2016 (9) TMI 207 - AT - Income Tax

Tribunal rejects disallowances under Income Tax Act, stresses evidence and legal precedents.

The Tribunal allowed the Assessee's appeal, rejecting disallowances under Section 14A of the Income Tax Act and adhoc disallowance of expenses. The ... Disallowance u/s 14A - Held that:- As assessee was having own funds which were more than the investment made and therefore, no disallowance under section 14A is sustainable in the eyes of law. - Decided in favour of assessee. Adhoc disallowance made by the AO in respect of 1/6th of expenses - Held that:- CIT(A) while recording his finding has pointed out that AO had made the disallowance without pointing out any specific defects in the books of accounts. Despite that he only allowed the claim of depreciation on vehicle and rest of the disallowance affirmed, which is not sustainable in the eyes of law and against the well settled law.- Decided in favour of assessee. Issues:1. Disallowance under Section 14A of the Income Tax Act.2. Adhoc disallowance of expenses.Analysis:Issue 1: Disallowance under Section 14A of the Income Tax ActThe Assessee appealed against the order of the Ld. CIT(A) confirming the disallowance under Section 14A of the Income Tax Act. The AO calculated the disallowance under Rule 8D due to the Assessee's substantial investments in mutual funds and dividend income. The Assessee argued that no disallowance was warranted as own funds exceeded investments. Citing relevant case laws, the Assessee contended that the disallowance lacked basis. The Ld. CIT(A) partly allowed the appeal, but sustained some additions. During the Tribunal hearing, the Assessee reiterated the lack of basis for disallowance. The Ld. DR supported the disallowance, citing fund diversion and lack of evidence for business purpose. The Tribunal, after reviewing the balance sheet and legal precedents, concluded that no disallowance under Section 14A was justified due to excess own funds, thereby allowing the Assessee's appeal.Issue 2: Adhoc disallowance of expensesThe AO made an adhoc disallowance of expenses, including vehicle running, telephone, and entertainment expenses. The Assessee argued that these expenses were incurred for business purposes, citing relevant case laws. The Ld. CIT(A) upheld the disallowance without specific defects in the books of accounts. The Tribunal referenced a precedent where disallowance without basis was deemed inappropriate. Consequently, the Tribunal deleted the adhoc disallowance, as the AO failed to provide concrete evidence of unrelated or personal expenses. The Assessee's appeal on this issue was allowed.In conclusion, the Tribunal allowed the Assessee's appeal, rejecting the disallowances under Section 14A and the adhoc disallowance of expenses. The judgment highlighted the importance of concrete evidence and legal precedents in determining the validity of such disallowances.