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2025 (3) TMI 1429 - AT - Income TaxDisallowance u/s 14A r.w.r. 8D - HELD THAT - In the present case admittedly assessee was having exempt income in the shape of dividend and also claimed interest on borrowed funds. It is a case where mixed funds were available for making investments and AO has failed to make out a case where interest bearing funds are directly applied in making such investments. Disallowance made u/s 14A should be restricted to the exempt income earned by the assessee. Therefore we uphold the addition. Depreciation claimed @ 100% on temporary structures - The Assessing Officer has disallowed 10% of such depreciation claimed without appreciating the fact that the scraps if any generated had also used in the other work sites. Therefore no such ad hoc disallowance could be made. It is further seen that depreciation is a statutory allowance and it is not a case where AO alleged that the assets created were not used or there were no temporary structures created by the assessee. CIT DR has failed to controvert the finding of the Ld. CIT(A) in this regard. Thus we find no occasion to interfere in the order of the Ld. CIT(A) on this score. Accordingly this ground of appeal of the Revenue is dismissed. Disallowance of the remuneration paid to one of the Director Smt. Vinita Guliani @ 10% of the total remuneration paid - While making the disallowance the Assessing Officer observed that the assessee has failed to substantiate the services rendered by her with credible documentary proof he thus invoked the provisions of section 40A(2)(b) and made disallowance of only 10% of total payment made to her. CIT(A) has followed the order of preceding assessment year while deleting the disallowance. During the course of hearing the Ld. CIT DR has not controverted the findings of the Ld. CIT(A). Thus we are not inclined to interfere in the order of CIT(A) more particularly when the AO himself has accepted the fact of services rendered though no documentary evidences were filed by the assessee. Further the fact remained that otherwise the AO has accepted the services of Smt. Vinita Guliani and therefore the disallowance made is rightly deleted by the Ld. CIT(A) which order is hereby upheld. Disallowance being 2% of total purchases of shuttering and scaffolding - HELD THAT - From the perusal of the facts and the details filed by the assessee on this issue we find that the expenditure includes purchases of some items such as wooden frames plywood sawn timber imported pine sawn timber shuttering pine wood etc. and the nature of which was such that they have to be consumed within a short period of time. It is also a matter of fact that assessee is having multiple sites where such consumables are required on regular basis. It is also seen that a total revenue generated was of 65.07 crroes on contractual work as against which the expense on consumables were claimed as 7.78 crores which is around 12% of the total revenue. We are in conformity with the order of the Ld. CIT(A) that consumable items are inevitable part for execution of the contract work and therefore we uphold the order of the Ld. CIT(A) confirming the deletion of the disallowance so made. Thus this ground of Revenue is dismissed. Addition observing that assessee has made earnest money deposited with its subsidiary and no interest is received - HELD THAT - AO applied 10% interest rate and made addition of Rs. 3 lakhs as notional interest. Ld. CIT(A) has deleted the addition by placing reliance on the decision of Tribunal in the case of assessee for AY 2003-04 2004-05 and 2005-06. CIT DR during the course of hearing placed reliance on the order of AO on this issue and failed to controvert the findings given by Ld. CIT(A). Disallowance of sub contract charges paid and job labour and other cite expenses - AO has made the disallowances u/s 69C of the Act all these expenditures as un-explained - HELD THAT - CIT(A) by observing that the AO has failed to provide an opportunity of cross-examination of such parties and further observed that when the assessee has filed all the necessary details such as bills etc. and payments were made through banking channel has deleted the disallowance. However the fact remained that the assessee has failed to controvert the observations made by AO with plausible evidences so as to prove the genuineness of the expenses claimed. Under the circumstances in our considered view these two issues need further examination on the part of the AO. Accordingly we remand these issues back to the file of the AO with the direction that assessee be provided an opportunity of cross examination of the persons whose statements are relied upon by the AO and also the assessee is directed to file all the necessary details and evidences.
1. ISSUES PRESENTED and CONSIDERED
The core legal issues considered in the appeal were:
2. ISSUE-WISE DETAILED ANALYSIS Disallowance under Section 14A: The legal framework involves Section 14A of the Income Tax Act, which disallows expenses incurred in relation to earning exempt income. The court reasoned that the disallowance should be limited to the amount of exempt income actually earned, which was Rs. 42,800/-. The Assessing Officer (AO) failed to demonstrate that interest-bearing funds were directly used for investments yielding exempt income. The court upheld the disallowance to the extent of the exempt income, allowing partial relief to the Revenue. Depreciation on Temporary Structures: The relevant legal principle is that depreciation is a statutory allowance. The court found that the temporary structures were demolished post-project completion, and any scrap was reused. The AO's disallowance was deemed arbitrary as it lacked evidence that the structures were not used. The court upheld the CIT(A)'s decision, dismissing the Revenue's appeal. Disallowance of Director's Remuneration: Section 40A(2)(b) addresses excessive or unreasonable payments to related parties. The AO disallowed 10% of the remuneration due to a lack of documentary evidence of services rendered. However, the court noted that the AO had accepted the fact of services rendered. The CIT(A)'s decision to delete the disallowance was upheld, as the AO's acceptance of services was inconsistent with the disallowance. Scrap Value Disallowance: The AO disallowed 2% of purchases as scrap value, based on observations from a previous year. The CIT(A) and Tribunal had previously dismissed similar disallowances due to low tax effect. The court agreed with the CIT(A) that consumables were essential for contract execution, dismissing the Revenue's appeal. Notional Interest on Advances: The AO added notional interest on advances to a subsidiary. The CIT(A) relied on precedent from previous years where similar additions were deleted. The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal. Subcontractor Charges and Accommodation Entries: The AO disallowed subcontractor charges to certain companies, alleging them to be fictitious based on a search on PACL Ltd. The CIT(A) deleted the disallowance, citing lack of cross-examination opportunity and payment through banking channels. However, the court found the AO had demonstrated the bogus nature of the expenses and remanded the issue for further examination, allowing the Revenue's appeal for statistical purposes. Job Charges to M/s Silicon Real Estate Pvt. Ltd.: The AO disallowed charges paid to M/s Silicon Real Estate Pvt. Ltd., alleging them to be accommodation entries. The CIT(A) deleted the disallowance, but the court found the AO had provided sufficient evidence of the bogus nature of the transactions. The issue was remanded for further examination, allowing the Revenue's appeal for statistical purposes. 3. SIGNIFICANT HOLDINGS The court established several core principles:
The final determinations were a partial allowance of the Revenue's appeal concerning Section 14A, dismissal of appeals on depreciation, director's remuneration, scrap value, and notional interest, and remand for further examination on subcontractor charges and job charges.
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