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TMI Blog2020 (10) TMI 401X X X X Extracts X X X X X X X X Extracts X X X X ..... usively incurred for the purpose of business of the assessee-company and he same, in our view, was rightly disallowed by the authorities below. - Decided against assessee. Disallowance of 20% of sales promotion expenses - assessee contended by relying on the provision of sub section (2) of section 142 that the Assessing Officer was required to carry out the necessary enquiry to establish that part of the expenses claimed by the assessee on sales promotion were not for the purpose of its business - HELD THAT:- Assessee-company failed to discharge the said onus successfully and satisfactorily inasmuh as the details and supporting bills and vouchers verified by the AO revealed that unverifiable and personal element was involved in the said expenditure. As rightly contended by the Id. DR, such personal and unverifiable event involved in the said expenses warranted a disallowance out of such expenses to some extent and since the disallowance so made by the AO and confirmed by the Id. CIT (A) at 20% of the sales promotion expenses is air and reasonable, we do not find any justifiable reason to interfere with the same. - There is merit in the alternative contention of assessee that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) erred in upholding the disallowance of expenditure u/s. 37 of the Act of ₹ 1,80,000/- incurred on supply of Alcohol to Ireland Embassy where the Director of the company was Honorary Member and payment of ₹ 1,42,640/- made to Taj Bengal, both dedicted under the head 'Sales Promotion Expenses', aggregating to ₹ 3,22,630/-, simply concurring with the A.O. about the appellant's alleged failure to establish the nexus with the business need and without giving any appropriate credence to the details of the expenditure with bills/vouchers and explanation of the appellant with supporting case laws. 2. That, the Ld. C.I. T.(A) further erred in upholding the overall adhoc disallowance of ₹ 1,68,773/ being 20% of total Sale Promotion Expenses of ₹ 8,43,863/-, which merely amounted to double addition on same account, without any proper reasoning for such disallowance and thus pivoted on surmise and conjecture . 3. The assessee in the present case is a Company which is engaged in the business of trading in goods and merchandise as well as dealing in shares and securities and real estates. The return of income for the year under consideration was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion under section 37 (1) of the Income Tax Act, 1961. In support of this contention, he relied on the decision of his Tribunal in the case of M/S MKJ Tradex Ltd. rendered vide its order dated 14.02.2018 passed in ITA No. 1044/KOL/2016 and submitted that the expenses of similar nature were allowed by the Tribunal as business expenditure. 5 . As regards the disallowance of 20% made by the Assessing officer and confirmed by Id. CIT (Appeals) out of sales promotion expenses of ₹ 8,23,863/- the Id Counsel for the assesese contended by relying on the provision of sub section (2) of section 142 that the Assessing Officer was required to carry out the necessary enquiry to establish that part of the expenses claimed by the assessee on sales promotion were not for the purpose of its business. He contended that the adhoc disallowance made by the Assessing Officer out of the sales promotion expenses without making any such enquiry and purely in arbitrary manner was not sustainable and the Id. CIT (Appeals) was not justified in confirming the adhoc disallowance made by the Assessing Officer on this issue. Alternatively he also contended that since the expenditure of ₹ 3,22,630/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capacity. Although he Id. AR has contended that the guests related to the business of the assessee-company were invited to participate in the said event, there is no evidence adduced by him to support and substantiate this contention. He has also not been able to establish on evidence that the said event in any way helped in the advancement of the business of the assessee-company. Even the decision of this Tribunal in the case of M/S MKJ Tradex Ltd (supra) cited by the Id. Counsel for the assessee in support of the assessee's case on this issue is distinguishable on facts inasmuch as an award was conferred in that case by the President of France to Shri Mahendra Kumar Jalan for promoting the trade and culture between France and India and expenditure incurred on the news of the said award as published in the local newspaper was held to be in the nature of an advertisement expenditure by the Tribunal which was connected to the business of the assessee-company, It was specifically observed by