Tribunal allows appeal, directs deletion of disallowances under Section 14A & net profit increase. Director's medical expenses upheld.

The Tribunal partly allowed the appeal, directing the deletion of several disallowances including disallowance under Section 14A and disallowance on account of an increase in net profit. The disallowance of director's medical expenses was upheld. The Tribunal found in favor of the assessee on issues related to business promotion and advertisement expenditure, depreciation on Apple LED Cinema, rent paid to related parties, and disallowance of 10% of various business expenses. The order was pronounced on 27/07/2021.

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Issues Involved:

1. Disallowance under Section 14A of the Income Tax Act.
2. Disallowance on account of increase in net profit being 1% of turnover.
3. Disallowance of business promotion and advertisement expenditure.
4. Depreciation on Apple LED Cinema.
5. Disallowance of rent paid to related parties under Section 40A(2)(b).
6. Disallowance of director's medical expenses.
7. Disallowance of 10% of various business expenses.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A:
The first issue pertains to the confirmation of disallowance of Rs. 50,000/- under Section 14A of the Income Tax Act, being 0.5% on the average value of investments. The assessee argued that no exempt income was earned during the year. The Tribunal found that the issue is covered in favor of the assessee by the decision of the Hon'ble Delhi High Court in the case of Cheminvest Limited Vs. CIT, where it was held that in the absence of exempt income, no disallowance under Section 14A can be made. Thus, this ground was allowed.

2. Disallowance on Account of Increase in Net Profit:
The second issue involves the disallowance made by the Assessing Officer (AO) by increasing the net profit by 1% of the turnover, which was scaled down by the CIT (Appeals). The AO noted that the assessee made 100% purchases from a related party and questioned the arm's-length nature of these transactions. The CIT (Appeals) applied Section 92BA and reduced the disallowance to Rs. 17,66,377/-. The Tribunal found that the AO and CIT (Appeals) did not properly apply Section 92BA, and the adjustment was actually in line with Section 40A(2). The Tribunal held that the AO did not prove that the purchase prices were unreasonable or excessive and thus allowed this ground.

3. Disallowance of Business Promotion and Advertisement Expenditure:
The third issue concerns the disallowance of Rs. 36,070/- being 30% of business promotion and advertisement expenditure, which was restricted to 10% by the CIT (Appeals). The AO disallowed the expenses on the grounds that they were incurred through the directors' credit cards and could be personal. The Tribunal noted that the expenses were for business purposes and should not be disallowed merely because they were incurred through directors' credit cards. Thus, this ground was allowed.

4. Depreciation on Apple LED Cinema:
The fourth issue relates to the depreciation on an Apple LED Cinema, which the assessee claimed at 60%, treating it as a computer. The AO and CIT (Appeals) allowed it at 15%, considering it general plant and machinery. The Tribunal held that the Apple LED Cinema is a computer monitor and thus is entitled to 60% depreciation. This ground was allowed.

5. Disallowance of Rent Paid to Related Parties:
The fifth issue is the disallowance of Rs. 2,97,000/- paid as rent to related parties under Section 40A(2)(b). The AO found that the rent paid was excessive compared to the perquisite value disclosed by the directors. The Tribunal noted that the rent had been consistently paid and allowed in previous years, and the Revenue did not prove that the rent was excessive or unreasonable. Thus, this ground was allowed.

6. Disallowance of Director's Medical Expenses:
The sixth issue involves the disallowance of Rs. 29,506/- as director's medical expenses. The AO disallowed the expenses due to a lack of appointment letters or resolutions. The Tribunal upheld the disallowance as the assessee did not provide evidence that the directors were entitled to medical reimbursement as per their terms of appointment. This ground was dismissed.

7. Disallowance of 10% of Various Business Expenses:
The seventh issue concerns the disallowance of 10% of various business expenses, amounting to Rs. 1,94,350/-. The AO disallowed the expenses to check leakage of profit under personal expenses. The Tribunal noted that the assessee is a private limited company, and personal expenses cannot be attributed to it. The disallowance was made on an ad-hoc basis without proving that the expenses were not incurred for business purposes. Thus, this ground was allowed.

Conclusion:
The appeal of the assessee was partly allowed, with the Tribunal directing the deletion of several disallowances while upholding the disallowance of director's medical expenses. The order was pronounced in the open court on 27/07/2021.

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