2022 (5) TMI 849 - AT - Income Tax

Disallowance of Development/improvement expenses - expenditure was on account of contractual payment to four related parties - As contended payment of the labour expenses to the contractors were held up for three years of sale of land and payment was made in the calendar year 2015 only after the A.O. sought proof of payment - CIT- A deleted the addition taking view that the assessing officer made addition on presumption basis and the addition is not based on evidence - HELD THAT - AO has not disputed the nature of work on which expenses on account of improvement was incurred. Though, the DCIT, Sabarkantha in his report submitted that some development work on the non-agricultural land was carried out 3-4 years back from the date of his visit, however, the items of works claimed by assessee and reported by DCIT is different. Therefore, instead of restoring the matter to the file of Assessing Officer, we deem it appropriate to disallow the part of cost of improvement expenses to avoid the possibility of revenue leakage. Considering the fact that neither the assessee could substantiate with documentary evidence about the genuineness of expenses nor the Assessing Officer brought comparable instances for similar improvement expenses on record, therefore, the order of ld. CIT(A) is modified and A.O. is directed to disallow 50% of improvement expenses out of total improvement expenses. Ground No. 1 .1 to 1.4 of the appeal is partly allowed. Disallowance under section 14A r.w.r.8D - CIT-A deleted the addition - HELD THAT - Assessee in reply to the show cause notice provided working of disallowance under Section 14A. The assessing office neither recorded the working of assessee nor disregarded it before making disallowance under section 14A. Before ld CIT(A) the assessee explained that the assessee has earned dividend income of Rs. 77,620/- from Gujarat Ambuja Cement Co-operative bank, which is taxable. We find that the other dividend of Rs. 14,522/-,which has been included by assessee in his total income for the year. We find that the ld CIT(A) after considering the submissions of the assessee held that as the assesse had offered the income for taxation therefore, the provisions of section 14A will be applicable. We find that when no exempt income is claimed by the assessee in its computation of income no disallowance under section 14A is warranted. Thus, we affirms the order of ld CIT(A) on this ground. In the result, ground No. 2 of appeal raised by the revenue is dismissed.

Summary

Issues Involved:
1. Disallowance of Development Expenses
2. Disallowance under Section 14A of the Income Tax Act

Issue-Wise Detailed Analysis:

1. Disallowance of Development Expenses:
The Revenue appealed against the deletion of the disallowance of development expenses amounting to Rs. 1,79,19,550/- by the Commissioner of Income Tax (Appeals) [CIT(A)]. The Assessing Officer (AO) initially disallowed these expenses, noting several discrepancies, including the non-payment of any amount to contractors during the assessment year and the immediate withdrawal of funds by contractors upon payment. The AO suspected the expenses were fabricated to suppress Long Term Capital Gains (LTCG).

The CIT(A) deleted the disallowance, reasoning that the AO's decision was based on assumptions and that the payments, though delayed, were made through cheques and were genuine. The CIT(A) also considered a report from the DCIT, Sabarkantha, which corroborated the development work. However, the Tribunal found that the AO had brought sufficient material to prove the expenses were not genuine, including the inordinate delay in payments and the immediate withdrawal of funds. The Tribunal modified the CIT(A)'s order, directing the AO to disallow 50% of the improvement expenses to avoid revenue leakage.

2. Disallowance under Section 14A of the Income Tax Act:
The AO disallowed Rs. 6,78,749/- under Section 14A, which pertains to expenses incurred for earning exempt income. The assessee argued that the dividend income of Rs. 77,620/- was included in the taxable income, and the exempt income was only Rs. 14,522/-. The CIT(A) deleted the disallowance, noting that the assessee had offered the income for taxation, thus Section 14A was not applicable.

The Tribunal upheld the CIT(A)'s decision, affirming that no disallowance under Section 14A is warranted when no exempt income is claimed by the assessee in its computation of income.

Conclusion:
The Tribunal partially allowed the Revenue's appeal, directing a 50% disallowance of the development expenses while upholding the CIT(A)'s deletion of the disallowance under Section 14A.