2017 (3) TMI 959 - AT - Income Tax

Income Tax Tribunal partially allows appeal, remands labour charges issue for fresh determination, overturns interest expenditure disallowance.

The Income Tax Appellate Tribunal partially allowed the appeal filed by the assessee. The issue of the Rs. 2,28,424 discrepancy in labour charges was ... Difference in the income as reflected in AIR information data base vide 26AS and income as reflected in books of accounts - Held that:- Until the assessee comes out with satisfactory and plausible explanation, this onus will not stood discharged. The assessee in the instant case has stated that there are large number of transactions exceeding 900 and hence it is not possible to reconcile the difference of ₹ 2,28,424/- is not a satisfactory explanation to discharge onus cast on the assessee. In our considered view keeping in view facts and circumstances of the case as well magnitude of transactions , we are of the considered view that one more opportunity need to be granted to the assessee to reconcile the difference in the income as reflected in AIR information data base vide 26AS and income as reflected in books of accounts wherein the assessee can also resort to calling account statements from the said parties wherein the amounts were not reconciled , to reconcile the difference wherever the said difference exceeded ₹ 10,000/-. We are inclined to accept difference of ₹ 10,000/- and less between the income as reported in books of accounts and income as reported in form no 26AS keeping in view smallness of difference and difficulties faced in reconciling the same. Disallowance of expenditure towards interest incurred in relation to earning of exempt income u/s 14A - Held that:- The figure of investments in shares which are capable of yielding exempt income was undisputedly adopted by the AO as ₹ 3,35,337 as at beginning of year and ₹ 3,53,838/- as at year end while computing disallowance u/r 8D(2)(ii) of 1962 Rules r.w.s. 14A of 1961 Act. There is no averment/finding on record brought by authorities below that interest bearing funds were specifically invested in assets being shares capable of yielding exempt income and in the absence thereof , the presumption shall apply that the assessee has used its own interest free capital which undisputedly was of ₹ 32,68,881/- and the same was utilized for making investments of ₹ 3,53,838/- in shares which were capable of yielding exempt income. - Decided in favour of assessee. Issues Involved:1. Addition of Rs. 2,28,424 due to discrepancy in labour charges.2. Disallowance of interest expenditure of Rs. 22,687 under Section 14A of the Income-tax Act, 1961.Detailed Analysis:1. Addition of Rs. 2,28,424 due to discrepancy in labour charges:The assessee, a partnership firm engaged in labour job work of heat treatment on ferrous metal items, faced an addition of Rs. 2,28,424 to its income. The Assessing Officer (AO) observed a discrepancy between the income reported in the assessee’s books of accounts and the figures as per the Annual Information Return (AIR) data, specifically form 26AS. The AO noted that the income reported in the books was Rs. 11,286,518, whereas the AIR data reflected Rs. 11,514,942, leading to an under-reporting of Rs. 2,28,424. The assessee failed to reconcile this difference, resulting in the AO adding this amount to the taxable income.Upon appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, noting that the assessee could not reconcile the difference despite submitting reconciliation charts. The assessee argued that due to the large volume of transactions, it was challenging to reconcile all discrepancies. The assessee cited various tribunal decisions to support their case, arguing that additions based solely on AIR data are not sustainable.The Income Tax Appellate Tribunal (ITAT) considered the rival contentions and observed that the assessee admitted dealing with all parties listed in the AIR data. The ITAT noted that the discrepancy was due to the magnitude of transactions and that the explanation provided by the assessee was not satisfactory. However, the ITAT granted the assessee another opportunity to reconcile the differences, particularly for discrepancies exceeding Rs. 10,000. The ITAT directed the AO to re-examine the issue, allowing the assessee to provide detailed evidence and reconcile the discrepancies.2. Disallowance of interest expenditure of Rs. 22,687 under Section 14A of the Income-tax Act, 1961:The AO disallowed Rs. 22,687 in interest expenses under Section 14A read with Rule 8D of the Income-tax Rules, 1962, on the grounds that the assessee had invested Rs. 3,53,838 in shares, earning a dividend income of Rs. 15,001, which was claimed as exempt. The AO contended that the assessee did not disallow any expenditure related to earning this exempt income.The assessee argued that the investments were made from its own interest-free funds amounting to Rs. 32,68,881, which were significantly higher than the investment in shares. The assessee relied on the decisions of the Hon’ble Bombay High Court in Reliance Utilities and Power Ltd. and CIT v. HDFC Bank Ltd., which established that if interest-free funds are available and exceed the investments, it should be presumed that the investments were made from these funds.The ITAT agreed with the assessee, noting that the interest-free funds were indeed higher than the investments in shares. The ITAT held that in the absence of any specific finding that interest-bearing funds were used for these investments, the presumption would apply that the assessee used its interest-free funds. Consequently, the ITAT ordered the deletion of the Rs. 22,687 disallowance made by the AO under Section 14A read with Rule 8D(2)(ii).Conclusion:The appeal filed by the assessee was allowed in part. The ITAT remanded the issue of the Rs. 2,28,424 discrepancy back to the AO for a de-novo determination, granting the assessee another opportunity to reconcile the differences. The disallowance of Rs. 22,687 under Section 14A was deleted, as the ITAT found that the investments were made from the assessee's interest-free funds.