ITAT directs AO to recompute disallowance under Section 14A, exempts guarantee commission, expenses, prior period expenditure

The ITAT allowed the appeal, directing the AO to re-compute the disallowance under Section 14A and consider the exempt income claim. Disallowances for guarantee commission, travelling expenses, and prior period expenditure were deleted based on consistency and judicial precedents.

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Issues Involved:

1. Disallowance of Guarantee Commission under Section 37(1)
2. Adhoc Disallowance of Travelling Expenditure under Section 37(1)
3. Disallowance of Prior Period Expenditure
4. Disallowance under Section 14A
5. Exempt Income not considered

Detailed Analysis:

1. Disallowance of Guarantee Commission under Section 37(1):

The assessee-company paid a guarantee commission to two Directors for extending personal guarantees to the Bank of India for obtaining a loan/credit facility. The Assessing Officer (AO) disallowed this commission, arguing that the directors performed no extraordinary work and that the guarantee was a routine business necessity. The CIT(A) upheld this disallowance, disregarding a previous ITAT order for AY 2010-11 that allowed a similar commission. The ITAT noted that the personal guarantee was a pre-condition by the lender and that the directors were not paid any remuneration. The ITAT found the disallowance unjustified, especially since a similar disallowance was deleted in the previous year. Therefore, following the principle of consistency, the ITAT allowed the commission as a business expense.

2. Adhoc Disallowance of Travelling Expenditure under Section 37(1):

The AO disallowed 50% of the travelling expenses on an adhoc basis due to a lack of evidence. The CIT(A) upheld this disallowance, citing that the guest house rates were not less than five-star hotels. The ITAT found that the directors' visits were for business purposes and that the expenses were justified. The ITAT referred to the Gujarat High Court's decision in Sayaji Iron & Engineering Co. v CIT, which held that personal use by directors in a limited company does not warrant disallowance. Thus, the ITAT found the adhoc disallowance unjustified and allowed the travelling expenses.

3. Disallowance of Prior Period Expenditure:

The assessee claimed an expenditure for bonus declared at a higher rate than the statutory requirement, which was crystallized in the current year. The AO disallowed this, arguing that the assessee followed the mercantile system of accounting. The CIT(A) upheld this disallowance. The ITAT noted that the liability for the bonus was crystallized in the current year and referred to the Delhi High Court's decision in CIT Vs. Exxon Mobile Lubricants (P) Ltd. and the Supreme Court's decision in Nonsuch Tea State Ltd. Vs. CIT, which supported the assessee's claim. Therefore, the ITAT allowed the prior period expenditure.

4. Disallowance under Section 14A:

The AO disallowed Rs. 2,33,533/- under Section 14A read with Rule 8D, arguing that the assessee did not consider the investment in SBI Mutual Funds. The assessee claimed that the investments were made from surplus funds and not borrowed funds. The CIT(A) did not address the issue of exempt income. The ITAT noted that the AO did not consider the assessee's claim regarding the dividend income from SBI Mutual Funds and directed the AO to re-compute the disallowance under Section 14A, considering the jurisdictional High Court's decision in CIT Vs. HDFC Bank.

5. Exempt Income not considered:

The assessee claimed that the dividend income from SBI Mutual Funds was not considered as exempt income by the AO. The CIT(A) failed to decide on this issue. The ITAT directed the AO to consider the claim of exempt income and re-compute the disallowance under Section 14A accordingly.

Conclusion:

The ITAT allowed the appeal filed by the assessee, directing the AO to re-compute the disallowance under Section 14A and consider the exempt income claim. The disallowances for guarantee commission, travelling expenses, and prior period expenditure were deleted, following the principle of consistency and relevant judicial precedents.

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