2022 (8) TMI 354 - AT - Income Tax

Disallowance u/s. 14A - Addition on account of interest and on account of administrative expenses as per the provisions of Rule 8D - Mandation of recording satisfaction - HELD THAT - As before making disallowance u/s. 14A of the Act the Assessing Officer has to state as to how he is not satisfied with the submissions of assessee that no expenditure has been incurred keeping in view the books of accounts of the assessee which means he has to point out from the books of accounts as to which expenditure is relatable to earning of such income. No such findings has made by Assessing Officer in this case. Disallowance out of salary and wages - Addition made on adhoc basis due to insufficiency of vouchers or due to self made cash vouchers - HELD THAT - As we find that the Assessing Officer had made disallowance equivalent to 5% of such expenses which the ld. CIT(A) has restricted to 50% of such disallowance which is quite reasonable, keeping in view the fact that the Hon'ble Allahabad High Court in the case of Rimjhim Ispat Ltd. 2016 (1) TMI 374 - ALLAHABAD HIGH COURT has held that where the expenses was not supported bills/vouchers the disallowance equivalent to 5% of such expenditure was justified. - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Addition/Disallowance under Section 14A read with Rule 8D(2)(iii).
2. Disallowance out of Salary and Wages.

Issue-wise Detailed Analysis:

1. Addition/Disallowance under Section 14A read with Rule 8D(2)(iii):
The assessee contested the disallowance of Rs. 95,000/- under Section 14A read with Rule 8D(2)(iii), arguing that no fresh investments were made during the year and no expenditure was incurred towards the administration of equities. The Assessing Officer (AO) had disallowed Rs. 4,21,463/- initially, but the CIT(A) reduced this to Rs. 95,000/- after finding surplus funds available with the assessee. The Tribunal noted that the AO did not record an objective satisfaction regarding the disallowance, which is a prerequisite as per Section 14A(2). The Tribunal emphasized that the AO must provide reasons for not accepting the assessee's claim, which was missing in this case. Citing various judicial precedents, including the case of U.P. Electronics Corporation Ltd. vs. DCIT, the Tribunal concluded that the AO's disallowance was not sustainable due to the lack of objective satisfaction. Consequently, the Tribunal deleted the disallowance of Rs. 95,000/- sustained by the CIT(A).

2. Disallowance out of Salary and Wages:
The AO made an ad-hoc disallowance of 5% of the total salary and wages expenses, amounting to Rs. 30,05,333/-, due to insufficient vouchers and self-made cash vouchers. The CIT(A) reduced this disallowance to 50% of the amount disallowed by the AO. The assessee argued that the expenses were incurred for business purposes and were supported by complete books of accounts and vouchers. However, the Tribunal found the CIT(A)'s restriction of the disallowance to 50% reasonable, especially considering the precedent set by the Hon'ble Allahabad High Court in the case of 'PCIT vs. Rimjhim Ispat Ltd.', which justified a 5% disallowance where expenses were not supported by bills/vouchers. Therefore, the Tribunal upheld the CIT(A)'s decision on this issue and dismissed the assessee's ground.

Conclusion:
The appeal filed by the assessee was partly allowed. The Tribunal deleted the disallowance under Section 14A read with Rule 8D(2)(iii) due to the AO's failure to record objective satisfaction but upheld the CIT(A)'s decision on the disallowance of salary and wages expenses. The order was pronounced in the open court on 04/08/2022.