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2021 (4) TMI 441 - AT - Income TaxAddition in respect of administrative expenses made u/s 14A - expenses incurred by the assessee in relation to such exempted income needs to be disallowed under the provisions of section 14A - HELD THAT - The primary onus lies upon the assessee to justify, based on the documentary evidence, that it has not incurred any expense against the exempted income. But the assessee before us failed to discharge the onus imposed upon him except contending that it has not incurred any expenses. Thus, the AO, in the absence of any material brought on record by the assessee in support of his contention, had no alternate except to make the disallowance as per the method prescribed under rule 8D of income tax rule. Even at the time of hearing before us, the learned AR appearing on behalf of the assessee has not brought any material evidence except making bald statement that it has not incurred any expense. Accordingly, we do not find any infirmity in the order of the authorities below. Addition on account of late payment of PF and ESI - Addition u/s 36(1)(va) r.w.s. 2(24)(x) - assessee for the month of April to June has deposited employee contribution toward PF and ESI after due date as prescribed under the respective Act - HELD THAT - As decided in GUJARAT STATE ROAD TRANSPORT CORPORATION 2014 (1) TMI 502 - GUJARAT HIGH COURT with respect to the sum received by the assessee from any of his employees to which provisions of sub-clause (x) of clause (24) of section 2 applies, the assessee shall be entitled to deduction in computing the income referred to in section 28 with respect to such sum credited by the assessee to the employees account in the relevant fund or funds on or before the 'due date' mentioned in Explanation to section 36(1)(va). Consequently, it is held that the Tribunal has erred in deleting respective disallowances being employees' contribution to PF Account/ESI Account made by the Assessing Officer as, as such, such sums were not credited by the respective assessee to the employees 'accounts in the relevant fund or funds on or before the due date as per the Explanation to section 36(1)(va) of the Act i.e. date by which the concerned assessee was required as an employer to credit employees' contribution to the employees account in the Provident Fund under the Provident Fund Act and/or in the ESI Fund under the ESI Act - Decided against assessee. Ad-hoc disallowances of the expenses being not incurred wholly and exclusively for business purpose - AO found that most of the expenses were incurred through cash which was supported on self-made vouchers. Therefore, the element of personal expenses out of the enhanced expenses incurred by the assessee cannot be ruled out - HELD THAT - We note that there is no provision under the Act to make the disallowance on ad-hoc basis. The AO has to see whether the expenses claimed by the assessee were to be disallowed under the provisions of law. But the AO has not made reference to any specific provision which was violated by the assessee. Admittedly, the expenses incurred in cash and further more supported on the basis of self-made vouchers, might create doubt about the genuineness of the expenses to ensure whether such expenses were incurred wholly and exclusively for the purpose of the business - there is no denial under the Act to incur the expenses in cash except as provided under section 40A(3) read with rule 6DD of income tax rule. But there was no invocation of such section. Thus, the expenses claimed for the purpose of the business cannot be disallowed merely on the reasoning that these expenses were incurred in cash and were supported on the self-made vouchers. There are many occasions/situations where the supporting details are not available for the expenses incurred by the assessee. Thus, in such a situation only self-made vouchers can be prepared in support of the expenses incurred by the assessee. There is no provision under the Act to make the disallowance on ad-hoc basis. The AO has to see whether the expenses claimed by the assessee were to be disallowed under the provisions of law. But the AO has not made reference to any specific provision which was violated by the assessee. Fact on record show that the assessee has added some new items in its business line. In a scenario where there is cut throat competition, the assessee has certainly to incur more expenses by extending more discount, free distribution samples to the prospective customers. This contention of the assessee has not been doubted by the authorities below. Accordingly, the onus was shifted from the assessee to the revenue and the revenue was to prove wrong to the assessee based on the materials available on record. But to our mind, the revenue has not brought any tangible material to draw an inference that the expenses were not incurred for the purpose of the business AO has doubted on the reasonableness of expenses but as such he has not pointed out that these expenses were not incurred for the purpose of the business which was the precondition for invoking the provisions of section 37 of the Act. Accordingly, we are of the view that no disallowance of the expenses is warranted. Thus the ground of appeal of the assessee is allowed.
Issues Involved:
1. Disallowance of administrative and other expenditure under Section 14A read with Rule 8D. 2. Disallowance due to late payment of PF and ESI. 3. Ad-hoc disallowance of various business expenses. Issue-wise Detailed Analysis: 1. Disallowance of Administrative and Other Expenditure under Section 14A read with Rule 8D: During the assessment proceeding, it was observed that the assessee claimed exempt income of ?3,75,000 as dividend on shares but did not make corresponding disallowances of expenditure under Section 14A read with Rule 8D. The assessee argued that the investment in shares was old and no borrowed funds were used, thus Section 14A was not applicable. The AO rejected this claim, calculating disallowances of ?7,21,937, including ?6,61,936 for interest expenses and ?60,000 for administrative expenses. The CIT(A) deleted the disallowance for interest expenses but confirmed the administrative expenses disallowance, directing the AO to verify the actual investment figures. The Tribunal upheld the CIT(A)'s decision, noting that the assessee failed to provide evidence that no administrative expenses were incurred in relation to the exempt income. The Tribunal emphasized that the primary onus was on the assessee to justify the absence of expenses, which was not met, leading to the dismissal of this ground of appeal. 2. Disallowance Due to Late Payment of PF and ESI: The AO noted from the tax audit report that the assessee deposited employee contributions towards PF and ESI late for the months of April to June. The assessee argued the delay was due to the non-availability of registration numbers, which was beyond its control. However, the AO, citing the Gujarat High Court judgment in CIT vs. Gujarat State Road Transport Corp., made an addition of ?51,711 under Section 36(1)(va) read with Section 2(24)(x). The Tribunal, following the jurisdictional High Court's ruling, dismissed the assessee's appeal on this ground, affirming that the deduction is only permissible if contributions are credited to the employees' accounts by the due date specified in the relevant Acts. 3. Ad-hoc Disallowance of Various Business Expenses: The AO observed a significant increase in indirect expenses compared to the previous assessment year, despite an increase in sales and GP ratio. The assessee justified the increase due to the addition of new products, opening new branches, and incurring higher selling and distribution expenses. However, the AO noted many expenses were incurred in cash and supported by self-made vouchers, leading to an ad-hoc disallowance of ?15,00,000 to prevent revenue leakage. The CIT(A) upheld the AO's decision, noting the unexplained and abnormal increase in expenses and the lack of verifiable evidence. The Tribunal, however, disagreed with the ad-hoc disallowance, stating there is no provision under the Act for such disallowances without specific violations. The Tribunal noted the legitimate business reasons for increased expenses and the lack of material evidence from the revenue to prove the expenses were not incurred for business purposes. Thus, the Tribunal allowed the appeal on this ground, reversing the disallowance. Conclusion: The Tribunal partly allowed the appeal, upholding the disallowance under Section 14A for administrative expenses and the disallowance for late payment of PF and ESI, but reversing the ad-hoc disallowance of ?15,00,000 for various business expenses. The order was pronounced in the Court on 23/03/2021 at Ahmedabad.
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