2021 (8) TMI 1097 - AT - Income Tax

Disallowance u/s 37 (1) - AO has disallowed 10% of the expenses on ad-hoc basis claimed under the head telephone expenses , travelling expenses and staff welfare expenses on the ground that element of personal use cannot be overruled as no logbook was maintained for Vehicles, details of phone calls was not maintained in respect of telephones and proper vouchers of tour and travel expenses were not maintained - HELD THAT - In our opinion, the Assessing Officer is not justified in making ad-hoc disallowance out of expenses without pointing out specific error or absence of particular voucher of expenses - Tribunal in identical circumstances has upheld the deletion of such disallowance. Respectfully, following the finding of the Tribunal in the case of the assessee in immediately preceding assessment year, we uphold the finding of the Learned CIT(A). The ground No. 1 of the appeal of the Revenue is accordingly dismissed. Disallowance u/s 14A - CIT(A) deleted the disallowance in view finding of his predecessor and no exempt income earned by the assessee - HELD THAT - We find that the Ld. CIT(A) has deleted the disallowance relying on the decision of the Hon ble Delhi High Court in the case of Cheminvest Ltd 2015 (9) TMI 238 - DELHI HIGH COURT . We do not find any error or illegality in the finding of the ld. CIT(A). Accordingly, the grounds No. 2 3 of the appeal of the Revenue are dismissed. Disallowance of interest expenditure related to interest free advances u/s 36(1)(iii) - AO observed that building was put to use in the year under consideration and interest on money borrowed corresponding to the period for which the building was not put to use was computed - HELD THAT - As assessee has already transferred the interest to preoperative expenses which has been allocated to fixed assets. The facts in the year under consideration are identical to assessment year 2010-11 2019 (1) TMI 1062 - ITAT DELHI thus, respectfully following the finding of the Tribunal (supra), we uphold the deletion of the addition by the Ld. CIT(A). The ground No. 4 to 6 of the appeal are accordingly dismissed.

Summary

Issues Involved:

1. Disallowance under Section 37(1) of the Income Tax Act.
2. Disallowance under Section 14A of the Income Tax Act.
3. Disallowance of interest expenditure under Section 36(1)(iii) of the Income Tax Act.
4. Application of the principle of res judicata in income tax proceedings.

Issue-wise Detailed Analysis:

1. Disallowance under Section 37(1) of the Income Tax Act:

The Revenue challenged the deletion of a disallowance amounting to ?3,77,74,156/- under Section 37(1) of the Act by the CIT(A). The Assessing Officer (AO) had disallowed 10% of expenses on an ad-hoc basis, citing the absence of proper maintenance of records for telephone, travel, and staff welfare expenses. The CIT(A) deleted this disallowance, relying on a similar decision from the previous assessment year (2010-11), which was upheld by the Tribunal. The Tribunal found no specific error pointed out by the AO and upheld the CIT(A)'s deletion of the disallowance.

2. Disallowance under Section 14A of the Income Tax Act:

The AO made a disallowance of ?32,78,941/- under Section 14A, related to investments in a subsidiary, despite no exempt income being earned by the assessee. The CIT(A) deleted this disallowance, referencing the decision of the Delhi High Court in Cheminvest Ltd. v. CIT, which held that Section 14A does not apply if no exempt income is received or receivable during the relevant year. The Tribunal found no error in CIT(A)'s reliance on this judgment and upheld the deletion.

3. Disallowance of interest expenditure under Section 36(1)(iii) of the Income Tax Act:

The AO disallowed ?54,339/- of interest expenditure, arguing it should have been capitalized as the building was not put to use for the entire period. The CIT(A) deleted this disallowance, noting that the assessee had already capitalized a significant portion of the interest and allocated it to fixed assets. This decision was consistent with the previous assessment year (2010-11), where a similar disallowance was deleted and upheld by the Tribunal. The Tribunal found the facts identical and upheld the CIT(A)'s deletion of the addition.

4. Application of the principle of res judicata in income tax proceedings:

The Revenue contended that the CIT(A) erred in allowing relief based on earlier orders, arguing that the principle of res judicata does not apply to income tax proceedings. However, the Tribunal upheld the CIT(A)'s decisions, noting that the findings were consistent with previous years and no new contrary material was presented by the Revenue.

General Grounds:

The Tribunal dismissed the general ground raised by the Revenue as infructuous.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s deletions of disallowances under Sections 37(1), 14A, and 36(1)(iii) of the Income Tax Act, and confirmed that the principle of res judicata was not applicable but consistency in decisions was maintained. The order was pronounced in the open court on 25th August 2021.