2020 (8) TMI 813 - AT - Income Tax

Tribunal decision: Section 14A disallowance deleted, ad-hoc disallowance restricted; AO must justify dissatisfaction

The Tribunal partly allowed the appeal by deleting the disallowance under Section 14A of the Income Tax Act and restricting the ad-hoc disallowance of ... Disallowance u/s 14A r.w.r. 8D(2)(iii) - AO was not satisfied with this claim of the assessee and accordingly, he invoked rule 8D of the rules and made addition for 0.5% of the average value of the investment towards administrative expenses for earning exempt income in terms of rule 8D(2)(iii) of the rules - HELD THAT:- In the assessment year 2009-10, the AO recorded that the assessee made heavy investment for earning of the exempt income and expenses for running the exempt income like manpower, vehicle, telephone, use of Internet, computer and its depreciation, electricity etc. must have been incurred by the assessee. Tribunal found that the AO was not specific as to what exactly the probable expenditure in the matter. Tribunal also noted that the expenses in respect of the mutual funds were already deducted by the respective operators. Tribunal observed that the AO would have taken legal exercise to verify the correctness or otherwise of the certificate, that was issued by the asset management companies or Citibank. In the year under consideration also the AO has recorded similar dissatisfaction and not made any attempt to carry out the exercise which was proposed by the Tribunal in assessment year 2009-10. In view of the identical dissatisfaction recorded by the AO, which has been held as not proper by the Tribunal we respectfully following the finding of the Tribunal in assessment year 2009-10, delete disallowance in dispute in instant year. Disallowance on account of the personal expenses out of the vehicles, depreciation, telephone and telex and travelling expenses - AO has made disallowance at the rate of 1/10 of the expenses on estimate basis in view of the non-production of the logbook of the vehicles - HELD THAT:- AO has not pointed out any other defects in the vouchers under other heads of expenditure. We find that the assessee has already admitted 1/20th of the expenses against the disallowance made under the head vehicle maintenance, depreciation telephone and telex and travelling expenses, therefore we feel it appropriate to restrict the disallowance to 1/20th of the expenses under the heads corresponding to the disallowance which was made by the AO. - Appeal of the assessee is partly allowed. Issues Involved:1. Disallowance under Section 14A of the Income Tax Act, 1961.2. Ad-hoc disallowance of personal expenditure on account of telephone, vehicle, depreciation, and traveling expenses.Issue-wise Detailed Analysis:1. Disallowance under Section 14A of the Income Tax Act, 1961:The assessee challenged the disallowance of Rs. 8,76,091/- made under Section 14A of the Act read with Rule 8D(2)(iii) of the Income Tax Rules, 1962. The assessee contended that the disallowance was made mechanically without recording satisfaction as required under Sub-sections (2) and (3) of Section 14A. The assessee claimed no expenditure was incurred for earning exempt income, which included Rs. 10,87,838/- from dividends, Rs. 8,26,342/- from interest on tax-free bonds, and Rs. 39,36,670/- from long-term capital gains on listed shares.The Assessing Officer (AO) was not satisfied with the assessee's claim and invoked Rule 8D, making an addition of 0.5% of the average value of the investment towards administrative expenses. The AO argued that managing a large investment portfolio entails various indirect costs. The CIT(A) upheld the AO's decision, stating that the AO was non-satisfied with the correctness of the assessee's claim and that some expenses would be incurred indirectly in the process of administration and supervision of investments.The Tribunal found that the dissatisfaction recorded by the AO was identical to previous years, where the Tribunal had deleted similar disallowances. The Tribunal noted that the AO did not make any specific attempt to verify the correctness of the expenses claimed by the assessee. Following the findings from earlier years, the Tribunal deleted the disallowance in dispute, allowing the assessee's appeal on this ground.2. Ad-hoc Disallowance of Personal Expenditure:The AO observed expenses of Rs. 49,61,348/- under various heads, including vehicle running and maintenance, depreciation on car, telephone and telex expenses, traveling expenses, conveyance expenses, Diwali expenses, and repair and maintenance expenses. The AO made a disallowance of 10% of these expenses due to the non-maintenance of a logbook for the vehicle and the possibility of personal use, amounting to Rs. 4,96,135/-. The assessee challenged the disallowance of Rs. 3,95,539/- before the CIT(A), who upheld the disallowance, noting that some personal expenditure was accepted by the assessee.Before the Tribunal, the assessee argued that similar disallowances had been deleted in earlier years. The Tribunal found that the AO had made the disallowance on an estimate basis without pointing out specific defects in the vouchers. The Tribunal deemed it appropriate to restrict the disallowance to 1/20th of the expenses, corresponding to the disallowance of Rs. 3,95,539/-. Thus, the Tribunal partly allowed the appeal on this ground.Conclusion:The Tribunal partly allowed the appeal of the assessee by deleting the disallowance under Section 14A and restricting the disallowance of personal expenditure to 1/20th of the claimed amount. The judgment emphasized the need for specific and justified recording of dissatisfaction by the AO before invoking disallowance provisions.