2019 (11) TMI 911 - AT - Income Tax

Disallowance u/s 14A read with rule 8D - HELD THAT - Undoubtedly the assessee has earned any exempt income of RS . 55564000/ . Claim of the assessee is that it is received on investments of ₹ 8,00,000/- in an Group Real Estate Company. However the assessee has made total investment as per balance sheet, at the beginning of the year of ₹ 114992691/ and at the close of the year of INR 127320663/ . Therefore it is apparent that assessee has huge non-interest-bearing funds available with it for the purpose of making an investment. Thus, we do not find any reason to uphold the disallowance u/s 14 A of the income tax act on account of interest. With respect to the disallowance of expenditure at the rate of 0.5% assessee has received dividend only on the investment of INR 800,000 from the company. As in case of ACB India Ltd vs Asst Commissioner of income tax 2015 (4) TMI 224 - DELHI HIGH COURT held that the value of investment for working out average value of investment, only those investments are required to be taken from which the assessee has earned exempt income during the year. In the present case the assessee has earned exempt income only from the investment of INR 800,000 which is outstanding at the beginning of the year ended the close of the year. AO is directed to delete the disallowance on account of the interest expenditure u/s 14A and to restrict the disallowance on account of expenditure under that section to the extent of 0.5% of INR 800,000 only. Accordingly the orders of the lower authorities are set aside to that extent. In the result the ground number 2 of the appeal of the assessee is partly allowed. Disallowance being 10% of the vehicle repairs and maintenance expenditure - AO has given a reason that the assessee has incurred the above expenditure is personal expenditure as the director does not own any motor car nor have they shown any income as perquisites on account of the use of the motor car - HELD THAT - We do not find the above reasons appropriate for making the disallowance because assessee is a company which cannot have any personal expenditure. Further if any addition is required to be made on account of perquisites , the same is required to be made in the hands of the director , if they have used it for their own benefit and not for the purposes of the business of the company. In view of this, we reverse the finding of the learned lower authorities and direct the learned assessing officer to delete ad hoc disallowance made on account of vehicle running and maintenance expenditure. Accordingly ground number 3 of the appeal of the assessee is allowed.

Summary

Issues:
1. Disallowance u/s 14 A read with rule 8D
2. Ad hoc disallowance of vehicle repair and maintenance expenditure

Analysis:

Issue 1: Disallowance u/s 14 A read with rule 8D
The appeal was filed against the order of the Learned Commissioner Of Income Tax (Appeals) where the disallowance under section 14 A was confirmed. The Assessing Officer disallowed a sum under section 14 A as the assessee had earned exempt income in the form of dividends. The Assessing Officer worked out the disallowance under rule 8D, considering the investment in equity shares and mutual funds. The assessee contended that no disallowance was warranted as it had interest-free funds available. However, the CIT (A) confirmed the disallowance. The ITAT held that since the assessee had substantial non-interest-bearing funds, the disallowance under section 14 A was not justified. The ITAT directed the deletion of the disallowance on interest expenditure and restricted the disallowance on expenditure to a specific amount based on the investment from which exempt income was earned.

Issue 2: Ad hoc disallowance of vehicle repair and maintenance expenditure
The Assessing Officer disallowed 10% of the vehicle repair and maintenance expenditure, alleging it to be personal expenditure. The CIT (A) confirmed the disallowance of 10% of the repair and maintenance expenditure but deleted the disallowance on depreciation. The ITAT held that as the assessee was a company, personal expenditure could not be attributed to it. The ITAT directed the Assessing Officer to delete the ad hoc disallowance made on account of vehicle running and maintenance expenditure. Consequently, ground number 3 of the appeal was allowed.

The appeal was partly allowed, with specific disallowances being reversed or restricted based on detailed arguments and legal principles. Grounds 1 and 4 were dismissed due to the lack of specific arguments.