2023 (12) TMI 27 - AT - Income Tax

Disallowance of 1/5th of vehicle expenses - expenditure attributable to the car registered in the name of director - AO and CIT(A) held that the possibility of the personal use of the car by the director cannot be ruled out - HELD THAT - We find that the facts of the present case are identical to the facts in the case of Sayaji Iron Engg. Co. 2001 (7) TMI 70 - GUJARAT HIGH COURT the expenditure incurred by the assessee-company on maintenance of vehicles which were available to the directors for their personal use would fall within the meaning of 'remuneration' as defined in the Explanation to section 198 of the Companies Act and once such remuneration was fixed as provided in section 309 of the Companies Act it was not possible to state that the assessee-company incurred an expenditure for personal use of the directors. The same was as per the terms and conditions of service and insofar as the assessee-company was concerned, it was a business expenditure and not disallowable as such. The assessee, which was a private limited company, was a distinct assessable entity as per the definition of 'person' under section 2(31) of the Act. Therefore, it could not be stated that when the vehicles were used by the directors 'even if they were personally used by the directors', the vehicles were personally used by the company, because a limited company by its very nature cannot have any 'personal use'. The limited company is an inanimate person and there cannot be anything personal about such an entity. The view was supported by the provision of section 40(c) and section 40A(5) of the Act. Once the expenditure in question was in terms as provided in sections 309 and 198 of the Companies Act, there could not be any 'non-business' purpose insofar as the assessee-company was concerned. Thus we find that the case of the present assessee company is squarely covered by the judgment of the Hon ble Jurisdictional High court in the above-mentioned case. Appeal of the assessee is hereby allowed. Disallowance u/s 14A r.w.r.8D - disallowance of the interest expense - sufficiency of own funds - HELD THAT - It is the settled position of law by virtue of the findings of several competent courts that if there are mixed funds, then the power of presumption would be that the investment has been made from interest free funds. In holding so, we draw support and guidance from the judgment of Torrent Power Ltd 2014 (6) TMI 185 - GUJARAT HIGH COURT wherein it was held as under It was noted from records that the assessee was having share holding funds to the extent of 2607.18 crores and the investment made by it was to the extent of Rs. 195.10 crores. Assessee had sufficient funds for making the investments and it had not used the borrowed funds for such purpose. This aspect of huge surplus funds is not disputed by the revenue which earned it the interest on bonds and dividend income. In the case on hand, the present assessee before the learned CIT(A) has contended that that it was having own fund being share capital and reserve surplus of Rs. 54,15,95,087/- against the average investment of Rs. 20,27,82,965/- only, which is more than the amount of investment. Thus, in the light of the above discussion, it should be presumed that the investment yielding exempted income was made from interest free own fund of the assessee only. Hence, in our considered view, no amount of interest expenditure u/s 14A r.w. rule 8D of Income Tax Rule can be disallowed in the given facts of the case. Disallowance of administrative expenses - contention of the assessee cannot be accepted that no expenditure in relation to the investment was incurred. Therefore, the disallowance of administrative expenses as per rule 8D of the Income Tax Rule needs to be made but such disallowance cannot exceed the amount of exempted income. In other words, the amount required to be disallowed must be lower than the amount calculated in accordance with rule 8D of income tax rule or the amount of exempted income. In the case of the present assessee, the amount of exempted income is Rs. 10,85,354/- whereas the amount of disallowable administrative expenses worked out under rule 8D of income tax rule is of Rs. 10,13,915/- only. Therefore, we direct the AO to restrict the disallowance of administrative expenses as per rule 8D of income Tax Rules to the extent of Rs. 10,13,915/- only. Hence, the ground appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. Disallowance of 1/5th of vehicle expenses.
2. Disallowance made under section 14A of the Act.

1. Disallowance of 1/5th of Vehicle Expenses:
The appeal was filed against the order of the Commissioner of Income Tax, CIT(A)-2, Ahmedabad, regarding the disallowance of 1/5th of vehicle expenses amounting to Rs. 5,68,888. The Assessing Officer (AO) disallowed this amount on an ad-hoc basis as one vehicle, a Porsche Car, was registered in the name of the director, leading to doubts about its business use. The learned CIT(A) confirmed this disallowance stating that the personal use of the car by the director could not be ruled out. However, the Appellate Tribunal noted that the case was similar to a precedent where the High Court held that a limited company cannot have personal use, and the expenses were business-related. Therefore, the Tribunal set aside the CIT(A)'s finding and directed the AO to delete the addition made.

2. Disallowance Made Under Section 14A of the Act:
The assessee had investments in a partnership firm, M/s Iris Infrastructure, generating income of Rs. 10,85,354 claimed as exempted income under section 10(2A) of the Act. The AO disallowed Rs. 4,71,458 for interest expenses and Rs. 10,13,915 for administrative expenses under section 14A(2) r.w.r. 8D of Income Tax Rule. The CIT(A) restricted the disallowance to the extent of the exempted income of Rs. 10,85,354. The Tribunal considered the own funds of the assessee against the investments and held that no interest expenditure could be disallowed. However, it found that administrative expenses needed to be disallowed but not exceeding the exempted income. Therefore, the disallowance of administrative expenses was limited to Rs. 10,13,915. The appeal was partly allowed based on these findings.