2020 (4) TMI 588 - AT - Income Tax

Disallowance u/s. 14A r.w Rule 8D - Assessee agitated the disallowance before the CIT(A) claiming that there is no exempt income - HELD THAT - We restore this issue to the files of the CIT(A) with a direction that the CIT(A) shall decide this issue in true perspective of the underlying facts in the issue after giving a reasonable opportunity of being heard to the assessee. GP estimation - additions on account of differences in EVA and lumpsum additions of wages - HELD THAT Once the AO has estimated the GP addition which was sustained by the CIT(A) all the related expenses are deem to be allowed and, therefore, there should not be any further addition in trading account. Therefore, modifying the findings of the CIT(A) we direct the AO to delete the addition on account of EVA and wages. Modifying the findings of the CIT(A) ground No.3 is dismissed.

Summary

Issues:
1. Disallowance under section 14A r.w Rule 8D
2. Disallowance of interest under section 36(1)(iii)
3. Disallowance on account of difference in Gross Profit

Analysis:

1. Issue 1 - Disallowance under section 14A r.w Rule 8D:
The AO made a disallowance of ?1,31,66,791 under section 14A r.w Rule 8D due to investments made by the assessee. However, the CIT(A) deleted the disallowance as there was no exempt income earned by the assessee during the relevant year. The ITAT upheld the CIT(A)'s decision citing precedents from the Delhi High Court and Gujarat High Court, and dismissed the revenue's appeal.

2. Issue 2 - Disallowance of interest under section 36(1)(iii):
The AO disallowed ?27,82,055 as interest, alleging it was given out of interest-bearing funds without proof of the building being put to use. The CIT(A) deleted the disallowance, but the ITAT found the CIT(A)'s reasoning irrelevant and remanded the issue back to the CIT(A for proper consideration, allowing the appeal for statistical purposes.

3. Issue 3 - Disallowance on account of difference in Gross Profit:
The AO disallowed ?2,16,56,114 due to differential rates in the valuation of raw material and a lump sum disallowance of wages. The CIT(A deleted both additions, citing explanations provided by the assessee and lack of cogent reasons from the AO. The ITAT upheld the CIT(A)'s decision, directing the AO to delete the additions on EVA and wages, and allowed the appeal in part for statistical purposes.

In conclusion, the ITAT upheld the CIT(A)'s decisions on disallowances under section 14A and Gross Profit differences, remanded the issue of interest disallowance back to the CIT(A, and allowed the appeal in part for statistical purposes.