2020 (10) TMI 929 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - Non recording of satisfaction before making disallowance - HELD THAT - As decided in own case AO 2019 (4) TMI 1436 - ITAT DELHI at the first instance should have examined the correctness of the statement made by the assessee that no expenses were incurred for earning the exempt income during the year and if and only if the Ld. AO is not satisfied on this account after making reference to the accounts, he is entitled to adopt the method under Rule 8D of the Rules. We, therefore, while allowing the plea of the assessee direct AO to delete the addition made on this score. Interest on Car Loans - AO held that income and expenditure account of the assessee for the year under consideration, it was seen that the assessee has debited interest paid on account of vehicle loan - HELD THAT - As decided in own case 2019 (4) TMI 1436 - ITAT DELHI it is not the case of the Ld. Assessing Officer that the car loan was diverted for any other purpose, because there is no denial of the statement of the assessee that the loan amount was directly disbursed to the seller of the car. Inasmuch as the loan was for the purpose of business and no question of diversion of such funds had taken place, merely because the assessee placed his own funds and also the interest free loans for some other purposes, is not open for the Ld. Assessing Officer to disallow the interest on the amount taken for business purpose. We, therefore, direct the Assessing Officer to delete this addition. Software Expenses - AO has disallowed the claim of the assessee of treating software expenses as revenue expenses and treated it as capital expenditure and depreciation @ 60 % was allowed and 40% of the expenses were disallowed on account of software expenses being capital in nature - HELD THAT - The issue of depreciation of the software and the computer accessories has been adjudicated a number of cases by this Tribunal wherein depreciation @60 % has been allowed - since the AO and the ld. CIT ( A) have categorically mentioned that the assessee did not produce the relevant evidences for the purchase of software, we, accordingly, set aside the orders of the authorities below and restore this issue to the file of AO with direction to re-decide the issue after giving an opportunity of being heard to the assessee, after verifying the bills and vouchers produced on this issue. This ground is allowed for statistical purposes. Disallowance of Personal Expenditure - AO noted that assessee has claimed telephone and telex, vehicle running and maintenance expenses and depreciation on vehicle in profit and loss account - HELD THAT - We are of the view that the entire addition is wholly unjustified. The AO has not pointed out on which items personal element was involved in claiming the aforesaid expenses. AO has not pointed out any specific item which is used by the assessee for personal purposes. It is ad hoc addition made by the AO by disallowing 1/10th out of these expenditures. It is well settled law that ad hoc addition cannot be sustained unless AO has pointed out any specific item in which personal element is involved. There was thus, no justification to make any disallowance out of these expenditures. We, accordingly, set aside the orders of the authorities below and delete the entire addition. Appeal of the assessee is allowed

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D.
2. Disallowance of interest expenses on car loan.
3. Disallowance of software expenses.
4. Disallowance of personal expenditure.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:

The assessee challenged the disallowance of ?7,38,963 made by the AO under Section 14A read with Rule 8D(2)(iii), claiming that no expenditure was incurred for earning exempt income. The AO's decision was based on the assessee's significant investments and the necessity to manage such a portfolio. The CIT(A) upheld the AO's decision. However, the ITAT found the disallowance unjustified, referencing a similar case from earlier years where the Tribunal ruled in favor of the assessee, emphasizing that the AO failed to establish specific expenses incurred for earning the exempt income. Consequently, the ITAT directed the deletion of the addition made by the AO under Section 14A.

2. Disallowance of interest expenses on car loan:

The AO disallowed ?2,22,649 of interest expenses on a car loan, reasoning that the assessee had extended interest-free advances to related parties. The CIT(A) confirmed this disallowance, citing a jurisdictional High Court decision. However, the ITAT referenced an earlier ruling where it was established that the car loan was solely for business purposes and not diverted for other uses. The ITAT found the disallowance unjustified and directed the deletion of the addition, following the precedent set in the previous year's case.

3. Disallowance of software expenses:

The AO reclassified ?4,80,465 of software expenses as capital expenditure, allowing only 60% depreciation and disallowing the remaining 40%. The ITAT noted that while software and computer accessories generally qualify for 60% depreciation, the AO and CIT(A) had highlighted the absence of relevant purchase evidence. Thus, the ITAT remanded the issue back to the AO for re-evaluation after verifying the necessary documentation, allowing the ground for statistical purposes.

4. Disallowance of personal expenditure:

The AO disallowed 1/10th of the total expenses amounting to ?34,93,780, citing potential personal use, resulting in an addition of ?3,49,378. The CIT(A) reduced this disallowance to ?2,62,484. However, the ITAT found the disallowance unjustified as the AO failed to identify specific items used for personal purposes, deeming the addition ad hoc and unsustainable. Consequently, the ITAT directed the deletion of the entire disallowance.

Conclusion:

The ITAT allowed the appeal of the assessee, directing the deletion of the disallowances made by the AO under Section 14A, interest expenses on car loans, and personal expenditures. The issue of software expenses was remanded back to the AO for re-evaluation. The order was pronounced in the open court on 12/10/2020.

← Previous Next →