the Tribunal in this regard that the award conferred to the Managing Director was going to increase the image of the assessee company at national and international level in the area of the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nses of ₹ 3,22,630/- incurred on organizing an event to celebrate Ireland National Day in India which was included in sales promotion having been entirely disallowed by the authorities below and the said disallowance having been confirmed y us, the disallowance of 20% should be restricted out of the balance amount of sales promotion expenses of ₹ 5,21,233/- (₹ 8,43,863/- minus ₹ 3,22,630/-). Ground no, 1 of the assessee s appeal is accordingly dismissed while ground no. 2 is partly allowed, 9. The issue raised by the assessee in Ground No. 3 of this appeal relates to the disallowance of ₹ 4,28,328/- made by the Assessing Officer and confirmed by the Id. CIT (Appeals) out of miscellaneous expenses. 10. During the course of assessment proceedings, the claim of the assessee for miscellaneous expenses of ₹ 44,65,150/- was examined by the Assessing Officer. On such examination, he found that general expenses and office expenses amounting to ₹ 11,28,453/- and ₹ 10,13,186/- were claimed by the assessee under the head of miscellaneous expenses. On verification of the ledger account as well as the supporting bills and vouchers, the Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is observed that the expenses claimed by the assessee under the head general expenses and office expenses were mostly paid in cash as found by the Assessing Officer and the same were no fully verifiable in the absence of proper and sufficient supporting evidence in the form of relevant bills/ vouchers. As further noted by the Assessing Officer in the assessment order, the assessee had also failed to establish fully the business expediency of the said expenses. At the time of hearing before the Tribunal, the Id. DR has invited our attention to the details of the general expenses and office expenses claimed by at page no. 28 and 29 of the assessee's paper book which clearly show that the said details given by the assessee were very vague and general in nature and it was difficult for the Assessing Officer to verify the business expediency of the same in the absence of sufficient details and supporting documentary evidence. Keeping in view of all these facts of the case, we agree with the view taken by the authorities below that the expenses claimed by the assessee under the head general expenses and office expenses were not fully verifiable and the same being not fully esta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant of ₹ 45,11,497/- would meet the purpose. (e) That, the Ld. C.I.T. (A) further erred in not considering that as per Balance Sheet of the relevant year, addition to investment of ₹ 9,09,11,895/- was out of own funds of ₹ 17,58,04,760 and hence no part of interest paid on loan funds can be directly or indirectly attributed to the exempt income earning investment an hence the disallowance/ addition u s.14A r. w. r. 8D of the Rules over and above offered by the appellant of ₹ 45,11,497/- is liable to be deleted. (f) That, without any prejudice to the above, the impugned disallowance upheld by the Ld. C.IT(A) is against the decision of Hon'ble I. T.A.T. Kolkata in the case of REI Agro Ltd. vs. DCIT (144 ITD 141) duly confirmed by the Hon'ble Calcutta High Court holding that disallowance u/s. 14A r. w. r. 8D of the Rules is to be in relation to the exempt income out of average investment which yielded such exempt income, which was ₹ 15,02,51,798/- and not ₹ 90,19,45 950/- as taken by the A.O . 15. During the course of appellate proceedings before the Tribunal, the assessee has raised the following additional grounds on this issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 90,19,45,950 695,88,18,727 1,16,02,190 III. 0.5% of investment 45,09,730 V. Amount already disallowed by the assessee 45,11,497 VI. Amount to be 1, disallowed now 1,16,90,694 17. The disallowance made by the Assessing Officer under section 14A read with Rule 8D was challenged by the assess e in the appeal filed before the Id. CIT (Appeals) and since the Id. CIT (Appeals) did not find merit in the submissions made by the assessee in support of its case on this issue, he confirmed the said disallowance made by the Assessing Officer for the following reasons given in his impugned order:- I have considered the grounds of appeal, statement of facts and submission of the authorized representative of the appellate company as well as the assessment order framed in the light of the materials available on reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d reported under [2018] 91 taxmann.com 154 (SC) has held that The expenditure which is in