Disallowance under section 14A if Assessee’s own funds exceeded investments & Assessee did not earn any exempt income during the year
Short Overview Where assessee’s own funds in the shape of share capital and free reserves far exceeded the investments made by it and also the assessee did not earn any exempt income during the year, the additional interest disallowance as made by the AO under section 14A read with rule 8D(2)(ii) would not be sustainable.
Assessee-company offered suo moto disallowance under section 14A against investments made by it. However, AO computed additional disallowance of interest under rule 8D(2)(ii) and added the same to the income of the assessee. CIT(A) confirmed the order of the AO. Aggrieved, assessee was in appeal.
It is held that Upon perusal of assessee’s financial statements, it could be gathered that the assessee’s own funds in the shape of share capital and free reserves far exceeded the investments made by it. Thus, a presumption would run in assessee’s favour that the investments were funded out of own funds. Secondly, the assessee did not earn any exempt income during the year. Therefore, the additional interest disallowance as made by the AO was not sustainable and accordingly the same was deleted.
Decision: In assessee’s favour.
IN THE ITAT MUMBAI “A” BENCH
VIKAS AWASTHY, J.M. & MANOJ KUMAR AGGARWAL, A.M.
Lotus Ornaments (P) Ltd. v. ACIT
I.T.A. No. 679/Mum/2020
A.Y. 2013-14
1 October, 2021
Assessee by: Gaurav Bansal–Learned Authorised Representative
Revenue by: Brajendra Kumar–Learned Departmental Representative
ORDER
Manoj Kumar Aggarwal, A.M.
Aforesaid appeal by assessee for assessment year (AY) 2013-14 arises out of the order of learned Commissioner (Appeals)-10, Mumbai (Commissioner (Appeals)), dated 11-12-2019 in the matter of assessment framed by learned assessing officer (AO) under section 143(3) on 25-3-2016. The impugned order has confirmed disallowance under section 14A as well as ad hoc disallowance of labour/assortment charges as made by learned assessing officer in the assessment order. Ground No. 1 has not been pressed before us and therefore, the same stand dismissed as being not pressed. In ground no.2, the assessee has contested the confirmation of 10% ad hoc disallowance of labour/assortment charges.
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The assessee, videLetter, dated 15-9-2021, has filed an additional ground challenging the disallowance made under section 14A. Since the same arises out of the assessment order, it is admitted in term of the decision of Hon’ble Apex Court in National Thermal Power Corporation Ltd. v. CIT (1998) 229 ITR 383 (SC) : 1998 TaxPub(DT) 0342 (SC). The assessee seeks deletion of disallowance under section 14A in terms of the decision of Hon’ble Apex Court in Pr. CIT v. Oil Industry Development Board (2019) 103 Taxmann.com 326 (SC) : 2019 TaxPub(DT) 1945 (SC) as well as CIT v. Chettinad Logistics (P) Ltd. (2018) 95 Taxmann.com 250 (SC) : 2018 TaxPub(DT) 4126 (SC) on the ground that no exempt income was earned by the assessee during the year.
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Having heard rival submissions and after careful consideration of material on record, our adjudication to the subject matter of appeal would be as given in succeeding paragraphs.
Disallowances under section 14A
4.1 The assessee offered suo moto disallowance under section 14A for Rs. 0.63 Lacs in the computation of income against investments made by the assessee. However, learned assessing officer computed additional disallowance of interest under rule 8D(2)(ii) for Rs. 4.60 Lacs and added the same to the income of the assessee. It is undisputed fact that the assessee has not earned any exempt income during the year. The assessee did not contest this issue during appellate proceedings. However, the assessee has assailed the disallowance before us.
4.2 Upon perusal of assessee’s financial statements, it could be gathered that assessee’s own funds in the shape of share capital and free reserves far exceeds the investment made by the assessee and therefore, a presumption would run in assessee’s favor that the investments were funded out of own funds. Secondly, the assessee has not earned any exempt income during the year. Therefore, the additional interest disallowance is not sustainable in law as per the cited judicial pronouncements. Therefore, by deleting the disallowance of Rs. 4.60 Lacs, we allow this ground of appeal.
Adhoc disallowance of Labor/Assortment Charges
5.1 The assessee claimed assortment/labour charges for Rs. 777.80 Lacs. Upon perusal of sample supporting bills, vouchers etc., it was noted by learned assessing officer that the nature and particulars could not be verified, few documents were not affixed with revenue stamps and in some cases, the payees could not be verified. Accordingly, learned assessing officer estimated an ad hoc disallowance of 10% against the same. The learned Commissioner (Appeals) confirmed the same since the assessee did not appear during appellate proceedings.
5.2 The learned Authorised Representative assailed the disallowance by submitting that the Books of Accounts have not been rejected and the ad hoc disallowance thus made would not be sustainable in law as per the decision of Hon’ble Delhi High Court in PCIT v. R.G. Buildwell Engineers Ltd. (2018) 99 Taxmann.com 283 (Del) : 2018 TaxPub(DT) 6785 (Del-HC); SLP dismissed which is reported at (2018) 259 Taxman 370 (SC) : 2018 TaxPub(DT) 6790 (SC). The learned Authorised Representative submitted that the nature of expenditure was duly explained before learned assessing officer and ledgers were produced along with vouchers. No specific defect has been pointed out in the documents furnished by the assessee. The learned Authorised Representative also submitted that similar expenditure was incurred in assessment years 2012-13 & 2014-15 wherein no disallowance has been made by learned assessing officer in scrutiny assessment proceedings under section 143(3). The copies of the orders have been placed on record. Lastly, it is the submission of learned Authorised Representative that assessee’s books of accounts were duly audited under the Companies Act, 2013 as well as under Income Tax Act and no adverse findings have been reported by the Auditors. The learned Departmental Representative, on the other hand, submitted that the facts of the case justify the disallowance.
5.3 After going through material facts, it could be gathered that the books of accounts have not been rejected by learned assessing officer. The books were duly audited under The Companies Act as well as under Income Tax Act and no adverse findings have been rendered by Auditors, in this regard. Except for general observations, no specific defects have been pointed out by learned assessing officer in sample documents produced by the assessee. Similar expenditure incurred by the assessee in assessment years 2012-13 & 2014-15 has been accepted. The complete details of the expenditure along with relevant ledgers were furnished by the assessee during assessment proceedings (page nos. 18 to 133 of Paper Book). There is no dispute about genuineness and admissibility of claim of expenses. Regarding the observation of learned assessing officer that there was drastic increase in such expenses during the year, the same stood explained by assessee’s reply, dated 19-1-2016 wherein it was submitted that the expenditure increased due to change in manufacturing pattern of the assessee which was necessitated due to customers requirements since the assessee diversified into small pieces for which higher labour charges were paid by the assessee. The net profit reflected by the assessee is 2.43% which is quite similar to net profit of 2.48% reflected in the earlier year. Thus, in terms of the cited decision of Hon’ble Delhi High Court and considering the facts of the case, we are inclined to delete the ad hoc disallowance as made by learned assessing officer. This ground stand allowed.
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The appeal stand partly allowed in terms of our above order.
