultimately sustained at a specific amount, providing relief to the assessee.

Issue 3: Disallowance of foreign tour expenses
The AO disallowed foreign tour expenses as the assessee failed to provide adequate submissions on the business relevance of the tour. However, the Tribunal noted that the foreign tour was related to business activities, particularly with customers in the USA, a significant market for the assessee's sales. The assessee's submission and supporting documents indicated a genuine business purpose for the foreign travel expenses. Consequently, the addition of foreign tour expenses was ordered to be deleted.

In conclusion, the appeal was partly allowed, addressing the issues of delay in presenting the appeal, disallowance under section 14A, and foreign tour expenses. The judgment provided detailed analysis and legal interpretations to support the decisions made on each issue.