relation to earning dividends call be disallowed under section 4A and rule 8D. The object of section 14A of the Act is to disallow the direct and indirect expenditure incurred in relation to income which does not form part of the total income. The expenditure (including interest paid on funds borrowed) in respect of investment in shares of operating companies for acquiring and retaining a controlling interest therein is hit by section 14A of the Income tax Act, 1961 in as much as the dividend received on such shares does not form part of the totaI income. In the first instance, it needs to be recognised that as per section 14A(1), deduction of that expenditure is not to be allowed which has been incurred by the assessee in relation to income which does not form part of the total income under this Act. Axiomatically, it is that expenditure alone which has been incurred in relation to the income which is includible in total income that has to be disallowed. The mere fact that those shares were old ones and not acquire recently is immaterial. It is for the assessee to show the source of acquis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be restricted to ₹ 8,88,566/-. 19. As regards the issue raised in other additional ground 4(h), he contended that the same is related to the alternative claim of the assessee that the disallowance under section 14A readith Rule 8 D has to be worked out by taking into consideration only the investment on which the exempt income was earned by the assessee during the year under consideration as heId by the Hon ble Calcutta High Court in the case of DCIT -vs.- REI Agro Limited [G.A. No. 3581 of 2013]. He contended that the disallowance so worked out by taking into consideration only the investment which fetched the exempt income to the assessee during the year under consideration as against the total investment considered by the Assessing Officer as well as by the Id. CIT (Appeals) works out to ₹ 26,84,024/- by applying Rule 8D(2) and the disallowance of ₹ 1,62,02,191/- made by the Assessing Officer and confirmed by the Id. CIT (Appeals) should be restricted alternatively to ₹ 26,84,024/-. 20. The Id. D. R. , on the other hand, submitted that the Hon ble Supreme Court in the case of Caraf Builders Constructions (P) Limited (supra) relied upon by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision of the Hon ble Delhi High Court in the case of Caraf Builders Constructions (P) Limited, which is affirmed by the Hon ble Supreme Court by dismissing the SLP filed by the Revenue. 22. We have considered the rival submissions and also perused the relevant material available on record. In ground no.4(a) to 4(f) as originally raised, the assessee has challenged the addition of ₹ 1,16,90,694/- made by the Assessing Officer a d confirmed by the Id. CIT (A) on account of disallowance u/ s 14A of the Income Tax Act, 1961 read with Rule 8 D of the Income Tax Rules, 1962. To further support and substantiate its case on the said issue, the assessee has raised two additional grounds i.e. ground no.4(g) and 4(h) w ich have been already extracted in the foregoing portion of this order. Since the issues raised by the assessee in the said additional grounds are legal in nature and the adjudication of the same does not require investigation into new facts, the said additional grounds raised by the assessee are admitted by us by relying on the decision of the Hon'ble Supreme Court in the case of National Thermal Power Co. Limited (supra). On merit, the issue raised by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be said that there as any admission on the part of the assessee-company that the expenditure of ₹ 45,11,497/was actually incurred by it in relation to the earning of exempt income. As already noted by us, Hon'ble Delhi High Court in the case of Joint Investment Private Limited (supra) and Caraf Builders Constructions (P) Limited (supra) has clearly held that a disallowance u/ s 14A as may be worked out by applying the formula given in ule 8D cannot exceed the exempt income actually earned by the assessee during the relevant year which in the present case is ₹ 8,88,566/- and simply because disallowance u/ s 14A r. w. Rule 8 D was offered by the assessee wrongly at ₹ 45,11,497/-, the assessee, in our opinion, cannot be prevented from contending that the disallowance u/ s 14A r.w. Rule 8D should be restricted to lower figure than that offered by the assessee wrongly. 24. It is observed that a similar issue had c me for consideration before the Co-ordinate Bench of this Tribunal in t e case of ACIT vs. Sharmila Kumar (ITA No.678/Kol/2016) cited by heId. Counsel for the assessee wherein this aspect was considered by the Tribunal in the light of the rele ..... 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