Tribunal Rules for Assessee: Disallows Rs. 2,13,382 u/s 14A; Limits Reassessment Addition to Rs. 23,125.

The Tribunal vacated the disallowance of Rs. 2,13,382 under Section 14A, ruling in favor of the assessee due to the A.O's failure to record dissatisfaction with the claim. Regarding the reopening of assessment for alleged bogus purchases, the Tribunal restricted the addition to Rs. 23,125, representing the profit element, thus partly allowing the appeal.

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Issues Involved:
1. Disallowance under Section 14A read with Rule 8D.
2. Reopening of assessment and disallowance of alleged bogus purchases.

Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:

Issue:
The first issue concerns the disallowance of Rs. 2,13,382/- under Section 14A read with Rule 8D(2)(iii), being 0.5% of the value of average investments earning exempt income. The assessee contended that no expenditure was incurred for earning the exempt dividend income, and the Assessing Officer (A.O) did not record his satisfaction regarding the correctness of the assessee's claim before making the disallowance.

Judgment:
The Tribunal observed that the A.O must record a finding of dissatisfaction with the assessee's claim before determining the amount of expenditure incurred in relation to exempt income. This requirement is mandated by law and supported by the Supreme Court's judgment in Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT & Anr. The Tribunal found that the A.O failed to satisfy this fundamental requirement and thus vacated the disallowance of Rs. 2,13,382/-. The appeal was allowed in favor of the assessee.

2. Reopening of Assessment and Disallowance of Alleged Bogus Purchases:

Issue:
The second issue pertains to the reopening of the assessment based on information that the assessee had made bogus purchases from two parties. The A.O disallowed Rs. 1,85,321/- claimed as an expense during the year, as the parties were not traceable and the purchases were deemed non-genuine.

Judgment:
The Tribunal noted that the assessee failed to substantiate the genuineness of the purchases and the parties were non-existent at the given addresses. However, the Tribunal also considered that the material purchased was used for setting up sets for the promotion of a movie. Given the consumption of the material was proved, the Tribunal concluded that the purchases were made from unidentified suppliers in the open/grey market. The Tribunal estimated the profit element involved in these purchases at 12.5% of Rs. 1,85,321/-, amounting to Rs. 23,125/-, based on the judgment of the Gujarat High Court in CIT Vs. Simit P. Sheth. Thus, the addition was restricted to Rs. 23,125/-. The appeal was partly allowed.

Conclusion:
The Tribunal allowed the appeal concerning the disallowance under Section 14A and partly allowed the appeal related to the reopening of assessment and disallowance of bogus purchases, restricting the addition to the profit element involved. The orders were pronounced in the open court on 28.02.2019.

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